Optimization of Capital Structure
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The capital structure of a project describes the amount of long-term debt and equity common and preferred employed. This chapter discusses the significance of optimising a project's capital structure and illustrates the process through the wind turbine acquisition model from the previous chapter. Essentially, the optimal capital structure minimises the weighted cost of capital employed on the project, thus maximising shareholder value. Balancing the advantages of high leverage with the risks associated with illiquidity, especially at the early stages of a project, is the essence of the capital structure optimisation problem. The weighted average cost of capital from various sources is employed as the Net Present Value discount rate, for a given capital structure. A project company is funded by equity capital from a small number of individual and institutional investors. Business risk is a significant factor in determining capital structure design.