mation in the following table to make a suggestion concerning the proportion of debt that the firm should utilize in its capital structure. Benefit or (cost) No debt 25% debt 50% debt Tax shield $0 $15 $25 75% debt $35 Agency cost -$10 -$4 -$4 -$16 Financial distress cost -$3 -$2 -$8 -$19 The firm can maximize firm value by ch
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Use the information in the following table to make a suggestion concerning the proportion of debt that the firm should utilize in its capital structure.
| Benefit or (cost) | No debt | 25% debt | 50% debt | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Tax shield
|
$0 | $15 | $25 | 75% debt | $35 | |||||||
|
Agency cost
|
-$10 | -$4 | -$4 | -$16 | ||||||||
|
Financial distress cost
|
-$3 | -$2 | -$8 | -$19 |
| The firm can maximize firm value by choosing (25%, 50%, 75% or 0%) debt capital structure. |
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