Answer the following questions:

Cost of Capital and Capital Structure

1. Define each of the following:

A. Capital Structure; business risk; financial risk
B. Operating Leverage; financial leverage, breakeven point
C. Reserve borrowing capacity

2. Why do public utility companies usually have greater capital structure that are different from
those of retail firms?

3. How do the types of assets used affect the firm’s capital structure?

4. How do lender and rating agency attitudes affect capital structure?