Financial Management: Principles and Applications, 13/e

15.1 A Glance at Capital Structure Choices in Practice

One of the primary duties of a financial manager is to raise capital to finance a firm’s investments. For every dollar the firm invests, it must come up with a dollar of financing. In Chapter 14, we defined capital structure as the mix of debt and equity used by the firm Capital structure is the mix of debt and equity used by the firm. In this chapter, we will discuss how firms make the financing decision that determines their capital structure.

The primary objective of capital structure management is to maximize the total value of the firm’s outstanding debt and equity. We refer to the mix of financing sources in the capital structure that maximizes this combined value as the optimal capital ...