Only: Rate of Return for Stocks and Bonds for Math Guru
Capital Asset Pricing Model is an instrument that can be used to calculate the expected return on investment and its risk. This can be used to understand the influence of debt and equity on a company’s capital structure, as each financing option has its own cost associated with it. The Weighted Average Cost of Capital (WACC) is a measure that takes into account both debt and equity in calculating a company’s overall cost of capital. It is the return that investors need before they can be compensated for taking additional risks.
The flotation costs are the cost of issuing new securities. They tend to be higher when issuing equity shares than they are when issuing bonds. If more equity is being allocated, this could result in an increase on WACCT. These concepts help to understand how much leverage should be used by a company and which type of financing will offer the highest returns with minimal risk.