{"id":15423,"date":"2021-05-15T08:54:41","date_gmt":"2021-05-15T08:54:41","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=15423"},"modified":"2022-04-25T09:16:03","modified_gmt":"2022-04-25T09:16:03","slug":"effects-of-capital-structure-policy","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/effects-of-capital-structure-policy\/","title":{"rendered":"Effects of Capital Structure Policy"},"content":{"rendered":"<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/QfyDO3BsKqY\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n\r\n<p>When evaluating the capital structure of a company, an analyst must consider the following:<\/p>\r\n<ol>\r\n\t<li>The capital structure of the company over time. The financial analyst can evaluate the company\u2019s ability to handle its financial obligations, considering the industry the company operates.<\/li>\r\n\t<li>The capital structure of the competitors that have similar business risks. Companies with similar business risks, such as pharmaceutical companies, need to be flexible financially to respond to competition.<\/li>\r\n\t<li>Company-specific factors such as the quality of corporate governance may affect agency costs.<\/li>\r\n<\/ol>\r\n<p>The common goal of capital structure decisions is to finance the company&#8217;s operations at the lowest cost of capital.<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>Which of the following is a factor that an analyst is <em>most likely<\/em> to consider when evaluating a capital structure policy?<\/p>\r\n<ol style=\"list-style-type: upper-alpha;\">\r\n\t<li>The capital structure of the competitors that have different business risks.<\/li>\r\n\t<li>The capital structure of the company over time.<\/li>\r\n\t<li>The extent to which a product is affected by market conditions.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is B.<\/strong><\/p>\r\n<p>When evaluating a company\u2019s capital structure policy, it is important to evaluate the capital structure over time and its target capital structure.<\/p>\r\n<\/blockquote>\r\n<p>Reading 15: Capital Structure<\/p>\r\n<p><em>LOS 15 (c) Explain factors an analyst should consider in evaluating the effect of capital structure policy on valuation.<\/em><\/p>\r\n","protected":false},"excerpt":{"rendered":"<p>When evaluating the capital structure of a company, an analyst must consider the following: The capital structure of the company over time. The financial analyst can evaluate the company\u2019s ability to handle its financial obligations, considering the industry the company&#8230;<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,346],"tags":[216,344,366,362],"class_list":["post-15423","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-corporate-finance-cfa-level-2","tag-cfa-level-2","tag-corporate-finance","tag-effects-of-capital-structure-policy","tag-reading-20-capital-structure","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Effects of Capital Structure Policy - CFA, FRM, and Actuarial Exams Study Notes<\/title>\n<meta name=\"description\" content=\"When evaluating a company\u2019s capital structure policy, it is important to evaluate the capital structure over time and its target capital structure.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/effects-of-capital-structure-policy\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Effects of Capital Structure Policy - 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