Long-Term Financial Decisions
Leverage involves the use of fixed costs to magnify returns. Its use in the capital
Structure of the firm has the potential to increase its return and risk.
Leverage and capital structure are closely related concepts that are linked to capital budgeting decisions through the cost of capital. These concepts can be used to minimize the firm’s cost of capital and maximize its owners’ wealth. We discuss leverage and capital-structure concepts and techniques to understand how the firm can use them to create the best capital structure.
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