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Capital Structure
Capital Structure
Chapter Six
1 Introduction
How should the company decide the mix of equity and debt
capital?
2 Practical Issues
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3 Theories of Optimal Capital Structure
a) Yield<Ke
b) Gearing causes Ke to rise
% Ke
Cost
of
Capital
WACC
Kd
0 X Gearing
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Key Points:
% Ke
Cost of
Capital
WACC
Kd
0 Gearing
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Key points:
Vd=Vu+VDT
WACC=Keu{1-T x Vd}
(Ve+Vd)
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4 Pecking Order Theory
! Internally-generated funds
! Debt
! New issue of equity
Firms simply use all their internally –generated funds first then move
down the pecking order to debt and the finally to issuing new equity.
Firms follow a line of least resistance that establishes the capital
structure.
Debt
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