capital-structure-and-covenants
Capital structure and covenants
Financing is not only where the money comes from. It is a set of ongoing constraints that will shape operating decisions for as long as the facility exists, and most of those constraints are discovered late.
Cost of capital sets the hurdle, so compute it rather than choosing a round number
Weighted average cost of capital blends the after-tax cost of debt and the cost of equity in the proportions actually used. It is the rate an investment has to clear before it creates value.
Debt is cheaper than equity — the rate is lower, the interest is deductible, and the claim is senior. That cheapness is exactly why leverage is tempting, and why the temptation needs a limit set in advance. Equity has a cost even though nobody writes a check for it; treating it as free is how capital gets consumed by projects that never earned their keep.