What are the different types of cost of capital theory?

The cost of capital theory is trying to explain whether the company's combination and debt affect the stock price. It is possible to distinguish two types of cost of capital theory: the theory of net operating income and the theory of net income. In the theory of net operating income, the mixture of debt and equity directly does not affect the financial value of the company. Within the theory of pure income, the way the corporation has its capital costs, its market value is a deep impact on its market value. The Company's costs per capital consist of debt and equity, and in most cases the capital itself is the preferred type of security. The money that the company receives in exchange for issuing shares and bonds is referred to as capital, which is eventually worth paying investors' interest. The cost of capital theory is trying to explain Whether issues a higher share of a single type of capital affects the ability of the company to secure more investors. For example, some financial experts believe thate issuing a higher share of bond versus shares will reduce the long -term value of the company's shares.

The company's debt mixture compared to its own capital does not affect the price of shares below the net operating income on capital theory. This theory states that the financial value of the corporation will be the same no matter what the capital structure is formed. For example, the company's shares will be the same, whether it issues 60 % of the shares of 40 percent of the debt or 90 percent of the debt per 10 percent of the shares. Although the mix of structure varies over time, it does not affect the market value of society.

Another type of cost of capital theory - pure income theory - occupies the opposite approach TON net theory of operating income. How much debt and equity the company decides to spend on the financing of its operations will significantly affect the price of shares according to this theory. The pure income theory has the market value of unpaid stock shares and adds itto the total value of the company's debt. Operating income or income before interest and taxes is divided by the value of their existing capital to achieve its percentage costs.

While some companies may prefer to comply with the specific costs of capital theory, many seek to maintain a structure that minimizes their costs and increases any tax benefits. Interest on debt costs can be deducted from the gross income of the company and reduces its tax liability. Publishing a larger number of bonds leads a higher long -term risk because the debt takes precedence over its own capital if the Company is to protect against bankruptcy.