The financial manager of a firm determines the following schedules of cost of debt and cost of equity for various combinations of debt financing: Debt/Assets After-Tax Cost of Debt Cost of Equity 0 % 4 % 8 % 10 4 8 20 4 8 30 5 9 40 6 10 50 8 12 60 10 14 70 12 16 Find the optimal capital structure (that is, optimal combination of debt and equity financing). Round your answers for the capital structure to the nearest whole number and for the cost of capital to one decimal place. The optimal capital structure: % debt and % equity with a cost of capital of %
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
The
| Debt/Assets | After-Tax Cost of Debt | Cost of Equity | |||
| 0 | % | 4 | % | 8 | % |
| 10 | 4 | 8 | |||
| 20 | 4 | 8 | |||
| 30 | 5 | 9 | |||
| 40 | 6 | 10 | |||
| 50 | 8 | 12 | |||
| 60 | 10 | 14 | |||
| 70 | 12 | 16 |
- Find the optimal capital structure (that is, optimal combination of debt and equity financing). Round your answers for the capital structure to the nearest whole number and for the cost of capital to one decimal place.
The optimal capital structure: % debt and % equity with a cost of capital of %
- Why does the cost of capital initially decline as the firm substitutes debt for equity financing?
The cost of capital initially declines because the firm cost of debt is than the cost of equity.
- Why will the cost of funds eventually rise as the firm becomes more financially leveraged?
As the firm becomes more financially leveraged and riskier, the cost of debt and equity will and cause the cost of capital to increase.
- Why is debt financing more common than financing with
preferred stock ?Debt financing is more common than financing with preferred stock because of which makes the cost of the debt financing the cost of the preferred stock.
- If interest were not a tax-deductible expense, what effect would that have on the firm’s cost of capital?
If interest were not a tax deductible, the cost of debt would be , the cost of capital.
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