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The issue of equity, on the other hand, would signal some lack of confidence, or at least that the share is over-valued. An issue of equity may then lead to a drop in share price. (This does not however apply to high-tech industries where the issue of equity is preferable, due to the high cost of debt issue as assets are intangible. [4])
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).
In economics and accounting, the cost of capital is the cost of a company's funds (both debt and equity), or from an investor's point of view is "the required rate of return on a portfolio company's existing securities". [1]
But also disadvantages including: new equity dilutes current ownership share of profits and voting rights (impacting control), cost of underwriting for equity is much higher than for debt, too much equity = target for a leveraged buy-out by another firm, and no tax shield, dividends are not tax deductible, and may exhibit double taxation.
The national debt held by the public has leaped from 40 ... the economy will grow by a little more than 4 percent. Past aggressive economic expansions were often heavily influenced by rapid labor ...
See today's average mortgage rates for a 30-year fixed mortgage, 15-year fixed, jumbo loans, refinance rates and more — including up-to-date rate news.
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.