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extel, the fifth largest mobile-phone company in the United States, offers its customers
unique technology that combines a variety of wireless services on one handset. Despite its
dominance in the business market and its high revenue growth, through early 2002 the company
was still in a net-loss position. Its continued march toward profitability requires large capital
expenditures; in 2000 alone, it spent $3.5 billion to keep up with technological advances and add
new features. To fund its growth, Nextel raised well over $20 billion in new debt and equity financ-
ing from 1996 to 2000.
Searching for new sources of capital and finding the most appropriate sources for different
purposes can keep costs of capital in line. Nextel aggressively raises capital whenever it sees an
opportunity, so that money will always be available for expansion. The firm combines different
financing instruments to create a healthy balance between debt and equity. The type of financing
is tied to market conditions. When the high-yield debt markets tightened in 1998 as a conse-
quence of the international financial situation, the private markets proved to be a better, more
reasonably priced choice. The company also issued convertible bonds and preferred stock when
market conditions were right. In 2000 Nextel was able to tap strong equity markets to issue $2.8
billion of common equity, which helped it to stay within existing debt provisions. This turned out to
be a good move; the market for telecommunications and other technology stocks collapsed soon
after.
Choosing cost-effective financing instruments so that Nextel can work toward a balanced
capital structure is no easy task in today’s volatile capital markets. If the equity markets are
closed, the company may have no choice but to issue debt, regardless of cost, in order to secure
adequate funding for its capital projects.
In this chapter we’ll demonstrate how to calculate the cost of specific sources of capital
and how to combine them to arrive at a weighted cost of capitalthat firms can use to evaluate
investment opportunities.NEXTEL
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