Beruflich Dokumente
Kultur Dokumente
Capital Structure Cost Of Equity Cost Of Debt Debt And Equity Weights Differences Between Debt And Equity Bonds Stocks
Capital Structure
Companies must decide how much to rely in debt and how much to rely on equity as sources of capital (capital structure) Remember that the total cost of capital of a company depends upon how it uses the money how risk is the business it operates The capital structure does not affect the risk of the business
Cost of Capital
How the market requires at any time to provide capital to a company or business Cost of capital depends upon the risk of the business to which to money will be provided For this assessment we will assume that we know the percentages of debt and equity
Cost of Capital
Cost of capital is the weighted average of the cost of equity and the cost of debt Cost of Capital = R Cost of Equity = RE, Share of Equity = WE Cost of Debt = RD, Share of Debt = WD WE + WD = 1 RC = WE*RE + WD*RD
Bond Valuation
Present Value of Bond Cash Flows Bond Cash Flows are
Coupon Payments Principal Repayment
Bond Risks
Inflation and Inflation Risk Default Risk Price or Interest Rate Risk
How bond price changes with interest rates Long-term bonds have more price risk than short-term bonds Low coupon rate bonds have more price risk than high coupon rate bonds
Reinvestment Risk
Uncertainty about return that can be achieved reinvesting cash flows Short-term bonds have more reinvestment rate risk than long-term bonds High coupon rate bonds have more reinvestment rate risk than low coupon rate bonds