The relevance of financial structure in WACC’s determination

Abstract

This paper aims to demonstrate the importance of financial structure in determination of cost of capital. The research idea starts from the observation that in the literature there isn’t a shared opinion on the identification of the financial structure, in particular on the weights to estimate cost of capital. Our model suggests the use of different average financial structures or different best financial structures considering the companies objectives and their sector. This model is based on data of companies listed in the European markets, but it can be also used to determine the weights of cost of capital in unlisted companies.

Keywords: financial structure, cost of capital,  weighted average cost of capital, WACC, value.