HAILEY:$$We$$d be talking about NCC$$s$$capital structure. This is the capital structure that NCC is currently exhibiting, and it can differ from its ideal capital structure.

CFO:$$Very good. Now, if NCC$$s current capital structure consists of $35\%$ debt and $65\%$ common equity, then, Hailey, how would we know if we are operating with our optimal capital structure?

HAILEY:$$An optimal capital structure is characterized by two important attributes: First, it minimizes the firm$$s$,$ and second, it maximizes$,$ which should make our shareholders very happy.

CFO:$$Again$,$ that$$s great! Now, tell me$,$ in general and without talking about NCC in particular, why would a company ever be willing to operate with a capital structure that is not equal to its desired or target capital structure?

HAILEY:$$Well$,$ sir, there are several reasons that I can think of$.$ Let$$s see. First, a firm may use debt and equity financing that differs from its targeted amounts if its business activities or its industry becomes$$risky or$$competitive$,$ and, in general, these changes will allow a firm to increase its reliance on debt financing, everything else remaining constant. Second, the availability of$$may prompt a company to borrow or issue new shares and thereby deviate from its target capital structure.

CFO:$$Hailey$,$ you$$ve passed my first test with flying colors! With this understanding of the theory and some real$-$world experience, you$$ll be earning your bonus in no time.

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