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  • Capital Structure Influences The Value of The Firm by Operating On Either

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    Capital structure influences a firm's value by impacting expected earnings and cost of capital. Using debt financing can reduce a firm's tax liability due to the deductibility of interest payments but increases financial risk. There are challenges in determining a firm's cost of capital such as controversies around how financing methods and levels impact costs, calculating equity and retained earnings costs, and whether to use future or historical costs.

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    Capital structure influences a firm's value by impacting expected earnings and cost of capital. Using debt financing can reduce a firm's tax liability due to the deductibility of interest payments but increases financial risk. There are challenges in determining a firm's cost of capital such as controversies around how financing methods and levels impact costs, calculating equity and retained earnings costs, and whether to use future or historical costs.

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    9 views3 pages

    Capital Structure Influences The Value of The Firm by Operating On Either

    Uploaded by

    Ab
    Capital structure influences a firm's value by impacting expected earnings and cost of capital. Using debt financing can reduce a firm's tax liability due to the deductibility of interest payments but increases financial risk. There are challenges in determining a firm's cost of capital such as controversies around how financing methods and levels impact costs, calculating equity and retained earnings costs, and whether to use future or historical costs.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
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    Effects of capital structure on Cost of Capital

    Capital structure influences the value of the firm by operating on either


    expected earnings or the cost of capital or both. Due to tax deductability
    of interest payments, recourse to debt financing generally reduces the
    firm's tax liability, but increases the financial risk.
    Effects of capital structure on Cost of Capital
    Capital structure influences the value of the firm by operating on either
    expected earnings or the cost of capital or both. Due to tax deductability of
    interest payments, recourse to debt financing generally reduces the firm's tax
    liability, but increases the financial risk.
    These problems in determination of cost of capital can briefly be summarized as
    follows:
    •Controversy regarding the dependence of cost of capital upon the method and level of
    financing. ...
    •Computation of cost of equity. ...
    •Computation of cost of retained earnings and depreciation funds. ...
    •Future costs versus historical costs.

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