engleski

Corporate Cost of Capital: The Effective Costs of Long-Term Debt Financing

Corporations face the same basic financing problem how to fund the project and activities they need to grow and prosper. Once the need for long-term financing has been acknowledged, a number of factors must be recognized in ascertaining which source of financing to employ. The difference between the internally generated funding and the corporation's total financing needs would be equal to its external financing requirements. This study examines the choices corporations face when selecting among financing alternatives, particularly those regarding internal versus external financing. Long-term debt is the dominant form of long- term external financing in all developed economies (Graham et al., 2010). Corporations prefer long-term debt to equity because they are allowed to deduct interest paid on debt from their tax liability. The aim of the empirical research is to explore the dependence between profitability and debt financing as well as the dependence between costs of financing and profitability of listed companies. Our work presents results from empirical research undertaken on a representative sample of listed companies in the Republic of Croatia, the Republic of Slovenia and the Czech Republic. Using methods from statistics, we analyzed a possible dependence between profitability and debt financing as well as the dependence between costs of financing and profitability of listed companies.

Long-term financing sources , Debt financing, Cost of capital, Effective interest rate after tax, Optimal selection

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