Prepare a written explanation for your boss explaining the relationship between capital structure and the cost of capital in this exercise.

Capital structure and cost of capital are related because different financing sources (e.g. debt or equity) have their associated costs. These include borrowing interest, dividends, as well as the payment of interest.

It’s important to note that all financial decisions made within a company should aim to optimize this balance in order to ensure optimal returns while also limiting risk exposure. Exercising too heavily on debt can result in higher costs and increased interest payments, which could put stress on cash flow. However, equity financing can also lead to greater volatility because investors are more involved in decision-making.

To run a business that is successful, it’s important to understand how each factor interacts with the other and have a plan for managing these factors. By remaining aware of current trends/needs we can make sure our funds are allocated in such way that yields the best results for everyone involved—which ultimately leads us closer towards achieving desired goals.