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

It is believed that capital structure affects the cost to capital because each source of finance (e.g. equity, debt) has its own costs. For example, interest is paid for borrowing funds or dividends are received when equity is used as a means of financing.

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. If a company relies too heavily on debt, it could lead to high expenses, as interest payments can strain cash flow over time.

In general, understanding the interaction between these two elements and having a good strategy for managing both are important components to running a business. 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.