Notes of Capital Structure

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• Capital Structure Theory Essay

  ...Caleb Johnson Capital Structure Theory Working Capital Management Dr. Woodward 10/14/14 Capital Structure Theory Part a. (Capital Structure) Capital structure is very important. Not only does it influence the return a company earns for its shareholders but can also be a determining factor on whether or not a firm survives a recession. A company’s capital structure is a mix of their short-term debt, long-term debt, and equity. A firm’s capital structure is the way the firm finances all of its operations, investments, and growth. When a firm’s debt-to-equity ratio maximizes its value and minimizes the firm’s weighted average cost of capital (WACC), it is said to be at the “target” or “optimal capital structure”. Debt usually offers a lower cost of capital because of the ability to deduct tax from interest, but the company’s risk increases as debt increases. Part b. (Business Risk) Business risk refers to the risk brought upon the firm by its operations. This can be influenced by many factors such as, cost of production, sales volume, unit price, competition, demand, government regulations, etc. A company with higher business risk should operate with a capital structure that has a lower debt ration to...

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• Essay on capital structure

  ...Introduction The context of this paper is to investigate the relationship between capital structure and firm performance on Malaysia plantations industries. According to Brealey and Myers (1988), the capital structure will determine the survival of a business. Damodaran (2001) defined capital structure as the mix of debt and equity used to finance the operation of firms. Capital structure is closed link with corporate performance (Tian and Zeitun, 2007). Corporate performance can be measured by variables which involve productivity, profitability, growth or, customers satisfaction. Companies often use debt when constructing their capital structure, which helps lower total financing cost and lower cost of debt financing. In general, using debt helps keep profits within a company and increases returns on equity for current company owners and helps secure tax savings. Malaysia plantation industry is an integral part of the agricultural sector. The major crops produces are palm oil, rubber and cocoa. For example, oil palm plantation sector is currently the second largest export revenue earner for Malaysia. Malaysia remains the world top exporter of palm oil, which is 47% of global exports, and seconds after Indonesia in palm oil production, accounting for 41% of global production. In year 2008, palm oil contributed around 3.2% of the...

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• Capital Structure Essay

  ...undertake (capital budgeting) and how will investment and finance decisions affect the firm's value (valuation)? • How can cash be raised for the required investments? This is known as the ‘financing decision' (cost of capital, capital structure and leasing). • How will the firm manage its day-to-day cash and financial affairs (short-term financing and net working capital)? The Capital Budgeting Mini Case presents a financial decision of acquiring another corporation. Two choices are available; Corporation A and Corporation B, the cost of each choice is $250,000, and acquiring both corporations is not an option. The primary goal of any company is to create value for its shareholders and as such, the most important job of the financial manager is to create value from the company's capital budgeting, Financial managers must be particularly aware of the timing of cash flows (the ‘time value of money') and associated risks. This financial decision-maker will use projected cash flows to determine whether acquiring Corporation A or Corporation B (i.e. NPV and IRR) is the best choice. If acquisition does not generate positive cash flow, the company is effectively providing finance for the acquired corporation. Capital Budgeting Decisions Many business opportunities involve sacrificing current earnings for future profits (opportunity cost). For the...

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• Capital Structure Essay

  ...Introduction Capital structure (CS) is one of the most important aspects of the Financial Management of any organization. It aims is to identify and implement the best capital structure proportion possible that suits the organizations needs and objectives. An optimal Capital structure boosts the prosperity of the company in the long run and reduces the risk. CS is a mixture of a company's current and non current debt, common and preferred equity. It's the way a company finances its functions generally and how it can grow by using different funds resource. The capital structure of a company may be simple, compound or complex. A simple capital structure is composed of one single security base (equity share). While a compound capital structure indicates a combination of two security base in form of equity and preference share capital. The complex capital structure is made up of many security bases, beside the above mentioned shares it includes series of debentures or bonds and loans from other sources. http://finance.mapsofworld.com/corporate-finance/hybrid-financing/capital-structure.html Importance of optimal Capital Structure A proper capital structure is a serious matter for any...

