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Such costs are separated into a firm's cost of debt and cost of equity and attributed to these two kinds of capital sources. A firm's overall cost of capital, which consists of the two types of capital costs, is then determined as the weighted average cost of capital. Knowing a firm's cost of capital is needed in order to make better decisions.
The idea applied is that, in general, equity may be viewed as a call option on the firm: since the principle of limited liability protects equity investors, shareholders would choose not to repay the firm's debt where the value of the firm is less than the value of the outstanding debt; where firm value is greater than debt value, the ...
As the debt equity ratio (i.e. leverage) increases, there is a trade-off between the interest tax shield and bankruptcy, causing an optimum capital structure, D/E*. The top curve shows the tax shield gains of debt financing, while the bottom curve includes that minus the costs of bankruptcy.
A higher debt-to-equity ratio leads to a higher required return on equity, because of the higher risk involved for equity-holders in a company with debt. The formula is derived from the theory of weighted average cost of capital (WACC).
The total capital for a firm is the value of its equity (for a firm without outstanding warrants and options, this is the same as the company's market capitalization) plus the cost of its debt (the cost of debt should be continually updated as the cost of debt changes as a result of interest rate changes).
It seems that a grand paradox of wealth inequality is the fact that it’s more expensive to be poor than it is to be rich. This theory has been called the “Boots Theory,” popularized by a ...
2. Put extra money toward your mortgage payments. Paying $50 to $100 more per month can make a real difference in building your equity and reducing the interest you pay over the life of your loan.
Cash-out refinance: Rather than taking out a second mortgage with a home equity loan, you can replace your original mortgage altogether – and borrow even more – with a cash-out refinance. The ...