Balance sheet (Statement of Financial Position)
Assets Equity 20,000
Current Assets 5,750 Capital stock 11,000
Retained earnings 9,000
Cash 1,000
Accounts receivable 1,500 Liabilities 2,000
Inventory 3,000
Prepaid expenses 250 Current Liabilities 700
Accounts payable 600
Long-term Assets 16,250 Taxes payable 100
Investments 5,000 Long-term Liabilities 1,300
Land 2,250
Buildings 6,000 Long-term loans 300
Machines & Equip. 3,000 Company bonds 1,000
22,000 22,000
SOURCES OF FINANCE
EQUITY
• RETAINED EARNINGS /+ SALES, SALE OF ASSETS/
• ISSUE OF SHARES
DEBT /LIABILITIES/
• TRADE CREDIT
• FACTORING
• LEASING
• OVERDRAFT & BANK LOAN
• BONDS AND DEBENTURES
0PTIMAL CAPITAL STRUCTURE
• OPTIMAL CAPITAL STRUCTURE ACHIEVED
WHEN WACC IS MINIMIZED – POINT X
• COST OF EQUITY RAISES AS DEBT LEVEL
RAISES
• INTEREST PAYMENTS ON DEBT PROVIDE
A TAX SHIELD EFFECT
REQUIRED RETURN
= RISK FREE RATE + RISK PREMIUM
WACC = COST OF EQUITY * PROPORTION OF EQUITY +
COST OF DEBT AFTER TAX * PROPORTION OF DEBT
DATA SOURCES FOR CALCULATION
• RISK FREE RATE /10Y GOVERNMENT BONDS HTTP://WWW.INVESTING.COM/MARKETS/
DATA SOURCES FOR CALCULATION
• BETA OF LISTED COMPETITORS HTTP://FINANCE.YAHOO.COM/
DATA SOURCES FOR CALCULATION
• MARKET RISK PREMIUM ASWATH DAMODARAN HTTP://PAGES.STERN.NYU.EDU/~ADAMODAR/
DATA