CFA L1 / Corporate / M6. Capital Structure
Module 6 · Corporate Issuers

Capital Structure

EN: WACC, MM propositions, target capital structure.
VN: WACC, lý thuyết MM, cấu trúc vốn mục tiêu.

1. Weighted Average Cost of Capital (WACC) Core

\[ WACC = \frac{E}{V}\,r_E + \frac{D}{V}\,r_D\,(1 - t) + \frac{P}{V}\,r_P \]

Components

  • E, D, P Market value of equity, debt, preferred.
  • V = E + D + P (total firm value).
  • rE Cost of equity (CAPM, DDM).
  • rD(1−t) After-tax cost of debt — interest tax-deductible.
  • rP Cost of preferred = DP / PP.
Practice problem

E/V = 60%, D/V = 40%, rE = 12%, rD = 6%, t = 25%. Compute WACC.

Show solution
WACC = 0.60(12%) + 0.40(6%)(1 − 0.25) = 7.2% + 1.8%
= 9.0%

2. Modigliani-Miller (No Taxes) Concept

  • MM I Firm value independent of capital structure.
  • MM II rE rises linearly with D/E to keep WACC constant.

3. MM with Taxes Concept

\[ V_L = V_U + t \cdot D \]

Levered firm worth more than unlevered by present value of interest tax shield. Pure tax view: 100% debt optimal — but ignores bankruptcy costs.

Practice problem

Unlevered firm value $1,000. Permanent debt $300, tax rate 25%. Compute levered firm value.

Show solution
VL = VU + tD = 1000 + 0.25(300)
VL = $1,075M

4. Static Trade-off Theory Concept

Optimal D/E balances the marginal tax shield benefit vs marginal expected cost of financial distress (bankruptcy + agency costs).