Capital Structure Essay Example | Topics and Well Written Essays - 500 words

Capital Structure - Essay Example I strongly believe in this context that the use of debt and equity in a proportionate manner aids in raising capital. Thus, based on my understanding, businesses are identified to consider two important elements that include â€Å"cost of capital† and â€Å"Weighted Average Cost of Capital† (WACC) for the purpose of accomplishing their respective business targets in long term. Subsequently, by mixing debt and equity, the aforesaid two elements can be reduced as per my knowledge. I think that obtaining debt in an adequate manner as a source of capital ensures in generating low and real risks of financial distress (Grundy, n.d.). In this regard, I support the fact that the use of only debt financing or equity financing is accountable for making financial distress in long run. As per my understanding, market values play an imperative role for companies at the time of raising capital. These are important as investors invest based on firms’ value and risks associated with businesses. Subsequently, I consider that there exists a complex relationship prevailing between WACC and debt, as increased amount of debt has positive as well as negative influences on the capital structure of a company. Consequently, I conjure that WACC values increase for more returns and on the other hand, these decreases for low cost of debt as compared to equity. In this regard, from the viewpoints of Modigliani & Miller, I understood that the market value of companies is not based on their respective capital structure totally but is also dependent on other factors (Grundy, n.d.). I strongly believed that gearing is a procedure of ascertaining capital structure of a company based on the relationship persisting between equity and debt. Thus, movements of WACC and share price impose significant impact on shareholders’ wealth. In this regard, the best example of understanding different aspects of debt and equity