income and to the firms assets if the company liquidates. The claim of holders of preferred stock comes after bondholders but before that of equityholders The relative importance of the three types of security is that debt is by far the most important in terms of quantity issued, equity is next and finally preferred stock is relatively insignificant. The quantitie d vary significantly over time but the le In average Is about 80% debt, 15% equity and 5% preferred stock Convertible Securities Corporations often issue securities with terms that can be altered subsequently at the option of the holder of the security. For example, convertible bonds can be transformed into the common stock of the corporation at the option of the holder. The purchase of a warrant entitles the holder to purchase the company' s common stock at a specified price on any date preceding the warrant's expiration 2.3 Capital structure Decisions The assumption behind most of the analysis we have done so far is that the firm is all equity financed. In practice, of course, firms use debt and many other types of security to finance themselves. In this section we are interested in whether using different types of ecurity, in particular debt and equity, creates value for shareholders Motivation Example The Saw Company is reviewing its capital structure. It pays no taxes and has access to perfect capital markets. The interest rate on debt is 10 percent. Its current position is as follows 88 income and to the firm's assets if the company liquidates. The claim of holders of preferred stock comes after bondholders but before that of equityholders. The relative importance of the three types of security is that debt is by far the most important in terms of quantity issued, equity is next and finally preferred stock is relatively insignificant. The quantities issued vary significantly over time but the long run average is about 80% debt, 15% equity and 5% preferred stock. Convertible Securities Corporations often issue securities with terms that can be altered subsequently at the option of the holder of the security. For example, convertible bonds can be transformed into the common stock of the corporation at the option of the holder. The purchase of a warrant entitles the holder to purchase the company's common stock at a specified price on any date preceding the warrant's expiration. 2.3 Capital Structure Decisions The assumption behind most of the analysis we have done so far is that the firm is all equity financed. In practice, of course, firms use debt and many other types of security to finance themselves. In this section we are interested in whether using different types of security, in particular debt and equity, creates value for shareholders. Motivation Example The Saw Company is reviewing its capital structure. It pays no taxes and has access to perfect capital markets. The interest rate on debt is 10 percent. Its current position is as follows: