Capital Structure: Weighted Average Cost of Capital (WACC)

2010 ◽  
pp. 193-221
Keyword(s):  
Capital Structure ◽  
Average Cost ◽  
Cost Of Capital ◽  
Weighted Average

THE CAPITAL STRUCTURE OF ISLAMIC BANKS UNDER THE CONTRACTUAL OBLIGATION OF PROFIT SHARING

1999 ◽  
Vol 02 (03) ◽  
pp. 243-283 ◽  
Author(s):  
TALLA AL-DEEHANI ◽  
RIFAAT AHMED ABDEL KARIM ◽  
VICTOR MURINDE
Keyword(s):  
Capital Structure ◽  
Average Cost ◽  
Financial Risk ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Market Value ◽  
Profit Sharing ◽  
Islamic Banks ◽  
Contractual Obligation ◽  
Islamic Bank

Islamic banks are established with the mandate of conducting all their transactions in conformity with Islamic precepts which prohibit, among other things, the receipt and payment of interest. Unlike conventional (non-Islamic) commercial banks, Islamic banks mobilise funds primarily via investment accounts using profit sharing contracts. In this paper, we argue that the concept of financial risk, on which modern capital structure theories are based, is not relevant to Islamic banks. Given the contractual obligation binding the Islamic bank's shareholders and investment account holders to share profits from investments, we propose a theoretical model in which, under certain assumptions, an increase in investment accounts financing enables the Islamic bank to increase both its market value and its shareholders' rates of return at no extra financial risk to the bank. We theoretically demonstrate that such a process leads to an increase in the Islamic bank's market value but does not alter its weighted average cost of capital, i.e. the weighted average cost of capital of the Islamic bank remains constant. The evidence obtained from estimating and testing the model on annual accounts drawn from a sample of 12 Islamic banks lends support to our theoretical predictions, as do the results from counterfactual simulations and sensitivity experiments. Hence, in the context of Islamic banks both our theoretical and empirical results provide a new dimension to the theory of capital structure, which is based on a mixture of only debt and equity financing. In general, viewed against the main competing tenets of the traditional school and the MM standpoint, our results provide an encompassing paradigm on the theory of capital structure.

scholarly journals Cost of capital adjusted for governance risk through a multiplicative model of expected returns

2011 ◽  
Vol 1 (1) ◽  
pp. 9-18 ◽  
Author(s):  
Rodolfo Apreda
Keyword(s):  
Capital Structure ◽  
Linear Approximation ◽  
Average Cost ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Multiplicative Model ◽  
Conventional Wisdom ◽  
Expected Returns ◽  
The Cost ◽  
Governance Risk

This paper sets forth another contribution to the long standing debate over cost of capital, firstly by introducing a multiplicative model that translates the inner structure of the weighted average cost of capital rate and, secondly, adjusting such rate for governance risk. The conventional wisdom states that the cost of capital may be figured out by means of a weighted average of debt and capital. But this is a linear approximation only, which may bring about miscalculations, whereas the multiplicative model not only takes account of that linear approximation but also the joint outcome of expected costs of debt and stock, and their proportions in the capital structure. And finally, we factor into the cost of capital expression a rate of governance risk.

scholarly journals Optimization of capital structure as a tool for managing the value of dairy enterprises

2021 ◽  
pp. 111-124
Author(s):  
O.M. Varchenko ◽  
I. Artіmonova ◽  
N. Kholodenko
Keyword(s):  
Capital Structure ◽  
Financial Management ◽  
Average Cost ◽  
Financial Stability ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Market Value ◽  
Business Entities ◽  
Retained Earnings ◽  
The Capital Structure

