Optimal cost of capital
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What are some of the advantages/disadvantages of using equity versus using debt to capitalize a firm and how would you decide the appropriate debt to equity mix for a specific firm?
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Solution Summary
The answer contains the advantages and disadvantages of using equity and debt and the steps to compute optimal cost of capital.
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What are some of the advantages/disadvantages of using equity versus using debt to capitalize a firm and how would you decide the appropriate debt to equity mix for a specific firm?
Meaning and types of equity:
Equity means the amount invested by the owners in the form of share capital in the Corporation. Equity is the difference between the assets and the liabilities if the company. Equity is of two types. The amount invested by the shareholders .i.e., if a shareholder has invested 100 shares of $10 each, then the equity amount held by him is $ $1000.Another type of account is Retained earnings. Retained earnings are the amount set out of the profit earned by the company for future expansion or diversification. This amount actually belongs to the stockholders. Therefore, the retained earnings are also the other form of equity. If the company has $ ...
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