Debt-Equity Mix

Term Paper # 96202

Accounting > Financial
Accounting > Managerial
Business > Accounting
Business > Finance, Investment and Banking
Business > Management

Debt-Equity Mix

An analysis of why weighted average cost of capital (WACC) is important to an organization.

824 words () | 3 sources | MLA | 2007 United States

Paper Summary:

This paper summarizes a simulation for examining and calculating a debt to equity mix. It includes, for each major phase in the simulation, a description of the scenario and the recommended solutions along with the logic for the decisions. It also details a summary for the different capital structure concepts addressed in this simulation and discusses why weighted average cost of capital (WACC) is important to an organization. It then discusses the impact that WACC has on capital budgeting and structure.

Outline:
Abstract
Debt-Equity Mix
Simulation Scenario and Recommendations
Importance of WACC to an organization
Impact of WACC on Capital Budgeting and Structure
Conclusion

From the Paper:

"Every organization must determine the amount of debt and equity used to fund operations. The Weighted Average Cost of Capital (WACC) is a vital tool for determining the optimal capital structure mix. WACC considers the relative proportions and costs of the debt and equity components to give the overall cost of capital for a firm (UOP Debt-Equity Mix Simulation, 2006 4). Choosing the correct mix of debt and equity optimizes the WACC for the organization. This paper summarizes a simulation for determining appropriate levels of debt and equity. Presented are details of each major phase of the simulation along with a recommended solution and an explanation for the solution. Other capital structuring questions will be addressed such as why the WACC is important to an organization and what affects the WACC has on capital budgeting and structure."

Sample of Sources Used:

Albrecht, W.S., Stice, J.D., Stice, E.K, Swain, M.R. (2005). Accounting: Concepts and Application p. 429-1210. The Thomson South-Western Corporation 9e.
Brealey, R.A., Myers, S.C., & Marcus, A.J. (2003). Fundamentals of Corporate Finance p.295-380. The McGraw Hill Companies, Inc. 4e.
University of Phoenix (2006). Week 4 "Debt-Equity Mix" Simulation. FIN 325 Financial Analysis Business Course Website: https://ecampus.phoenix.edu/secure/resource Sourced November 10, 2006.