Optimal capital structures

Reference no: EM13967572

In an earlier chapter, it was argued that factors should be used in such proportions that the mar- ginal product/price ratios for all inputs are equal. In terms of capital budgeting, this implies that the marginal net cost of debt should equal the marginal net cost of equity in the optimal capital structure. Yet firms often issue debt at interest rates substantially below the yield that investors require on the firm's equity shares. Does this mean that such firms are not operating with optimal capital structures? Explain.

Reference no: EM13967572

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