Explain the CPI Bias and How It Can Distort Private

question 325

Essay

Explain the CPI bias and how it can distort private contracts and increase government outlays.

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Definitions:

Target Capital Structure

The optimal mix of debt, equity, and other financing sources that a company aims to achieve to minimize cost of capital and maximize shareholder value.

Optimal Structure

The ideal mix of debt, equity, and internal funds that minimizes the cost of capital while maximizing shareholder value.

IRR

Internal Rate of Return, a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

Cost Of Capital

The minimum return that a company must earn on existing asset base to satisfy its creditors, owners, and other providers of capital.