Unit 8: Corporate Capital Structure
Does it matter whether a company's assets are financed with 50% from a bank loan and 50% from investors' money? Does that form of capital structure, where 50% of assets come from debt and 50% from equity, influence how a company succeeds in business? This unit addresses these questions by focusing on the theory of capital structure. Specifically, this unit explains the concept of capital structure and introduces the most common formula used when comparing a company's return to the cost of capital: the weighted average cost of capital (WACC). We will also explore how tax policy affects a company's true cost of capital.
Completing this unit should take you approximately 5 hours.
Upon successful completion of this unit, you will be able to:
- explain the different components of a company's capital structure;
- explain the Modigliani-Miller theorem in finance;
- compute the market value and book value of a company; and
- apply the WACC formula for estimating a company's cost of capital.
8.1: Capital Structure Finance Theory
This section discusses capital structure, optimal capital structure, debt and equity, and cost of capital considerations. Why are these concepts important when managing a business? Application and examples are presented in this section so the student and manager will understand how to use the optimal capital structure effectively.
This video gives you an example of two similar businesses with different capital structures. This video will help reinforce and explain concepts concerning capital structure that you read earlier.
This video explains the difference between market value and book value for defining firm value.
This video explains how to calculate the market value of a firm by concentrating on its assets.
8.2: Cost of Capital and Capital Structure – WACC
This video explains the relationship between choosing a particular cost of debt and the return on capital.
How do businesses benefit from using capital structure, optimal capital structure, debt and equity, and return on investment? Businesses have the opportunity to earn more return from their investments and their blend of debt and equity capital structure. This section gives examples of how these concepts are used.
This section provides an overview of the cost of capital, flotation costs, debt cost, preferred stock cost, and common stock cost. It also gives examples that show why WACC is important.
This section presents the WACC in more detail. Why is the WACC so important?
Unit 8 Practice and Assessment
Complete these exercises and problems and then check your work.