What is the relationship between capital structure and capital costs?

Capital structure and capital costs have a direct relationship in terms of the financial welfare of the company. In balance, both the capital structure and the specific type of capital costs, help in choosing the right type of investment that will become the name of the company, how best to use the resources that are not necessary for the daily operation of the company, and even how to buy equipment that provides the greatest advantage in this basic operation over time. Without connecting the capital structure and cost of capital of business activities in the most productive way, the potential of operation failure increases.

In order to understand the relationship between capital structure and capital costs, it is necessary to define every term. The capital structure refers to the combination of short and long -term debt held by the company along with the level of normal and preferred capital. The debt will include any outstanding Bond problems as well as due items with the duration of the year or more. AndCIE will include undivided business earnings, as well as common and preferred shares held under the Company's assets. Capital costs relate to the benefits or revenues that the company expects to generate a specific project, such as creating a new production facility.

This means that the connection between the capital structure and the cost of capital helps to demonstrate how to decide how to operate the business have a direct impact on both debt and capital that the company holds at any given moment. For example, if the cost of capital analysis suggests that the revenues of the construction of a new plant do not lead to any significant increase in income production, the capital structure would be adversely affected by increasing the debt without any kind of Growth's own capital to compensate for these other expenditures. As a result, the financial stability of the company is adversely affected.

did not know each otherRecognition of the relationship between capital structure and capital costs, increases the potential for taking further debt without a large way of benefits. Over time, this can weaken business to the extent that continued operations are not possible. Maintaining the balance between debt and its own capital to a reasonable extent will equip the company so that during the economic decline remains viable and will have a better chance to remain in operation for a long time.