Topic: Capital structure, Leverage and Dividend Policy
A firms primary goal is to maximize its shareholders value. The principal way value is
increased is by investing in projects that earn more than the firms cost of capital. A firms cost
of capital is not only affected by the cost of capital components, but also affected by the
company’s capital structure and dividend policy.
In your essay, please discuss in details what influences capital structure decisions. In
o Explain the trade-offs that firms must consider when they determine their target capital
o Explain the effects that debt financing has on the firms risk and cost of capital
o Summarize capital structure theory
o Explain why firms in different industries have different capital structure.
o Explain why some investors like the firm to pay more dividends while other investors
prefer reinvestment and the resulting capital gains.
o Discuss the various trade-offs that companies face when trying to establish their
optimal dividend policy.
o Differentiate between stock splits and stock dividends.
o List the advantages and disadvantages of stock repurchases vis–vis dividends from
both investors and companies perspectives.
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