Question

True or False: Although firms tend to raise their capital in large, lumpy amounts, their weighted average cost of capital (WACC) and the capital investment that they are evaluating assume that the project will be financed with the same proportion of funds contained in their target capital structure.

Answer 1

Answer:

True

Explanation:

The capital structure is defined as the careful balancing between the equity and the debt that the entity uses to finance its assets, day-to-day operations, and future growth.  It combines debt and equity.  Debt comes in the form of bond issues or loans, while equity may come in the form of common stock, preferred stock, or retained earnings.  The optimal capital structure is estimated by calculating the mix of debt and equity that minimizes the weighted average cost of capital (WACC) of a company while maximizing its market value.  However, in calculating the WACC and evaluating the capital investment, the timing of the capital inflow is not considered.