The ultimate capital structure formed with debt, equity, and preferred debt that a company strives to obtain is known as the target capital structure of a company. The target capital structure of a company is decided depending upon some factors that are related to the financial condition of the company.Usually, companies define their target capital structure by optimizing the values of debt and equity and they make sure that the risk associated with the target capital structure is minimum. The company uses its target capital structure while it raises new capital from the market.Factors that Affect the Target Capital Structure ... Read More

Issue costs are one-time costs that are incurred while raising funds by debt and equity financing for a project. As the name suggests, every company needs to spend money while issuing securities in the stock exchange. It is incurred while offering the IPOs or raising debt from the market through issuance of securities. Although the issue costs are not ongoing, it may be a significant amount and hence must be accounted for in the Adjusted Present Value (APV) method of evaluation of a project.In legal terms, issue costs may be attached to any kind of cost that is incurred while ... Read More

Levered beta indicates the systematic risk a stock has in the capital asset pricing model (CAPM). In CAPM, the function of the financial debt versus equity represents the levered beta or equity beta.The debt a company collects from the markets and the equity it has in its reservoir make up the comparison that shows the levered beta of a stock.The debt portion of an investment in a project that has been resourced from the market makes big difference in the financials of the project.If a large amount of debt is used to finance a project, the risks associated with the ... Read More

The choice of using Capital Cash Flow (CCF) in evaluating an investment project is related more to convenience than theoretical grounds. CCF is not the only approach for evaluating an investment project. It is used to evaluate a project when some certain conditions are present. In this article, we will discuss the conditions that should be met in order to choose CCF as an evaluation tool for an investment project.The evaluation of a project rests more on whether debt is fixed, or the debt-to-equity ratio is fixed in an investment. The fact is that, calculations of a project can be ... Read More

The asset beta or unlevered beta of the assets of a company is a representation of the systematic risks of the assets. The asset beta is the weighted average of debt beta and equity beta of the assets. It is also called unlevered beta because it can be determined from the equity beta.To determine the unlevered beta, the equity beta has to be divided by a factor 1 plus (1 minus tax rate) times the debt-to-equity ratio of the company. That is, $$\mathrm{Unlevered \:Beta\:=\:\frac{Equity\: Beta}{1+[(1-Tax \:rate)\times(\mbox{Debt-Equity} \:Ratio)]}}$$Asset Beta and Systematic RiskAsset beta also has a direct impact on the systematic ... Read More

Free Cash Flow (or, FCF) is a term widely used in Corporate Finance. It is the extra cash flow available with the company after deducting the working capital expenditures and the expenses towards fixed assets. It is significant because it shows the flexibility of a company to meet newer expenditures or to allow more payment to security holders and creditors without affecting the operations of the company. FCFs are of interest to the creditors, lenders, borrowers and financial managers, as it is related to the financial wellbeing of a company.How to Calculate Free Cash Flows?FCF can be calculated in a ... Read More

Financial FlexibilityFinancial flexibility refers to the capability of a company to respond to its cash flow or an investment opportunity set in a timely and value-maximizing manner. The concept of financial flexibility is not new, but the most corporate approach has been via the Miller and Modigliani model of capital structure where the corporate performance is judged in a perfect capital market. Such capital markets are frictionless, and they perform in a costless manner where the firms can enjoy complete flexibility of arranging their capital structure.Financial Flexibility is Important in Uncertain TimesFinancial flexibility plays a critical role only when the ... Read More

Free Cash Flow (or FCF) is a widely used metric in finance and it is sometimes known as the unlevered cash flow. But before we dive deeper into why FCFs are called so, let's begin with what FCFs are.What is Free Cash Flow?Free Cash Flow is a cash component that a company retains after investing and distributing money to all kinds of debt outstanding in the market. FCF is a measure of the wellbeing of a company and so, it is of interest to the lenders and debt-holders of the company.Simply put, FCF is the funds that remain after repaying ... Read More

In Free Cash Flow (FCF) method, the interest tax shield is adjusted in the discount rate which is also called weighted average cost of capital (WACC). The adjustment is not done in cash flows of the firm. We can take an alternate measure to adjust the cash flow where the adjustments are not made in tax shields of the business. This is known as Capital Cash Flow (CCF) approach.In this approach, interest tax shields are adjusted in cash flows rather than in discount rates. This method of adjusting tax shields in cash flow is known as capital cash flow. In ... Read More

The Adjusted Present Value of a project takes the Net Present Value (NPV) of a project and adds this with the cost of debt, including financing effects, such as interest tax shield, issue costs, costs of distress, and subsidies etc. The APV is used instead of NPV for evaluating an investment project for various reasons. Here's why APV is used more frequently than other methods of evaluation of a project.The Effect of Debt and EquityThe use of all-equity financing may be debilitating for the health of a company's financials. In some situations, the NPV of such project turn positive due ... Read More