Assessing Capital Structure Is WACC
In This Chapter
Measuring weighted average cost of capital
Assessing the cost of debt
Evaluating the cost of equity
Determining the proper capital structure
For corporations, understanding debt and equity have, at their heart, the goal of managing the cost of capital. Raising capital isn’t cheap, and if a corporation wants to make money (and who doesn’t?), then it must ensure that any prospective projects or operations will generate more value and, therefore, more revenues than will be paid out as repayment for capital raised. In this chapter, I give you the inside scoop on how to assess capital structure.
Making More Money than You Borrow
When you borrow money, you want to make sure that you bring in more money than the interest you’re paying on that loan. In other words, if the repayment of loans and equity is higher than the revenues generated, then “you’re doing it wrong.” You can apply capital structure evaluations in two ways, each of which acts in a very similar manner to the other:
Overall corporate application of the cost of ...