17.1 The Concept of Capital Structure Capital structure refers to how a company finances its assets. The two main sources of capital are debt financing and equity financing. A cost of capital exists because investors want a return equivalent to what…
By the end of this section, you will be able to: A company can finance its assets in two ways: through debt financing and through equity financing. Thus far, we have treated these sources as two broad categories, each with…
By the end of this section, you will be able to: Debt and Financial Distress The more debt a company uses in its capital structure, the larger the dollar value of the interest tax shield. Why, then, do we not…
By the end of this section, you will be able to: So far, we have taken the company’s capital structure as given. Each firm’s capital structure, however, is a result of intentional decisions made by the financial managers of the…
By the end of this section, you will be able to: Once you know the weights in a company’s capital structure and have estimated the costs of the different sources of its capital, you can calculate the company’s weighted average…
By the end of this section, you will be able to: The costs of debt and equity capital are what company lenders (those who allow the firm to use their capital) expect in return for providing that capital. Just as…
By the end of this section, you will be able to: The Basic Balance Sheet In order to produce and sell its products or services, a company needs assets. If a firm will produce shirts, for example, it will need…
Figure 17.1 A company can only attract capital if it offers an expected return that is competitive with other options. (credit: modification of “1166357_33949449” by Jenifer Corrêa/flickr, CC BY 2.0) Chapter Outline 17.1 The Concept of Capital Structure 17.2 The Costs of Debt and…
1. Westland Manufacturing spends $20,000 to update the lighting in its factory to more energy-efficient LED fixtures. This will save the company $4,000 per year in electricity costs. What is the payback period of this project? 2. Westland Manufacturing spends…
capital budgetingthe process a business follows to evaluate potential major projects or investments discounted payback periodthe length of time it will take for the present value of the future cash inflows of a project to equal the initial cost of…