ABSTRACT
Capital structure refers to the mix of debt and equity the firm uses to fund its assets. The different sources of funds have different costs and different levels of risk, and firms typically use the mix of debt, preferred equity and common equity that minimizes their weighted average cost of capital (WACC)—the average cost from all sources of funds, weighted according to how much of each source the firm uses to finance its operations. This chapter discusses the sources of funds available to the firm and the methods used to determine the cost of funds from each of those different sources. Using these methods, the firm’s financial managers are able to minimize the firm’s costs, thereby maximizing their earnings.
