During the course of operations of any company‚ once the capital budgeting decisions have been made and proposals selected‚ the most important question before the finance manager is to arrange sufficient funds to finance them. Funds are also required to keep existing projects going on and the company can raise funds required for investment either by increasing the owners’ claims or the creditors’ claims or both. The claims of the owners increases when the company raises the funds by issuing equity
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Notes: Capital Structure by Kyung Hwan Shim University of New South Wales Australian School of Business School of Banking & Finance for FINS 1613 S1 2011 May 14‚ 2011 ∗ These notes are preliminary and under development. They are made available for FINS 1613 S1 2011 students only and may not be distributed or used without the author’s written consent. ∗ 1 Contents 1 Introduction 2 Financial Leverage 3 M&M Proposition I: Capital Structure Irrelevance 4 M&M Proposition II: Capital Structure
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Determinants of capital structure 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. Simply‚ capital structure refers to the mix of debt and equity used by a firm in financing its assets. The capital structure decision is one of the most important decisions made by financial management. The capital structure decision is
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References: Ameer R.‚ Ramli F. and Zakaria H. (2010). A new perspective on board composition and firm performance in an emerging market. Emerald Group Publishing Limited‚ ISSN‚ 10‚ 647-661. Andres Pablo de‚ Azofra V. and Lopez F. (2005). Corporate Boards in OECD Countries: size‚ composition‚ functioning and effectiveness. Corporate Governance‚ 13 (2)‚ 197-210
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Chapter 12 Capital Structure and Leverage LEARNING OBJECTIVES After reading this chapter‚ students should be able to: • Explain why capital structure policy involves a trade-off between risk and return‚ and list the four primary factors that influence capital structure decisions. • Distinguish between a firm’s business risk and its financial risk. • Explain how operating leverage contributes to a firm’s business risk and conduct a breakeven analysis‚ complete with
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of Diageo‚ the treasury team was given the task of establishing the cost of capital for each of the different areas the company operated. The team had to create a simulation model which should consider new finance approaches‚ treasury functions to focus on‚ what the firm’s risk footprints will be‚ how to calculate cost of capital and finally how to optimally structure capital. How has Diageo managed its capital structure? Both Grand Metropolitan and Guinness had little debt prior to the merger‚
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1. Determine the drivers of capital Structure. The primary factors that influence a company’s capital-structure decision are: Company size Big firms are likely to be more leveraged than small firms. This is due to the huge capital assets that they posses Management style Management style ranges from aggressive to conservative. Conservative management is less inclined to use debts to increase profits while an aggressive management may try to grow the firm quickly using significant amount
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AGENCY THEORY AND FIRM PERFORMANCE By Alex Ganas Department of M.B.A At the university of I.S.T / L.S.B.U There has been considerable discussion of managerial agency and firm performance problems that arise from the separation of ownership and control. Economists have long been concerned with the incentive problems that arise when decision making in a firm is the province of managers who are not the firm ’s security holders. The adoption of the agency logic increased during
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of risk is one of the main determinants of a firm`s capital structure. By looking at the trade off theory we might expect a negative association when risk and leverage are concerned. If firms have high earnings volatility‚ for some obvious reasons‚ they would not want to indulge in debt financing. It follows that when firms are exposed to bankruptcy and agency costs greater is the incentive to reduce the level of debt otherwise the more volatile a firm`s earnings are‚ the more risk is there of defaulting
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The Impact of the Concept of “Tank (Wewa)-Stupa (Dagaba)‚ Village (Gama) - Temple (Pansala)” (TSVT) to an Integrated Tourism Promotion System: A study in Anuradhapura District‚ Sri Lanka Dayangana K T L U S a‚ Gamlath G R M b a Lecturer‚ Department of Tourism and Hospitality Management‚ Faculty of Management Studies‚ Rajarata University of Sri Lanka. udaya8199@gmail.com b Project Accountant‚ National Post Consumer Plastic Waste Management Project‚ Central Environmental Authority‚ Sri Lanka.
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