Munich Personal RePEc Archive

Analysis of the influence factors on the capital cost

Popescu, Eleodor (2011): Analysis of the influence factors on the capital cost.

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Abstract

The capital structure refers to the long-term financing types used by the enterprises (for example, reinvested profit, long-term shares and debts) and the way they are financed by a combination of the own capital and debts. An optimal structure of the capital involves making some important decisions regarding the maximization of the enterprise value by their managers. But these decisions are not important only for maximizing the enterprise value, but also for the impact they have on the enterprises ability to face the competition existing on the market. An optimal structure of the capital should provide to the shareholders bigger gains than the ones they would gain from an economical entity fully financed by the own capitals. In the attempt to explain the way the enterprises finance their assets and the factors influencing these financing decisions, a series of theories and models of the capital structure have been suggested. These theories and models try to explain the percentage of the debts and of the own capital found in the enterprises balance sheet. Among the theories of the capital structures that have been imposed in time, Modigliani and Miller’s theorem (1958) may be considered as the starting point of explaining the capital structure, although, it subsequently proved to be a purely theoretical model with no solid empiric funding . The basic idea of this classic theory is that, in the absence of the taxation and on a perfect market, the value of an enterprise is not influenced by the way it is financed.

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