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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

A firm is about to double its assets to serve its rapidly growing market. It must choose between a highly automated production process and a less automated one. It also must choose a capital structure for financing the expansion. Should the asset investment and financing decisions be jointly determined, or should each decision be made separately? How would these decisions affect one another? How could the leverage concept be used to help management analyze the situation?

Summary Introduction

To identify: Whether the asset investment and financing decisions are determined separately or jointly, the effect of both the decisions on one another and use of leverage concept.

Introduction:

Capital Structure:

Capital structure refers to the securities or debt included in the total capital of the firm. Optimum capital structure is required for the optimum utilization of funds.

Explanation
  • The asset investment and financing decisions are determined separately because without determining the required funds to finance assets, the financing decisions cannot be made.
  • Both the decision have significant effect on one another as investing decision considers the sale and purchase of fixed assets while financing decisions considered the sources and utilization of finance.
  • Leverage is a strategy used by the management to use debt in the capital structure in order to increase the return, it helps the management to analyze the situation as it determines the optimal capital structure...

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