The Weighted Average Cost Of Capital

Now that we have the costs associated with the main sources of capital the firm employs, we need to worry about the specific mix. As we mentioned earlier, we will take this mix, which is the firm's capital structure, as given for now. Also, we will focus mostly on debt and ordinary equity in this discussion.

In Chapter 3, we mentioned that financial analysts frequently focus on a firm's total capitalization, which is the sum of its long-term debt and equity. This is particularly true in determining cost of capital; short-term liabilities are often ignored in the process. We will not explicitly distinguish between total value and total capitalization in the following discussion; the general approach is applicable with either.

0 0

Post a comment