The article is devoted to the study of methodological and practical approaches to optimizing the capital structure as a tool for managing the value of dairy enterprises. It is established that the most common and suitable for research in the context of optimizing the capital structure are two theories: compromise and the theory of the hierarchy of funding sources. It is argued that compromise models are not designed to accurately determine the optimal capital structure of the enterprise, but allow that the owners from the standpoint of risk is most advantageous to rank sources of funding as follows: retained earnings; debt sources; equity instruments, shares. It is proved that only in the complex use of approaches of foreign theories of capital structure optimization and developments of domestic scientists taking into account the environment of business entities it is possible to develop effective tools for maximizing the market value of the enterprise, minimizing the average market value of capital and risk of financial stability. The calculation of the integrated indicator of financial stability is offered, which allows to determine the level of the financial stability reserve, which allows to take into account the industry specifics and to carry out current monitoring of financial stability at the enterprise. It is substantiated that one of the methods of quantitative assessment of capital structure and substantiation of its optimal structure is the method of capital expenditures. It is argued that the estimated weighted average cost of capital varies in a fairly narrow range, is one of the key factors in the value of business, and achieving a minimum level of such a barrier rate increases the company's ability to make effective investments. It is established that determining the optimal financial structure of capital is one of the most difficult problems of financial management of dairy enterprises. It was found that the management of the formation and use of capital of dairy enterprises is focused on meeting the needs of sources of financing of their economic activities, and to achieve a balanced structure of sources of financing of capital by economic entities is possible only on the basis of optimization criteria. It is proved that the calculation of the weighted average cost of capital based on the capital assets model (CAPM) should be used provided reliable information on intra-industry indicators, in a developed stock market and the turnover of shares in the securities market. Key words: capital structure. cost of capital, cost management, dairy enterprises.

scholarly journals USING THE CONCEPT OF TRANSACTION COSTS IN CAPITAL STRUCTURE MANAGEMENT

2020 ◽  
pp. 71-75
Author(s):  
Svetlana Viktorovna Lepeshkina
Keyword(s):  
Decision Making ◽  
Capital Structure ◽  
Transaction Costs ◽  
Average Cost ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Point Of View ◽  
Efficiency Assessment ◽  
Modern Period ◽  
The Cost

The article discusses the theoretical aspects of issues related to the assessment of capital, the formation of its structure from the point of view of making management decisions in cost formation on its attraction and maintenance. The concept of “capital” is clarified from the point of view of its formation and subsequent efficiency assessment. The approach to the formation of capital structure concepts of the modern period on the development basis is justified. The method of estimating the cost of capital and the formation of the target capital structure, based on the inclusion of transaction costs in the cost of capital, which allows you to more accurately determine the size of these costs in relation to the amount of equity and more accurately generate the weighted average cost of capital of the organization. The empirical nature of the study allows us to use the proposed method of forming the capital structure in relation to various (individual) conditions of the organization’s functioning, followed by clarification of the parameters of decision-making based on the set goals of the organization’s activities.

scholarly journals THE INFLUENCE OF THE CAPITAL STRUCTURE ON THE VALUE OF THE BUSINESS

2020 ◽  
Vol 8 (10) ◽  
pp. 265-268
Author(s):  
A. V. Strokova
Keyword(s):  
Capital Structure ◽  
Average Cost ◽  
Financial Stability ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Equity Capital ◽  
Minimum Condition ◽  
Net Profit ◽  
The Capital Structure

This article is devoted to the analysis of influence the capital structure on the value of a business using the example of PJSC "Rosneft". The article analyzes the capital structure of PJSC "Rosneft" and determines the most optimal one based on generalizing the relevant criteria - minimizing the weighted average cost of capital, maximizing net profit per 1 ruble. equity capital and compliance with the minimum condition for financial stability.

scholarly journals ANALISIS STRUKTUR MODAL YANG OPTIMAL PADA PT. TELEKOMUNIKASI INDONESIA, Tbk PERIODE 2004-2008

2017 ◽  
Vol 6 (2) ◽  
Author(s):  
Arnold Japutra ◽  
Winda Wijaya
Keyword(s):  
Decision Making ◽  
Capital Structure ◽  
Average Cost ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Return On Equity ◽  
Optimal Capital Structure ◽  
Optimal Capital ◽  
A Company ◽  
The Capital Structure

<p>Capital structure is one of the most important elements in a company. Decision-making errors in the capital structure may cause a very big impact and it can force the company into bankruptcy. Therefore, in order to continue operating, a company should have an optimal capital structure. Optimal capital structure is achieved at the lowest cost level and the highest level return on equity. The research objective is to measure the financial performance of PT Telekomunikasi Indonesia, Tbk by analyzing the composition of capital structure, ACC, ROE, and whether the capital structure by the years 2004-2008 were optimal or not. From the results of the research, capital structure of PT Telekomonikasi Indonesia, Tbk during the years 2004 -2008 showed an optimal capital structure. The result can be seen as the ROE produced by the company is bigger compared to Weighted Average Cost of Capital (WACC) for each period.</p><p>Key words : Capital structure, return on equity, Weighted Average Cost of Capital</p>

