Final answer:
Capital structure decisions are made in conjunction with investment decisions, as they determine the cost and amount of capital that a firm can access for its growth initiatives.
Step-by-step explanation:
Capital structure decisions are made in conjunction with investment decisions. Firms often take actions such as purchasing machinery, building new facilities, or initiating research and development, which all involve significant capital outlays and affect future earnings. In raising financial capital to fund these projects, firms must choose from different sources such as investments from early-stage investors, reinvesting profits, borrowing through banks or bonds, and selling stock. These decisions are interconnected as they influence both the firm's leverage and its capacity to invest in growth opportunities. Managers must carefully weigh the cost of capital against the potential returns of investments, considering factors like risk and rate of return.
Furthermore, the governance structure of a firm, including who will serve on their board of directors, plays a role in these decisions due to the asymmetric information between those running the firm and external investors.