Cracking Capital Structure Concepts for the CFA Level 1 Exam

Welcome to the exciting world of capital structure! Are you ready to unlock the secrets behind how companies finance their operations? Let’s dive in!

Weighted Average Cost of Capital

Embark on a journey to the heart of the cost of capital with WACC. Uncover its key components, learn how to calculate it, and grasp its significance in a firm’s capital decisions. Understand the role of tax, how weights are assigned, and why it doubles as the marginal cost of capital. Plus, apply your newfound knowledge in a practical example with Polix Corp.

► Ready to get cracking with WACC? Try our WACC calculation challenge here.

Capital Structure and Company Life Cycle

Discover the intriguing relationship between a company’s capital structure and its life cycle. Learn how start-ups, growing firms, and mature businesses employ different mixes of debt and equity to finance their operations. And remember, as a company grows, its capital structure evolves!

► Master the complexities of capital structure life cycle here.

Theories of Capital Structure I – MM Propositions

Dive into the capital structure world with Modigliani and Miller’s 1958 and 1963 propositions, unraveling the relevance of capital structure and how it interacts with taxes and cost of capital. Understand how these theories pave the way to the more real-world applicable static trade-off theory.

►  Embark on the journey to comprehend  MM capital structure theories here.

Theories of Capital Structure II – Static Trade-off Theory

Get to grips with the static trade-off theory and how it shapes a firm’s target capital structure. Learn how to strike a balance between the benefits of a tax shield and the rising costs of financial distress to determine the optimal capital structure.

► Think you’ve got it? Get a grip on static trade-off theory here.

Factors Affecting Capital Structure Decisions

Fasten your seatbelts as we venture into the world of capital structure decisions! We’ll decode the influence of debt ratings and business characteristics, assess the impact of external factors, and face the truth about agency costs and asymmetric information costs. Plus, we’ll untangle the web of the pecking order theory and discover why companies think twice before opting for public equity offerings.

► Start your adventure in understanding capital structure decisions here.