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Capital structure

BAR Chapter 6 · Area I · Blueprint I.B.2

Every business is paid for by some mix of lenders and owners, and the mix changes the cost of money, the risk and the numbers on the statements. The Blueprint asks you to calculate the cost of capital, judge how a change in structure affects covenants, liquidity and leverage, and compare ways to finance a new project. Brightwater Breweries needs $10 million for a new brewhouse and must decide how to pay for it.

In this chapter

1. Debt, equity and what each costs the business
2. The cost of common equity
3. Weighted average cost of capital
4. Operating and financial leverage
5. Covenants, liquidity and the optimal structure
6. Choosing how to finance a new project
7. How structure changes the statements and key measures

This chapter has 7 lessons, 50 practice MCQs with explanations and 20 simulations, plus flashcards and a recall sheet.

What this chapter covers

• Cost of capital
• leverage, liquidity and covenants
• comparing financing strategies

Chapter 5: Budgeting, forecasting and projection · Chapter 7: Investment decisions