For the estimation of his firm's weighted average cost of capital, paul calculates the average of the firm's cost of equity and after-tax cost of debt, both of which are weighted based on the firm's capital structure.
The combination of multiple external funding sources, collectively referred to as capital in corporate finance, that are used to finance a corporation is known as the capital structure. It is listed in the balance sheet of the company and comprises equity owned by shareholders, debt, and preferred shares.
The over- or under-capitalization is avoided. capital structure aids the business in boosting profitability through increased returns to stakeholders. Maximizing shareholder capital while lowering overall capital costs is made possible with the use of an appropriate capital structure.
Following are some of the key characteristics of a sound capital structure: Maximum Return, Less Risky, Safety, Flexibility, Economy, Capacity, and Control are among the factors.
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