Page 10 - PowerPoint Presentation
P. 10
COST OF CAPITAL
Financial Gearing
• The level of debt within a company. It is a measure of financial leverage
(showing the degree to which a company’s operations are funded by
debt).
A highly geared company = a company with a lot
of debt!!
• Capital structure = The relationship between debt and equity in
financing the assets of the company.
• Refer to analysis of financial information (ratios) for important capital
structure ratios.
Is debt good / bad???
• The cost of debt (Kd) is lower than the cost of equity (Ke) due to lower
risk, lower expected returns and tax advantages.
• However, the debt brings financial risk into the company’s financial
structure which increases the required return of ordinary shareholders
(Ke) and debt providers (Kd).
10
