Which alternative capital structure is more advantageous? Why?© BrainMass Inc. brainmass.com June 3, 2020, 9:01 pm ad1c9bdddf
Capital structure means mix composition of debt and equity in the organization. It affects the cost of capital of the organization. A firm's long-term success depends upon the firm's investments earning a sufficient rate of return. This sufficient or minimum rate of return necessary for a firm to succeed is called the cost of capital.
The cost of capital can also be viewed as the minimum rate of return required keeping investors satisfied. Thus it is used to know the rate of return expected by the investors.
Cost of capital (WACC)=
(Cost of Equity x Proportion of equity from capital)+ (Cost of debt x Proportion of debt from capital)+ (Cost of Preference share x Proportion of preference share from capital).
Equity includes retained earnings and the cost of R/E is taken at cost of equity. Cost of ...
Solution gives 3 options for debt/equity composition in a business, with brief analysis of their risks, in 500 words.