Corporate Issuers
Capital structure
Modigliani-Miller without taxes: firm value is independent of leverage. With taxes, value rises by the tax shield, t x D. Financial distress costs, agency costs, and the pecking order offset the shield, producing a target capital structure. Use target or market-value weights for WACC, never book weights.
Cost of capital
Estimate the cost of equity with CAPM, adjusting beta: unlever the comparable's beta, then relever to the target structure, beta_L = beta_U[1 + (1 - t)(D/E)]. Add a country risk premium for cross-border projects. The marginal cost of capital schedule identifies break points where the cost of a source rises.
Dividends and repurchases
Dividend irrelevance holds in perfect markets; in practice, signaling, clientele effects, taxes, and agency costs matter. The residual dividend model funds positive-NPV projects first and pays out the remainder. Repurchases cut shares outstanding, raise EPS when the earnings yield exceeds the after-tax cost of funds, and reduce book value per share when the price exceeds book value.
Governance, ESG, and M&A
Board independence, shareholder rights, and dual-class structures; ESG integrated as a risk factor. In M&A, test earnings accretion or dilution and value synergies; recognize takeover defenses and the premium paid to target shareholders.
Worked example
A firm has unlevered beta of 1.10, a 25% tax rate, and a target D/E of 0.60. Relevered beta = 1.10 x (1 + 0.75 x 0.60) = 1.595. With a risk-free rate of 4% and an equity risk premium of 5%, cost of equity = 4% + 1.595 x 5% = 11.98%.
Rule of thumb: relever with the target capital structure and always apply the marginal after-tax cost of debt, not the coupon on old issues.