Pratt and Grabowski (2008) also state that WACC has two sides: pretax and after tax. The valuation of the assets is different before and after the tax rate. Tax can be attached only to the debt financing part or loans taken from the bank. Since interest paid on debt reduces Net Income of the company, it also reduces the tax payments for the firm. The formula for calculation of WACC is: WACC = rD (1- Tc )*( D / V )+ rE *( E / V ) Where: Rd is the interest paid on debt 1-Tc is the after tax rate D represents the portion of money borrowed from
The final financial metric to look at is WACC. Before the debt leverage, Blaine’s WACC was only the cost of equity, as they had no debt. Cost of equity was calculated using the 10 year UST rate, 5.02%, because it is a good measurement of the risk free rate, plus the firm’s beta, 0.56, multiplied by the risk premium, which we concluded to be 5%. This gave Blaine, when unlevered, a WACC of 7.82%. When taking the $40 million debt and $100 million cash buyout of stocks into account, cost of debt is now a factor.
WACCis a calculation of organization's cost of capital in which each category of capital is proportionately weighted. The importance and usefulness of WACC, as a financial tool for investor and firms is well accepted among the financial analysts. During making financial decisions, managers are assumed to have a target capital structure in their mind according to the relative propations of equity, preference shares and loans may vary . The cost of capital is decided by investors to make investment decisions and evaluate projects with similar and dissimilar risks. Calculation of important metrics of appraisal like net present
These are equity Financing Corporation that looks for firms that can give a 30% return on investment every year. They basically participate in the organizing and management of the business they fund and hold a huge capital grounds for up to $500 million by investing in all levels of the business as it grows. Private equity comprises of majority of institutional investors and accredited investors who are in a position that can commit large sums of money for long phases of time. As where private equity investments are concerned they often demand long holding periods to permit for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company. A new source of financing is creating a vast new wave of mergers and acquisitions.
If additional liquid cash exists, then it is the most relevant source of finance for new projects. Alternatively, pressurising debtors for early settlement or extending the payment period for creditors could help increase the cash resources. However, if this strategy doesn’t work, then the company must consider raising finance externally. If finance needs to be raised externally, should it be debt or equity? Here a company needs to consider how much it should borrow.
It is often the quality, and growth of a company's earnings that drive its stock price. The ratio is calculated by dividing the operating profit by turnover and multiplying the quotient by 100. 11. The price/earnings ratio (P/E) is one of the most trusted investment valuation indicators. This
It forms part of the capital structure of the Company. It affects the firm’s capital structure, Interest rates, risks and the market’s overall attitude towards risk. The capital structure are sources of financing for business projects which can either be in form of debt or equity. Most small companies will opt for short term debt as opposed to large companies which might opt for securities such as bonds to raise the initial capital. Debt is always preferred to equity because of tax shield benefit of debt among other benefits.
For example, capital markets are less developed than other emerging markets (Bley and Chen, 2006). As a result, bankruptcy costs are lower because of the tendency of companies to prefer private equity financing (Fernandez, Kumar and Mansour, 2013). Furthermore, the economies in the GCC are more dependent than most economies on the price of oil, the price of the US dollar and the global economic conditions (Fasano and Iqbal, 2003). Aim and Objectives The overall aim of this study is to identify the determinants of capital structure in the GCC. Secondary aims of this study include: • Identifying the most statistically significant firm specific and market determinants of capital structure identified from literature • Determining the strength, magnitude and direction of the relationship between the most statistically determinants and capital structure • Using results of the study to guide financial mangers as to how best determine the optimal structure
So bondholders may try to put restrictions on the dividend payouts through bond indenture Furthermore, Alli et al. (1993) explained that as the number of stockholders would increase, the agency problem would also increase and the need for monitoring the actions of the management would also increase. If dividends can mitigate this problem, we can expect a positive relationship between number of common stockholders and dividend payout ratio. Large sized firms with stable earnings and profitability record will have easy access to outside capital. Dickens, Casey, and Newman (2002) studied the impact of ownership in the banking industry and concluded that management's ownership was negatively correlated with the payout ratio.