Procter and Gamble: Cost of Capital

2017 ◽  
pp. 1-16
Author(s):  
Kenneth M. Eades
Keyword(s):  
Capital Structure ◽  
Average Cost ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Business Risk ◽  
Household Products ◽  
A Company

To assess whether a company should enter the household-products market, Procter and Gamble's weighted-average cost of capital is computed. Clorox's cost of capital is also computed as a check on the P&G estimate. The case emphasizes the conceptual as well as mechanical aspects of computing cost of capital for a company with homogeneous business risk and stable capital structure.

scholarly journals Analisis Struktur Modal dan Laba pada Perusahaan Umum Air Minum Daerah (Perumda) Tirta Mangkaluku Kota Palopo Tahun 2016 - 2020

2021 ◽  
Vol 4 (2) ◽  
pp. 234
Author(s):  
Renaldi Renaldi ◽  
Suryati Suryati
Keyword(s):  
Capital Structure ◽  
Financial Performance ◽  
Average Cost ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Profit Rate ◽  
Return On Equity ◽  
The Impact ◽  
The Capital Structure

AbstrakStruktur modal dikatakan optimal bilamana dapat meminimumkan biaya modal rata-rata tertimbang (Weighted Avarage Cost of Capital) dan memaksimumkan Return On Equity (ROE). Disamping itu akan tergambar apakah struktur modal tersebut menghasilkan Lavarage yang positif yaitu suatu kondisi dimana Rentabilitas Ekonomi lebih besar dari biaya modal rata-rata tertimbang. Penelitian yang dilakukan pada Perusahaan Umum Air Minum Daerah Tirta Mangkaluku Kota Palopo untuk menganalisis pengaruh struktur modal terhadap biaya modal yang ditimbulkan, menganalisis berapa besar proporsi modal pinjaman jangka panjang pada beberapa alternatif struktur modal (2016 – 2020) dan menganalisis tingkat laba yang diperoleh perusahaan pada setiap alternatif struktur modal tersebut. Hasil penelitian menunjukkan bahwa struktur modal pada perusahaan ini khususnya tahun 2019 dan 2020, sudah optimal dimana Return On Equity (ROE) setelah hutang jangka panjang adalah 1,45% (2019) dan 1,60% (2020) yang lebih besar dari biaya modal rata-rata tertimbang yaitu 0,50% (2019) dan 0,37% (2020). Selain hal diatas, Struktur modal tersebut juga telah menghasilkan Leverage positif dimana secara rata-rata Rentabilitas Ekonomi diangka 1,52% jauh lebih besar dari rata-rata biaya modal rata-rata tertimbang yaitu sebesar 0,60%. Dengan mempertahankan komposisi struktur modal yang ada atau mengembangkan pada komposisi yang lebih baik, maka semakin menjamin kontribusi dari laba Perusahaan Umum Air Minum Daerah Tirta Mangkaluku kepada Pendapatan Asli Daerah (PAD) kota Palopo. Kata Kunci : Biaya Modal, Kinerja Keuangan, Struktur ModalAbstractThe optimization of capital Structure can happen if there's a condition where the Weighted Average Cost of Capital can be minimized and the Return of Equity (ROE) is maximized. The result will tell whether the capital structure can bring out the positive leverage or not. The positive leverage is a condition where economic rentability is bigger than the Weighted Average Cost of Capital. The purpose of the research on Mangkaluku Municipal Waterwork in Palopo City are to analyze the impact of capital structure toward the capital cost, to analyze the proportion of long-term capital loan on some alternatives of capital structure from 2016 to 2020 and to analyze the profit rate that is gained by the company on those alternatives of capital structure. The result of this study is showing that the capital structure rate of this company, especially in 2019 until 2020 shows the optimization of Return of equity (ROE) in this company after the long-term debt. The Return of Equity (ROE) in 2019 and 2020 reached 1,45% and 1,60%. The number is bigger than the Weighted Average Cost of Capital  as much of 0,50% in 2019 and 0,37% in 2020. Besides, that structure modal has resulted in positive levarage, where the average of economic rentability is 1,52%, which is 0,60% bigger than the Weighted Average Cost of Capital. By maintaining the existing modal structure composition or to develop the better composition, it will secure the profit contribution in the company of Mangkaluku Municipal Waterpark toward the locally-generated revenue of Palopo City. Keyword: Capital Structure Analisys, Cost of Capital, Financial Performance

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