Busıness Fınance Iı Deneme Sınavı Sorusu #1012630
What is traditional approach of capital structure?
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The traditional approach to capital structure suggests that there exist an optimal debt to cash ratio where the overall cost of capital is the minimum and market value of the firm is the maximum. |
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Accounting for financial transactions can be classified into two types of approaches. One is the Traditional Approach and another one is the modern approach. |
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Traditional management systems focus on goals and objectives that the senior management of the company establishes. |
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An optimal capital structure is the best mix of debt, preferred stock and common stock that maximizes a company's stock price by minimizing its cost of capital. |
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A traditional approach is an intermediate model, compromising between the net income approach and the net operating income approach. Traditional approach assumes an optimal capital structure where the weighted average cost of capital (WACC) is minimized and the value of the firm is maximized. |
A traditional approach is an intermediate model, compromising between the net income approach and the net operating income approach. Traditional approach assumes an optimal capital structure where the WACC is minimized and the value of the firm is maximized. The model suggests that up to a certain level of leverage, the use of debt financing reduces the WACC, but after that optimal level, the WACC escalates depressing the firm value. The cost of debt remains constant more or less up to a certain level, however, above that level, interest rate rises with the increase in the likelihood of financial distress.
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