INTRODUCTION Capital is the important element for all kinds of business transactions, which are formed by the nature and size of business firm. Capital is raised by the help of several sources of funds. If the firm maintains adequate and proper level of investment capital, this will earns high profits to the company and this can be provided more wealth to its share holders. MEANING OF CAPITAL STRUCTURE Capital structure is a mix of long term source of fund it may be debt and equity form of capital to the firm. It is a proportionate of debt –equity funds towards firm’s capitalization. Capital structure is a mix of long term sources of funds used by a firm. It is made up of debt and equity securities and it refers to …show more content…
Shares and bonds.” According to keown et al. defined capital structure as “balancing the array of funds sources in a proper manner i.e., in relative magnitude or in proportions.” The term capital structure represents the proportionate relationship between the various long term kinds of capital requirements such as equity, debentures, preference and retained earnings. It includes both long term and short term sources of funds. Capital structure is a part of financial structure. A company’s capital structure can be said as optimum when the proportion of debt and equity is that resulting in maximization of return for the equity share holders is high. Thus, capital structure would vary from one company to another company depend upon the company’s availability of fund, operational size, from different sources and management efficiency etc. IMPORTANCE OF CAPITAL STRUCTURE Capital structure is commonly designed to serve the interest of the equity share holders. Maximizing the …show more content…
maximizes the return to equity share holders. It means the maximum usage of capital in to last extent in which it gains more profitability to the company in effective use of capital structure. The main objective of the firm’s is to maximize the value of business. This is done through minimizing the cost of capital and maximizes the value of shares of the firm. The optimum capital structure is a proportion of equity and debt which fulfill the objective of the firm. FEATURES OF OPTIMUM CAPITAL STRUCTURE • Optimum capital structure is a relationship between debt and equity is made in such a way that it maximizes the value of per equity share of the firm. • Optimum capital structure maintains the financial stability of the organization. • The optimum capital structure considers the finance manager in which he determines the proportion of capital structure the debt equity capital in such a manner that financial risk remains low or which maintains the level of financial risk is less. • To achieve the optimum capital structure the advantage of leverage given by corporate taxes is taken in to
Based on the optimal capital structure analysis, they should pursue as 70% debt proportion, which will give them the lowest cost of capital at 11.58%. Currently Star has no debt in their capital structure, so these new projects should begin to add debt to the company. However, no matter what debt and equity proportions are chosen for each project, the discount rate of 11.58% should be used, as the capital budgeting decisions should be independ...
See Exhibit C. CAPITAL STRUCTURE MCI's current capital structure is x% debt and y% equity. Their key ratios are a, b, and c. Comparing to other firms in the utilities industry they appear to be underutilizing (debt/equity). See Exhibit D for more information. Referencing the forecast there is expected to be an x% annual increase in net income which would support an increase in debt/equity and keep ratios within the range of other firms in the industry (see exhibit E)....
Most companies’ primary goal is to maximise profit in order to remain competitive in the market. The concern usually arises in the measures and approaches companies take to achieve that goal and how it will benefit in the short-term and long-term process. (Eccles, 2011)
The Modigliani-Miller theorem, proposed by Franco Modigliani and Merton Miller, forms the basis for modern thinking on capital structure, though it is generally viewed as a purely theoretical result since it assumes away many important factors in the capital structure decision. The theorem states that, in a perfect market, the value of a firm is unaffected by how that firm is financed. This result provides the base with which to examine real world reasons why capital structure is relevant, that is, a company's value is affected by the capital structure it employs. These other reasons include bankruptcy costs, agency costs and asymmetric information. This analysis can then be extended to look at whether there is in fact an 'optimal' capital structure: the one which maximizes the value of the firm.
There is no optimal debt-equity relationship. It varies depending on the companies’ line of business, the ...
There is a close relation between the capital adequacy and the financial system but it is important to have an overview before get to the more detailed study of what is going on in the financial system.
Capital relates to the physical capital, the equipment and structures that are used to produce goods and services. Capital goods increase productivity and include; tools, factories, buildings, tractors, computers to name a few.
The sources of this capital may either be internal (contribution from shareholders in the form of equity; ploughed back revenue et cetera); or they could external (borrowing from banks; private equity firms; development finance institutions; capital markets et cetera).
· Capital: When labor is applied to land to grow wheat, for instance, something else is used. Generally it is a plow or a tractor. That is to say, land and labor are shared with manufactured resources in order to produce the things that we need. These manufactured resources are called capital, which consists of machines, buildings, and tools. Additionally, capital consists of enhancement to natural resources, such as irrigation ditches. Money is used to buy factors of production – it is not a factor itself. The return for investing in capital is called interest.
The capital structure decisions for Target Inc. are significant since the profitability of the firm is specifically influenced by this decision. Profit maximization is part of the wealth creation process and wealth maximization can be a lengthy process for financial managers. Profits affect the value of the firm and it is expressed in the value of stock. Cost of capital is how investors evaluate weighted average cost of capital (WACC). Capital structure ratios help investors gauge the level of risk that a company is taking on through financing. While Target
Research on the Sources of Finance for a Business Firms sometimes need to raise finance for Working Capital and Capital Expenditure. Explain what each is and give examples. · Working Capital (or Revenue Expenditure) The working capital is made up of the current assets net of the current liabilities. It is vital to a business to have sufficient working capital to meet all its requirements. Many businesses have gone under, not because they were unprofitable, but because they suffered from shortages of working capital.
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.
Short term and long capital are needed for organizations to survive in today's economy. Organization's now more that ever need these different sources to diversify, expand or to keep processes more efficient thus keeping them at the head of the pack. Today's businesses and consumers demand for speed and quality of products.
First of all, corporate finance is about the capital managing process in any business whether private or public, large or tiny, manufacturing
Sources of finance are the different methods for a business to earn and obtain money. There are lots of ways to obtain money but two large basic sources of finance, which are the “owner’s capital” and “capital borrowed”. They are also called internal sources of finance and external sources of finance. In those sources, they are mainly divided in two groups, which are short-term sources of finance and long-term sources of finance.