Unit 5: Corporate Capital Structure, Cost of Capital, and Taxes
Does it matter whether a company's assets are being financed with 50% from a bank loan and 50% from investors' money? Does that form of capital structure, where 50% of assets comes 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, Unit 5 explains the concept of capital structure and introduces you to the most common formula used when comparing a company's return to the cost of capital: The weighted average cost of capital (WACC). Also, Unit 5 exposes the concept of how tax policy affects a company's true cost of capital.
Completing this unit should take you approximately 2 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.
5.1: Capital Structure Finance Theory
This video gives you an example of two similar businesses that have different capital structures.
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 the firm's assets.
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 effectively utilize the concepts of optimal capital structure.
5.2: Cost of Capital and Capital Structure: WACC
This video explains the relationship between choosing a particular cost of debt and the return on capital.
This section covers discussions about capital structure, optimal capital structure,debt and equity and return on investment. How do businesses benefit from using these concepts? Businesses have the opportunity to earn more return from their investments and their blend of debt and equity capital structure. Examples are presented that demonstrate how these concepts are used.
This section presents the Weighted Average Cost of Capital (WACC) in more detail. Why is the Weighted Average Cost of Capital (WACC) concept important? The answer to this question is presented with the WACC equation that is compiled and solved.
Unit 5 Assessment
Take this assessment to see how well you understood this unit.
- This assessment does not count towards your grade. It is just for practice!
- You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.