CMA Part 2 | Strategic Financial Management | Capital Structure | LetsLearn Global
Channel: LetsLearn Global
Date: 05/02/2022

Corporate Finance | Capital Structure | Debt Capital
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Capital structure refers to how the firm's assets are financed. If the monetary resources that the current activity is able to produce are not enough to offset the cash-outs due to the company's investment activity, the firm needs to raise new funds from investors. 


Accordingly, capital structure is concerned with explicitly costly forms of financing just as financial debts (bonds, loans, overdrafts) and equity are. In fact, both debt holders and shareholders want to be compensated  for the money they invested into the company. It is then possible to determine the cost of capital as the average of the net cost of debt and equity (WACC).  

Cost of equity is dividend and the cost of net capital is interest. The amount of interest paid to the bond holders will reduce the tax burden as the interest paid  on bonds allowed as an expenses before the tax is paid. The tax saving on the interest payment is known as tax shield.

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