Cf T8 Q5.docx

Tutorial 8 question 5 - Optima capital structure is the mix of debt, preferred stock and common equity at which share price is maximized. The target of capital structure is mix of debt, preferred stock and common equity with which the firm intends to raise capital.

- Company's Tax Exposure Debt payments are tax deductible. As such, if a company's tax rate is high, using debt as a means of financing a project is attractive because the tax deductibility of the debt payments protects some income from taxes.