Capital Structure and WACC: Determination and Usefulness

Running head: BUSINESS2
Business2
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1BUSINESS2
Table of Contents
Capital structure.........................................................................................................................2
Determination of WACC...........................................................................................................2
Usefulness of WACC in determining the capital project feasibility..........................................4
Project evaluation recommendation...........................................................................................4
Marginal cost of capital..............................................................................................................5
Reference....................................................................................................................................6

2BUSINESS2
Capital structure
Capital structure of any company is the amount of equity and debt employed by it for
financing its assets and funding its operations. The capital structure is generally known as
debt to capital ratio or debt to equity ratio. For example, Apex Printing’s total liabilities are $
73,050,000 for the year ended 31st December 2013 whereas total stockholder’s equity
amounted to $ 84,550,000 for the same period (Robb & Robinson, 2014). Therefore, debt to
equity ratio is 0.86. Equity and debt are used by the company to carry on its business
operations, funding the acquisitions, capital expenses and investments. Each component of
the capital structure like equity capital, preference capital and long - term debt has different
cost and is raised through various sources (Rampini & Viswanathan, 2013).
Determination of WACC
WACC or weighted average cost of capital is the key metrics used for evaluating the
feasibility of capital project investment. It is the rate at which the future cash flows of any
company are required to be discounted to compute the present value of the project. Further
this is used to perceive the riskiness of cash flows.
Computation of WACC –
WACC = (E/V * Ke) + [(D/V * Kd) * (1-T)]
Where,
E/V = weight of equity
D/V = weight of debt
Ke = cost of equity