Capital Structure Of A Company

Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.

The capital structure decision is important for any business organizations. The capital structure is essential because it maximize returns, and its impact, such a decision has on the firm’s power to deal with its competitive environment. The capital structure of organization is a mixture of different securities….

Nevertheless, the use of the Optimal Capital Structure (OCS) is the right techniques to be used in order to acquire the right combination of debt and equity that can maximize the

The Gearing Ratio or Leverage Ratio is often used to describe this process. Resources of financing include but are not limited to corporate bonds, firm equity, and hybrid securities. Modigliani and Miller (1963) showed that existence of liabilities in a company can increase the firm value under assumptions. Ross et al (2009) claimed that utilization of debt has limitation. Graham and Harvey (2001) studied factors that affected utilization of debt. Others have proposed a Trade-off Theory of Capital Structure which states a company should balance the benefit of debt and the risk of agency costs.The difference between current assets and current liabilities is working capital. This difference shows the ability of a firm to pay off short-term debt. Working capital involves the arrangement of short term financing and investments (liabilities and assets).The standards of evaluating working capital management are closely related to some accounting ones, such as Cash Conversion Cycle, Return on Assets (ROA),Return on Equity (ROE) and so on.

Using debt is also advantageous to existing owners because of the effect of financial leverage. When companies use debt to provide addition capital for their business operations, equity owners get to keep any extra profits generated by the debt capital, after any interest payments. Given the same amount of equity investments, equity investors have a higher return on equity because of the additional profits provided by the debt capital. As long as using debt doesn’t threaten the financial soundness of a company in times of difficulties, equity owners welcome certain debt uses to help enhance their investment

20. A firm's capital structure is the mix of financial securities used to finance its activities and can include all of the following except

In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this example, is referred to as the firm's leverage. In reality, capital structure may be highly complex and include dozens of sources. Gearing Ratio is the proportion of the capital employed of the firm which come from outside of the business finance, e.g. by taking a short term loan etc. – Take what you can from this.

Capitalism is a market approach wherein the government allows the penetration of foreign companies to acquire certain public companies to assure the economic growth of the country. Thus, the capital structure is defined as the proportion between equity and debts of a company as a whole. The structures of a business are dependent on the different economy status of a country. Thus when economy is in good condition, expect capital structure to be smooth flowing and that debts is low as there is increased in profits for the business with the good economic standing of the country.

Capital structure describes how a corporation has organized its capital—how it obtains the financial resources with which it operates its business. Businesses adopt various capital structures to meet both internal needs for capital and external requirements for returns on shareholders investments. As shown on its balance sheet, a company 's capitalization is constructed from three basic blocks:

It is well known that firms are more likely to issue equity when their market values are high, relative to book and past market values, and to repurchase equity when their market values are low. We document that the resulting effects on capital structure are very persistent. As a consequence, current capital structure is strongly related to historical market values. The results suggest the theory that capital structure is the cumulative outcome of past attempts to time the equity market.

Generally, firms can choose among various capital structures in order to maximize overall market value of the company. It is proposed however, that

The course project involved developing a great depth of knowledge in analyzing capital structure, theories behind it, and its risks and issues. Before I began this assignment, I knew nothing but a few things about capital structure from previous unit weeks; however, it was not until this course’s final project that came along with opening

Capital structure is defined as the mix of the long-term sources of funds that a firm use. It is composed of equity, debt securities and affect long-term financing of the entity. It is made up by shareholder’s funds, long-term debt and preference share capital. The capital structure mostly focus on the proportions of debt and equity displayed in the company financial statements, especially in the balance sheet (Myers, 2001). The value of a firm can be calculated by the sum of the value of its firm’s debt and equity.

Already in 1958, Modigliani and Miller have pointed the discussion of capital structure towards the cost of debt and equity. According to their first proposition, in a world of no corporate taxes and with perfect markets, financial leverage has no effect on a firm’s value. In their second proposition, they state that the cost of equity equals a linear function defined by the required return on assets and the cost of debt (Modigliani and Miller, 1958).

The relationship between capital structure and firm value has been discussed frequently in the literature by different researcher accordingly, in both theoretical and empirical studies. It has also been discussed that whether the firm has any optimal capital structure that has been adopted by an individual firm, or whether the proportions of debt usage is completely irrelevant to the individual firm value.