Company’s Capital Structure over its Life Cycle
The maturity, capital intensity, market position strength, and the stability and nature of a company’s operation are all elements that influence its capital structure and ability to support debt. As a general rule, companies begin as capital consumers; that is,…
Factors Affecting Capital Structure
Both internal and external forces influence a corporation’s capital structure, and it varies among countries and sectors. These factors include: $$ \begin{array}{l|l} \textbf { Internal Factors } & \textbf { External Factors } \\ \hline \text { Business model characteristics…
Effect of Taxes on Cost of Capital
Taxes significantly impact the weighted average cost of capital (WACC) of a company. However, taxes affect the cost of capital from different sources of capital in different ways. The Effect of Taxes on Debt In many tax jurisdictions, interest on…
Calculating Cost of Equity Capital
A company can increase its common equity either by reinvesting its earnings or issuing new stock. The cost of equity will, therefore, be the rate of return that its shareholders require. Three methods are used to estimate the cost of…
Calculation and Interpretation of Weighted Average Cost of Capital (WACC)
The concept of cost of capital informs the investment decisions that a company’s management makes. Similarly, it is useful in the valuation of a company by investors and analysts. A company that invests in a project that produces a return…
Peer Comparison of Company’s Liquidity
A company’s liquidity determines its creditworthiness and capacity to borrow at cheaper rates and with better credit conditions, increasing its flexibility. The less liquid it is, the more likely a corporation is to go bankrupt. Similarly, the less liquid a…
Real Options Relevant to Capital Investment (2023)
Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date. In the same vein, real options are capital allocation options that allow managers the…
Sources of Liquidity and Liquidity Position
The degree to which a corporation can satisfy its short-term obligations using cash flows and assets that it can quickly convert into cash is referred to as liquidity. In this context, liquidity refers to the available cash, borrowing power, and…
Relationship between Working Capital, Liquidity, and Short-term Funding Needs
Successful businesses aim to strike a balance between funds set aside for current assets and the risk of current asset shortages. Each company has different needs for working capital. Retail enterprises, for example, focus on inventory and receivables, whereas software…
Breakeven Quantity of Sales and Net Income
“Breakeven point” or “breakeven quantity of sales” refers to the number of units of a company’s product that is produced and sold, at which point the company’s net income becomes zero. Computing Breakeven Quantity of Sales At the point where…
