Capital use of less expensive borrowing funds, meaning

Capital structure represents the way thecompany will finance its operations through the utilisation of various sourceof funds. The WACC for Starhub in 2016 is 5.

40 %. Thisfinancial indicator gives the weight of debt and cost of borrowing money throughequity. This is done in order to finance new investments, expansions based onthe company’s level of debt and equity. Proponents of theclassical capital structure theory assume that there is an optimal capitalstructure, and that the firm has the opportunity to increase its value througha 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 increasein (Ke) does not fully offset the use of less expensive borrowing funds,meaning that the savings achieved through the use of resources less expensiveallows to obtain a reduction in its cost of capital.

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Regardingthe 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, reducingequity costs and rearrange its capital structure.Restructuring debt represents a possibilityto increase capital and reduce the debt to capital ratio. In order to reduce cost ofdebt 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, thecompany can select to extend the loan term, which can also possibly lower themonthly payment. This strategy will Starhub to improve its bottom line profitabilityas well as its cash flows.

 

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