10: Financing Decisions
- Page ID
- 150146
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In Chapter 9, you learned how financial managers evaluate which projects to accept using capital budgeting tools such as net present value (NPV), internal rate of return (IRR), and sensitivity analysis. Those tools focus on value creation: identifying investments that are expected to increase firm value after accounting for risk.
Chapter 10 turns to the next fundamental question in financial management: how those value-creating projects should be financed. Once a firm decides to invest, it must choose how to raise the required funds through debt, equity, or a combination of both. These choices define the firm’s capital structure and shape its financial risk, flexibility, and cost of capital.
The concept map provides a visual guide to how these financing decisions fit together. The chapter begins with the components of capital structure, then examines how the cost of debt and equity combine into the weighted average cost of capital. It then explores how leverage affects risk and return, and how dividend policy influences internal financing and growth. The required returns used in cost of capital calculations build directly on the risk–return framework developed in Chapter 8.
Together, these elements determine the firm’s overall risk profile, financial flexibility, and ability to create long-term value.
Learning Outcomes
By the end of this chapter, you should be able to:
- Describe the major components of capital structure.
- Explain how firms estimate the cost of debt and the cost of equity.
- Compute and interpret the weighted average cost of capital (WACC).
- Evaluate how leverage influences firm value, risk, and required return.
- Connect financing decisions to capital budgeting and project valuation.
Next: Section 10.1 examines the components of capital structure, debt, equity, and preferred stock, and the role each plays in corporate financing decisions.