.What is an optimal capital structure for a company and what is the cost of equity? Would you be looking at the after tax or before tax cost of debt and equity for comparison?
An optimal capital structure for a company is the way by which an organization integrates equity or debts to finance its assets. Therefore, the liabilities of an organization constituent the optimal capital structure of. The optimal capital structure of an organization may be intricate and have a lot of sources.
The cost of equity is the proceedings that are paid out to the shareholders, as a reimbursement for the risk that they put themselves to when they are investing their money. For organizations to develop they have to get money from other from elsewhere and it’s at this juncture that investors come in. Investors can be other organizations or persons. In return for risking their money so as for the organization to grow, the organizations in turn offer them a share of their returns as rewards.
Would you be looking at the after tax or before tax cost of debt and equity for comparison?
After-tax is defined as the proceedings got from a specific investment inclusive of all the returns realized, after all the anticipated or settled taxes have been calculated.
Before-tax is defined as the average compound rate per year that has been got before the taxes have been accounted for. After-tax return supposes that that the interest income has been invested again, however, reveal that taxes that the distribution is indebted.
Cost of debt is the effectual charge that an organization reimburses on its present debt and can be calculated in two ways: either after the pre-tax proceedings or the after-tax proceedings.
Cost of equity or rate of return is the yearly rate of return that a person who invests anticipates to get from the invested company in shares. The investor’s annual rate of return constitutes of the dividends that are paid for the shares and any decrement or increment of his shares in the market value.
I would be looking at the after tax for comparison of cost of debt and cost of equity instead of before tax. The interest rates in after the tax are tax deductible if I compared the cost of debt and equity after tax. On the contrary, to calculate the cost of debts and equity before the tax, interest charges and the percentage of debt that will be increased in the market are estimated. I would opt to compare the cost of debt and equity after tax because if I chose before tax, the interest charges would soar to adverse levels.