Question

(1) Why do companies need capital? (2) What sources of long-term debt capital do firms use?...

(1) Why do companies need capital?
(2) What sources of long-term debt capital do firms use?
(3) Write the formula to calculate the weighted average cost of capital

Homework Answers

Answer #1

1) All the companies require capital to purchase assets to carry out the operations of the entity, Also to maintain the day to day operations of the company. The capital to acquire assets are satisfied through the common stock and debt capital whereas the day to day affairs are satisfied through working capital like current assets and current liabilities.

2) Surces of lon term debt capital are Loans from banks and fincial instituitions, Issue of notes , bonds (long term in nature) and issue of debentures.

3) Weighted average cost of capital = Market value of equity / Total value * Cost of equity + Market value of debt *cost of debt (post tax)/ Total value.

Total value of firm = Market value of equity + Market value of debt

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