[MercyGrace]

The WACC and Optimal Capital Structure. Huh??? If any of you wonderful scholars would like to break this one down for me I would appreiate it. Using Becker but I am lost! Having a hard time with the WHY????

BEC - 75 (Prayed Hard)
AUD - 85 (Thanking God!)
REG - 77 (Yes, Lord!!)
FAR - 4/20/12

[Anonymous]

Ya, I struggled through this concept too. It didn't start to make sense to me until I practiced tons of mcq's on it and learned how to answer the questions. Im not saying I understand the concept…but doing lots of mcq's at least taught me what key words and the related amounts to look for and use in an equation to find the answer.

[Accounting Pilot]

Are you having trouble with Weighted Average Cost of Capital, Optimal Capital Structure, or both?

WACC is the total cost of capital of the company's debt and equity securities. Very basically, if you have 50% debt at a cost of 8% and 50% equity at a cost of 12%, then your WACC will equal (8% x .5) + (12% x .5) = (4% + 6%) = 10%.

Optimal Capital Structure is the capital structure which minimizes your cost of capital to its lowest possible point. Debt securities typically have a lower cost of capital, but as debt becomes a larger part of the capital structure its cost increases. As a result, a Cost of Capital graph will look like a “U” shape. The left side of the “U” is 100% debt, and the right side of the “U” is 100% equity. The lowest point of the “U” is some combination of debt and equity. The Optimal Capital Structure is this lowest point.

There's a summary in a (very small) nutshell. If you have specific questions let us know.

Wisconsin Candidate. NTS 450
BEC - 82 AUD - 85
FAR - 83 REG - 71, 86

[MercyGrace]

@CalCPASoon – yes, it's taking tons on MCQ practice.

@Accounting Pilot – Thanks, that makes sense. I get caught up in all the other %'s within the question and become distracted by them.

BEC - 75 (Prayed Hard)
AUD - 85 (Thanking God!)
REG - 77 (Yes, Lord!!)
FAR - 4/20/12

[Author]

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