Essay About Much Debt And Cost Of Capital

Finance Journal
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I had a little bit of trouble while trying to follow this chapter because it was so mathematically based. I touched on this fact in my last journal entry, but I wish the text book included more written out explanations in everyday wording to accompany the mathematical formulas. It provides formulas with explanations of all the components and examples but I wish there was more on what the equations are used for in real life. The chapter got right into explanations on different ways to calculate the cost of capital but I wish they would have included more explanation of the overall concept so I had more background knowledge and a basic understanding before I began the mathematical portion of the chapter.All firms have the goal to have an optimum capital structure, because it is the ideal structure that will lead to the most profitable gains. Debt is the cheapest form of financing so companies often use this form more than the others. But, it is only profitable to a certain point. Debt is a smart way to finance, but when a company starts to acquire too much debt it looks bad to creditors and investors. If they pass the acceptable limit, people question their financial stability and the company will suffer. The cost of capital curve depicts this concept with its U-shape. As the debt-asset ratio increases, the cost of capital initially goes down. The lowest point on the curve is the optimum capital structure, and after this point the line starts to curve upwards and using debt as a means of financing becomes less and less profitable, and therefore less and less appealing.