Capital structure of a company

Debt includes loans and other types of credit that must be repaid in the future, usually with interest.

Capital structure of a company

In the tutorial on Present Value, we demonstrated that the greater the "riskiness" of a future cash flow, the lower its present value. We also explained that "riskiness" is measured by the percentage return expected from an alternative investment with the same amount of risk.

The "Cost of Capital" calculation quantifies that risk. What Does "Cost of Capital" Mean? More specifically, "cost of capital" is defined as "the opportunity cost of all capital invested in an enterprise. We calculate a company's weighted average cost of capital using a 3 step process: Cost of capital components.

Capital structure of a company

First, we calculate or infer the cost of each kind of capital that the enterprise uses, namely debt and equity. The cost of debt capital is equivalent to actual or imputed interest rate on the company's debt, adjusted for the tax-deductibility of interest expenses. Equity shareholders, unlike debt holders, do not demand an explicit return on their capital.

However, equity shareholders do face an implicit opportunity cost for investing in a specific company, because they could invest in an alternative company with a similar risk profile. Thus, we infer the opportunity cost of equity capital. This model says that equity shareholders demand a minimum rate of return equal to the return from a risk-free investment plus a return for bearing extra risk.

This extra risk is often called the "equity risk premium", and is equivalent to the risk premium of the market as a whole times a multiplier--called "beta"--that measures how risky a specific security is relative to the total market.

Next, we calculate the proportion that debt and equity capital contribute to the entire enterprise, using the market values of total debt and equity to reflect the investments on which those investors expect to earn a minimum return. Finally, we weight the cost of each kind of capital by the proportion that each contributes to the entire capital structure.

Gateway draws upon two major sources of capital from the capital markets: Cost of Gateway's debt capital.

Theories of Capital Structure | Accounting Education

Enter this figure in cell C25 of worksheet "Inputs. For the purposes of this tutorial, however, let's run the numbers. For this case study, we can click here to see Gateway's K. Gateway's SEC filing tells us that this debt-equivalent capital lease has a "fixed rate of 6.

Because there are two kinds of debt with different interest rates, we have to weight the different interest rates associated with each kind of debt by the relevant proportion of debt that each comprises. In this case, the pre-tax cost of debt would be equivalent to 4. Enter the pre-tax cost of debt in cell C5 of worksheet "Inputs.

We noted above that we have to adjust for the tax-deductibility of interest expenses, which lowers the cost of debt according to the following formula: Thus, the purpose of this cost-of-debt calculation is purely instructional.

Also, plese note that in this example, we have used a company's actual cost of debt as a proxy for its marginal cost of long-term debt. A company's marginal cost of long-term debt may be better estimated by summing the risk-free rate and the "credit spread" that lenders would charge a company with a specific credit rating.

Cost of Gateway's equity capital. We noted above that: To calculate any company's cost of equity capital, we need to find a reliable source for each of these inputs: We suggest using the rate of return on long-term ten-year government treasury bonds as a proxy for the risk-free rate.

We enter this data point in cell C4 of worksheet "Inputs.

Capital structure of a company

To get further details, you can register free of charge. Paid subscribers to the WSJ's online service can find quotes for key interest rate measures including the ten-year T-Bond by clicking here.

We enter this data point in cell C8 of worksheet "Inputs. Value Line Investment Survey. Paid subscribers to this service can obtain Value Line's estimates of a company's beta coefficient. Value Line can be accessed either online or offline through a paid subscription, as well as at most public libraries.

Click here to see how to read a company-specific Investment Survey using Value Line. Arrow 1 points to where you can find Value Line's Beta estimate.

Yahoo offers free beta estimates through its Company Profile service. Click here to see Gateway's Company Profile on Yahoo. Free beta estimates from Bloomberg can be accessed online.Share capital of the company and shareholder structure.

As of September 30 th, , the share capital of the company amounts to € ,, divided into ,, shares, all of the same class and all fully paid up and subscribed. Structure. Mezzanine financings can be completed through a variety of different structures based on the specific objectives of the transaction and the existing capital structure in place at the company.

Jillian Manus is an experienced banking and media executive, a technology investor and entrepreneur. She is the Managing Partner of Structure Capital, a Silicon Valley-based venture capital firm that invests in early-stage technology companies.

The equity part of the debt-equity relationship is the easiest to define. In a company's capital structure, equity consists of a company's common and preferred stock plus retained earnings, which.

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A company that pays for assets with more equity than debt has a low leverage ratio and a conservative capital structure. That said, a high leverage ratio and/or an aggressive capital structure can also lead to higher growth rates, whereas a conservative capital structure can lead to lower growth rates.

8 Factors That Influence Capital Structure of a Business | Ohio University