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• Essay about Capital Structure

  ... Capital Structure 7 July 2013 Introduction The capital structure for a company can be very important for the success of the company. Many aspects of the business must be evaluated in order to determine the appropriate capital structure. Throughout this paper, three companies will be evaluated. The three companies being evaluated are eBay (NasdaqGS: EBAY), The Clorox Company (NYSE: CLX), and Alaska Air Group Inc. (NYSE: ALK). Company Overview eBay is a very popular company for people of all walks and from all around the world. According to the company’s website, eBay “is a global commerce platform and payments leader connecting millions of buyers and sellers. We do so through eBay, the world's largest online marketplace, which allows users to buy and sell in nearly every country on earth; through PayPal, which enables individuals and businesses to securely, easily and quickly send and receive digital payments; and through GSI, which facilitates ecommerce, multichannel retailing and digital marketing for global enterprises” The Clorox Company has been a leader in cleaning and household supplies for many years. According to their website, “The Clorox Company manufactures and markets consumer and professional products worldwide. The company’s Cleaning segment offers laundry additives, including bleach products under the Clorox brand, and Clorox 2 stain...

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• Capital Structure Essay

  ...Assignment 1. Some of the key trends in the capital structure of India Inc. are as follows: Key observations: * Indian corporate employ substantial amount of debt in their capital structure in terms of the debt-equity ratio as well as total debt to total assets ratio. * As a result of debt-dominated capital structure, the Indian corporate are exposed to a very high degree of total risk as reflected in high degree of operating leverage and financial leverage and, consequently, are subject to a high cost of financial distress * The foreign controlled companies in India use less debt than the domestic companies * The dependence of the Indian corporate sector on debt as a source of finance has declined over the years particularly since the mid-nineties * The corporate enterprises in India seem to prefer long-term borrowings over short-term borrowings * The foreign controlled companies use more long-term loans relatively to the domestic companies Priority order of source of financing in Indian corporate: * Retained earnings are the most favoured source of finance. There is significant difference in the use of internally generated funds by the highly profitable corporate relative to the low profitable firms * The low profitable firms use different forms of debt funds more than the highly profitable firms * Loan from financial...

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• CAPITAL STRUCTURE Essay

  ... 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: Long-term debt. By standard accounting definition, long-term debt includes obligations that are not due to be repaid within the next 12 months. Such debt consists mostly of bonds or similar obligations, including a great variety of notes, capital lease obligations, and mortgage issues. Preferred stock. This represents an equity (ownership) interest in the corporation, but one with claims ahead of the common stock, and normally with no rights to share in the increased worth of a company if it grows. Common stockholders' equity. This represents the underlying ownership. On the corporation's books, it is made up of: (I) the nominal par or stated value assigned to the shares of outstanding stock; (2) the capital surplus or the amount above par value paid the company whenever it issues stock; and (3) the earned surplus (also called retained earnings), which consists of the portion of earnings a company retains after paying out dividends and...

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• Essay about Capital Structure

  ...| PROJECT ON CAPITAL STRUCTURE | | FORE SCHOOL OF MANAGEMENT | | | ACKNOWLEDGEMENT We are very thankful to everyone who all supported us to complete our project effectively. We are grateful to Prof.Himanshu Joshi for providing us proper guidelines and moral support regarding completion of the report. TABLE OF CONTENTS S.NO. | CONTENT | PAGE NO. | | ACKNOWLEDGEMENT | 2 | | EXECUTIVE SUMMARY | 4 | | ABSTRACT | 5 | 1. | INTRODUCTION | 6 | 2. | RESEARCH METHODOLOGY | 8 | 3. | HYPOTHESIS | 9 | 4. | FMCG SECTOR | 10 | 5. | IT SECTOR | 11 | 6. | TELECOM SECTOR | 12 | 7. | POWER SECTOR | 13 | 8. | TESTING & ANALYSIS OF HYPOTHESES | 14 | 9. | CONCLUSION | 18 | 10. | REFERENCES | 19 | 11. | ANNEXURES | 20 | EXECUTIVE SUMMARY: The objective of the project is to understand the capital structure decisions taken in different industries. For this, 4 industries have been taken into consideration which is as follows: FMCG: HUL , P& G, Dabur and Nestle IT: Infosys, HCL and Wipro Power: Adani Power, Reliance Power and Birla Power Solutions Telecom: Bharti Airtel, Idea Cellular and Reliance Communications Major findings: * In IT and FMCG sector, investment is predominantly handled through equity * Capital structure in these sectors * Profitability of companies in each...

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