Economics Capital Budgeting Questions
The impact of capital structure on capital budgeting decisions refers to how the mix of debt and equity financing affects the evaluation and selection of investment projects. The capital structure determines the cost of capital, which is the required rate of return for investments. A higher proportion of debt in the capital structure increases the financial risk and the cost of capital, which may lead to a higher hurdle rate for investment projects. This can result in fewer projects being accepted or requiring a higher return on investment to be considered viable. Conversely, a lower proportion of debt in the capital structure reduces the cost of capital, making it easier for projects to meet the required rate of return and increasing the likelihood of accepting more investment opportunities. Therefore, the capital structure plays a significant role in determining the feasibility and profitability of capital budgeting decisions.