Home Depot & Capital Structure

    Exhibits 2 shows that an inordinately large dividend payment in 2015 of the cash budget, coupled with a large asset purchase, places both companies in a negative cash position. Paying out such a large dividend can be a problem for lenders, who do not like to issue loans so that companies can use the funds to pay their shareholders and thereby weaken their ability to pay

The objective of the capital structure is to reduce the cost of capital. Though debt is cheaper than the

The relationship of borrowed funds to ownership funds is an important solvency ratio. Capital from debt and other creditor sources is more risky for a company than equity capital. Debt capital requires fixed interest payments on specific dates and eventual repayment. If payments to a company's creditors become overdue, the creditors can take legal action which may lead to the company being declared bankrupt. Own capital is less risky. Dividends are paid at the discretion of the directors, and there is no provision for repayment of capital to stockholders. It is generally assumed that the more ownership capital relative to debt a company has in its capital structure, the more likely it is that the company will be able to survive a downturn in business that may force other more financially leveraged companies into bankruptcy. An excessive amount of own capital relative to debt capital may not necessarily indicate sound management practices, however. Equity capital is typically more costly than debt capital. Also, the company may be previous opportunities "to trade on its equity," that is, borrow at a relatively low interest rate and earn a greater rate of return on these funds. The difference between these two

Home depot is one of the largest retail stores in America battling big companies like Walmart, Lowes and target. However, home depot is leading its industry of home improvement supplies retailing company which competes for the industry market share mostly with Lowes.

The number of different variables and situations that influence capital financing structure decisions are far too numerous and complex to list here, but essentially a company should continually assess the cost of debt and the cost of equity, and use this knowledge combined with earnings expectations and environmental factors to determine an appropriate capital structure (Bierman, 2003). It is rare that a company would select to go with all equity financing or with all debt financing, as a mixture of both allows for a balance of risk minimization and profit maximizations (Bierman, 2003). Investors are generally best served by whatever serves the company best; too much debt erodes earnings, but too much equity dilutes them, so again an appropriate balance is necessary to maximize shareholder value.

Capital Structure: "Capital structure is the manner in which a firm's assets are financed; that is, the right-hand side of the balance sheet. Capital structure is normally expressed as the percentage of each type of capital used by the firm debt, preferred stock, and common equity." (Capital Structure Decision, 2002)

The theorem is the foundation of today’s corporate finance. Capital structure of a company is the way a company finances its assets. A company can finance its operations by either debt or equity, or different combinations of these two sources. Capital structure of a company can have majority of debt components or majority of equity, only one of the two components or an equal mix of both debt and equity (Modigliani and miller, 1953)

ABSTRACT This paper is a review of the central theoretical literature. The most important arguments for what could determine capital structure is the pecking order theory and the static trade off theory. These two theories are reviewed, but neither of them provides a complete description of the situation and why some firms prefer equity and others debt under different circumstances. The paper is ended by a summary where the option price paradigm is proposed as a comprehensible model that can augment most partial arguments. The capital structure and corporate finance literature is filled with different models, but few, if any give a complete picture.

In the capital structure policy, the finance manager will raise the capital through debt and/or equity. It is worth noting that each financing option comes with advantages and disadvantages. For example, the debt (Loans or Bonds) comes with a tax advantage (on the interest expense) but also increases the risk of financial distress (bankruptcy). When selecting the optimal capital structure, the finance manager will consider factors such as the risk tolerance, the ability to access equity markets, the ability to take advantage of the tax write off and others.

The traditional theory of capital structure describes the existence of optimal debt to equity ratio, where the cost of capital is minimum and the market value of a firm is maximum. The changes in the financing mix can bring positive change to the value of the firm. Before the changes in the financing mix, the marginal cost of debt is less than cost of equity and after the change; the marginal cost of debt is higher than that of equity. This theory supports the combination of the equity and debt ratio of the capital structure of a firm when the market value is at its maximum. The debt in the capital structure of a firm can only be up to a certain point, any increase beyond that point can cause the increase in the leverage and can result in the decrease in the market value of a firm.

The capital structure refers to the proportion of debt and equity by which a company is financed. In fact, shareholders are the ones that provide the company with equity financing, whereas bond investors and banks provide it with debt through bonds and loan contracts.

Bhaduri (2002) studied the capital structure choice in developing countries through a case study of Indian corporate sector, for the period 1989-90 to 1994-95, based on a sample of 363 firms across nine industries. The author has reported optimal capital structure choice is influenced by factors such as growth, cash flow size and product industry and characteristics.

Capital structure is the way a company combines between Equity and Liabilities in order to

Capital structure is the proportion of debt and equity in which a corporate finances its business. The capital structure of a company/firm plays a very important role in determining the value of a firm. There are various theories which propagate the ‘ideal’ capital mix / capital structure for a firm.

The capital structure of a company refers to the mixture of equity and debt finance used by the company to finance its assets. Capital structure is the proportion of firm’s value financed with debt. Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings.Short-term debt such as working capital requirements is also considered to be part of the capital structure. Some companies could be all-equity-financed and have no debt at all, whilst others could have low levels of equity and high levels of debt. The decision on what mixture of equity and debt capital to have is called the