The capital structure is the particular combination of debt and equity used by a company to finance its overall operations and growth.
Debt comes in the form of bond issues or loans, while equity may come in the form of common stock, preferred stock, or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure.
Short-term debt, also called current liabilities, is a firm’s financial obligations that are expected to be paid off within a year. It is listed under the current liabilities portion of the total liabilities section of a company’s balance sheet.
Does it matter whether a company’s assets are being financed with 50% from a bank loan and 50% from investors’ money? Does that form of capital structure, where 50% of assets comes from debt and 50% from equity, influence how a company succeeds in business?
This course addresses these questions by focusing on the theory of capital structure. Specifically, this course explains the concept of capital structure and introduces you to the most common formula used when comparing a company’s return to the cost of capital: The weighted average cost of capital (WACC). Also, course exposes the concept of how tax policy affects a company’s true cost of capital.
Completing this course should take you approximately 5 hours.
Upon successful completion of this course, you will be able to:
- Explain the different components of a company’s capital structure;
- Explain the Modigliani-Miller theorem in finance;
- Compute the market value and book value of a company; and
- Apply the WACC formula for estimating a company’s cost of capital.