An Analysis of Cost of Capital Sensitivities and Firm Value for Lee

Luohan Zhou

College: College of Business and Public Management

Major: BS.ACCOUNTING

Faculty Research Mentor: Kakolyris, Andreas

Abstract:

This project studies how capital structure decisions influence firm value, using Lee as the company example. The main objective of this analysis is to examine whether changing the proportion of debt and equity can affect the company’s weighted average cost of capital (WACC) and overall firm value. Capital structure is an important financial decision because it determines the firm’s financing cost and risk level. To conduct this analysis, I estimate the cost of equity using the Capital Asset Pricing Model (CAPM) and calculate the cost of debt based on available financial information. After that, I simulate different debt-to-equity ratios to observe how WACC changes under various leverage levels. By comparing these scenarios, I evaluate how leverage adjustments may impact the company’s capital cost and valuation. Based on financial theory, increasing debt may initially reduce WACC due to tax benefits, but higher leverage also increases financial risk and the cost of equity. Therefore, there may be an optimal capital structure that balances risk and return. This study applies corporate finance concepts to a real company case and helps illustrate how financing decisions can influence firm value.