Capital Structure Theory Essay

The mixture of debt-equity mix is important so as to maximize the stock price of the Costco. However, it will be significant to consider the Weighted Average Cost of Capital (WACC) as well so that it can evaluate the company targeted capital structure. Cost of capital (OC) may be used by the companies as for long term decision making, so industries that faced to take the important of Cost of capital seriously may not make the right choice by choosing the right project(Gitman’s, ).

Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.

In order to find the WACC, we need to find the cost of the components of the capital structure and their proportion in the total capital.

they must pay interest payments or risk bankrupting of the firm. It also helps reduce

For this reason, new, or marginal, costs are used in its calculation. WACC is calculated by multiplying the cost of each capital component by its proportional weight and then summing then together. The capital components included in this calculation are a firms after-tax costs of debt, preferred stock, and common stock.

Despite this change in price, the Weighted Average Cost of Capital (WACC) will give a more accurate representation of what the change in capital structure implies for the firm, by taking account the costs of debt.

1. Why should a firm have a capital structure policy, i.e. a target debt ratio?

Kd (Wd), Ke (We) and Kp (Wp) are the costs (weights) associated, respectively, with the firm’s interest bearing debt,

WACC is the weighted average cost of capital and provides firms with the idea of the proportion of debt

WACC (Weighted Average Cost of Capital) is a market weighted average, at target leverage, of the cost of after tax debt and equity.

War One, a huge conflict that sparked in 1914 and lasting all the way until 1918. The war was between the world’s greatest powers as two opposing sides; the Central Powers and the Allies. It was a chain of events that had started this was which consist of key features such as imperialism, alliances, growth of militarism, crisis, and nationalism. It was the result of these accumulating factors that had eventually evoked war. The effects on World War One included over 8 million deaths, higher taxes, rationing of food, and etc.

The course project involved developing a great depth of knowledge in analyzing capital structure, theories behind it, and its risks and issues. Before I began this assignment, I knew nothing but a few things about capital structure from previous unit weeks; however, it was not until this course’s final project that came along with opening

The fall in the D/E ratio has been studied in detail and has been presented with supporting charts, graphs and data.

This study will further lead to the dynamics of KSE listed firms. Investor trends towards highly leveraged firms and determination whether the optimum capital structure effects the decision of investor resulting change in the balance sheet of a company.

Already in 1958, Modigliani and Miller have pointed the discussion of capital structure towards the cost of debt and equity. According to their first proposition, in a world of no corporate taxes and with perfect markets, financial leverage has no effect on a firm’s value. In their second proposition, they state that the cost of equity equals a linear function defined by the required return on assets and the cost of debt (Modigliani and Miller, 1958).