Final answer:
A firm's capital structure is the mix of its debt and equity financing. Bonds and bank loans are both forms of borrowing, but they have different terms and investor relationships. Home equity is calculated as the home's market value minus any loan balances, starting with the down payment as initial equity.
Step-by-step explanation:
To evaluate a firm's capital structure, we look at the mix of debt and equity financing it uses to fund its operations. The firm in question has a cost of equity of 8.6%. This is relevant as it helps us assess the expected returns for equity investors. A firm's capital structure is optimized when the weighted average cost of capital (WACC) is minimized.
A bond is similar to a bank loan from a firm's perspective in that both involve borrowing funds that must be repaid over time, typically with interest. However, they differ in that a bond is a fixed-income investment where the firm owes the holders a debt and is obliged to pay interest and repay the principal at a later date. A loan, conversely, usually involves a more direct relationship with the lender, such as a bank, and often has more flexible terms and conditions. When calculating home equity, if someone such as Fred bought a house for $200,000 and made a 10% down payment, the equity would be the down payment amount, which is $20,000 in this case. This is because equity is defined as the current market value of a property minus any outstanding loan balances.