Finance



Finance

The research paper “The cost of capital, corporation finance and the theory of Investment”, is about the cost of capital, which is one of the most developed areas of finance , in particular following the definitions of Modigliani and Miller , the capital asset pricing model of William Sharpe and the whole financial theory. The research paper has defined the central role of the cost of capital, because it is necessary to maintain compatibility between the variables analyzed in order to obtain consistent and correct results. In theory they show at least three types of cost of capital, which are the cost of equity, the cost of debt and the weighted average cost of capital. The cost of equity capital is equivalent according to the theory of capital asset pricing model to the "rate of return on equity". Cost of equity is the minimum rate of return that a company must offer to its shareholders in order to reward funds received from them. The cost of equity itself incorporates the first two components of return "time", the second a remuneration for "risk" volatility to which they are subject. The other coast of capital discussed in paper is about the cost of debt, which the effective rate of return that a firm pays to its debt holders. This can be measure before or after the tax returns, because of the interest expenses, which are deductible. In often cases the after tax cost is mostly observed. The third element of capital structure and most important is the weighted average cost of capital (WACC), which is the weighted average of cost of equity and the cost of debt capital for any company. According to Modigliani and Miller, the WACC is the minimum rate that a company must generate as return on investment in order to pay creditors, shareholders and other providers of capital exchangeable, warrants, stock options. Companies tracking down financial capital from various sources: ordinary shares, preference shares, debt ordinary, convertible bonds, exchangeable bonds, warrants, options, severance pay, stock options, and grants. The WACC is calculated taking into account the relative weight of each component of capital structure.

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The research in the economic capital structure was created with a well-known work of Franco Modigliani and Merton Miller in 1958, which has the formula, in the simplest version of the Modigliani-Miller theorem. This result is ...