Tag: equity

Theories of Capital Structure

Posted on by Rhys Williams

I don’t normally venture in to discussions of financial topics but I have recently taken a course on Corporate Finance and whilst it isn’t my normal cup of tea it was quite interesting and I learned a lot! In today’s article, I therefore want to summarise some concepts around capital structure and discuss the various theories I learned which go some way to explain observed differences in leverage ratios of companies (although, there is no universal theory of debt, there are instead theories which may apply in different circumstances).

To start, the capital structure of a company refers to how it finances its operations and growth. [...]

What is the WACC?

Posted on by Rhys Williams

The weighted average cost of capital (WACC) is simply an average cost of the two types of capital: debt and equity. It tells us the amount an investor would need in compensation to invest in a project. Therefore if we were to offer a lower return than the WACC, we would find that we have no investors; a return greater than WACC would lead to a situation where we have excess demand for our project.

To theoretically calculate the rate of return on a project we would need to compare it with existing returns on projects which have similar risk characteristics, and then set the return similar to these projects to ensure that we can attract finance. [...]