Capital use of less expensive borrowing funds, meaning

Capital structure represents the way the
company will finance its operations through the utilisation of various source
of funds.

The WACC for Starhub in 2016 is 5.40 %. This
financial indicator gives the weight of debt and cost of borrowing money through
equity. This is done in order to finance new investments, expansions based on
the company’s level of debt and equity.

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Proponents of the
classical capital structure theory assume that there is an optimal capital
structure, and that the firm has the opportunity to increase its value through
a judicious combination of capital own and debts. As the firm goes into debt,
shareholders demand an increase in return on equity (Ke), but the rate of borrowing
(Ki) does not increase only after a significant level of indebtedness.

As a first step,
the weighted average cost of capital falls with the debt because the increase
in (Ke) does not fully offset the use of less expensive borrowing funds,
meaning that the savings achieved through the use of resources less expensive
allows to obtain a reduction in its cost of capital. Regarding
the traditional theory of capital structure is the theory the lower the WACC is,
the more the market value of assets are amplified. In order to lower its WACC,
Starhub can implement various strategies such cutting cost of debt, reducing
equity costs and rearrange its capital structure.

Restructuring debt represents a possibility
to increase capital and reduce the debt to capital ratio. In order to reduce cost of
debt it is possible for the company to reduce the interest applied on its loans.

Indeed, reducing the cost of non-payment could possibly lower the cost of debt.

Refinancing to a lower interest rate, the payment could be lower. Moreover, the
company can select to extend the loan term, which can also possibly lower the
monthly payment. This strategy will Starhub to improve its bottom line profitability
as well as its cash flows. 


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