Optimal Capital Structure
OPTIMAL CAPITAL STRUCTURE
INTRODUCTION
This report tries to visualize “OPTIMAL CAPITAL STRUCTURE” and represent the facts that include features of capital structure, determinants of capital structure, and patterns of capital structure, types and theories of capital structure, theory of optimal capital structure, risk associated with capital structure, external assessment of capital structure and some assumption related to capital structure.
BROAD OBJECTIVE
• To determine features of capital structure
• To know about determinants of capital structure
• To evaluate pattern and form of capital structure
• To identify the types and theories of capital structure
• To analyze the theories of optimal capital structure
• To determine the risk associated with capital structure
• To have an overview about external assessment of capital structure
• To know the assumptions related to capital structure
SOURCES OF INFORMATION
• Books on financial management
• Articles published on capital structure
• Search out different websites for data collection related to capital structure decisions.
LITERATURE REVIEW
Capital structure is one of the most complex areas of financial decision making because of its interrelationship with other financial decision variables. Poor capital decision can result in a high cost of capital thereby lowering the NPVs of projects and making more of them unacceptable. In practical sense, a firm can probably more readily increase its value by improving quality and reducing costs than fine tuning its capital structure. Effective capital structure can lower the cost of capital, resulting in higher NPVs and more acceptable projects, and thereby increasing the value of the firm.
A firm’s major decision is its financing decisions which are analysied in the theory of corporate capital structure and based on the model developed by Dodd (1986), capital structure is determined mainly by three agency costs variables- agency equity, agency debt and bankruptcy risk
INTRODUCTION
This report tries to visualize “OPTIMAL CAPITAL STRUCTURE” and represent the facts that include features of capital structure, determinants of capital structure, and patterns of capital structure, types and theories of capital structure, theory of optimal capital structure, risk associated with capital structure, external assessment of capital structure and some assumption related to capital structure.
BROAD OBJECTIVE
• To determine features of capital structure
• To know about determinants of capital structure
• To evaluate pattern and form of capital structure
• To identify the types and theories of capital structure
• To analyze the theories of optimal capital structure
• To determine the risk associated with capital structure
• To have an overview about external assessment of capital structure
• To know the assumptions related to capital structure
SOURCES OF INFORMATION
• Books on financial management
• Articles published on capital structure
• Search out different websites for data collection related to capital structure decisions.
LITERATURE REVIEW
Capital structure is one of the most complex areas of financial decision making because of its interrelationship with other financial decision variables. Poor capital decision can result in a high cost of capital thereby lowering the NPVs of projects and making more of them unacceptable. In practical sense, a firm can probably more readily increase its value by improving quality and reducing costs than fine tuning its capital structure. Effective capital structure can lower the cost of capital, resulting in higher NPVs and more acceptable projects, and thereby increasing the value of the firm.
A firm’s major decision is its financing decisions which are analysied in the theory of corporate capital structure and based on the model developed by Dodd (1986), capital structure is determined mainly by three agency costs variables- agency equity, agency debt and bankruptcy risk