1. 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. For example, a firm that sells $20bn dollars in equity and $80bn in debt is said to be 20% equity financed and 80% debt financed. The firm's ratio of debt to total financing, 80% in this example, is referred to as the firm's leverage. 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. Capital structure in a perfect market Assume a perfect capital market (no transaction or bankruptcy costs; perfect information); firms and individuals can borrow at the same interest rate; no taxes; and investment decisions aren't affected by financing decisions. Modigliani and Miller made two findings under these conditions. Their first 'proposition' was that the value of a company is independent of its capital structure. That is, you cannot change the size of a cake by cutting it into different sized pieces. Their second 'proposition' stated that the cost of equity for a leveraged firm is equal to the cost of equity for an unleveraged firm, plus an added premium for financial risk.
Balance sheet lists assets, liabilities and owner’s equity. The assets listed on the balance sheet are acquired either by debt (liabilities) or equity. “Companies that use more debt than equity to finance assets have a high leverage ratio and an aggressive capital structure. A company that pays for assets with more equity than debt has a low leverage ratio and a conservative capital structure. That said, a high leverage ratio and/or an aggressive capital structure can also lead
Target Corporation: Report on Long-term Financing Policy and Capital Structure with an Acquisition Analysis Introduction This report will be based on the Target Corporation, and will consist of two sections: 1) long-term financing policy and capital structure, and 2) an acquisition analysis. The first section will include: Target's most recent long-term financing decision; an analysis of the economic, business, and competitive background in which the financing occurred; Target's book value and market value; possible changes that would occur to Target's finance policy and capital structure if it was forced to consider re-organization and bankruptcy strategies; and finally discuss Target's international investment and financing opportunities, as well as foreign exchange risks. The second section will be a report to the board of directors that identifies a synergistic acquisition candidate for Target.
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)....
There is no universal theory of the debt-equity choice, and no reason to expect one. In this essay I will critically assess the Pecking Order Theory of capital structure with reference and comparison of publicly listed companies. The pecking order theory says that the firm will borrow, rather than issuing equity, when internal cash flow is not sufficient to fund capital expenditures. This theory explains why firms prefer internal rather than external financing which is due to adverse selection, asymmetry of information, and agency costs (Frank & Goyal, 2003). The trade-off theory comes from the pecking order theory it is an unintentional outcome of companies following the pecking-order theory. This explains that firms strive to achieve an optimal capital structure by using a mixture debt and equity known to act as an advantage leverage. Modigliani and Miller (1958) showed that the decisions firms make when choosing between debt and equity financing has no material effects on the value of the firm or on the cost or availability of capital. They assumed perfect and frictionless capital markets, in which financial innovation would quickly extinguish any deviation from their predicted equilibrium.
...are both involved in Market Penetration. The first strategy would be to create additional market share through innovative and stylish advertising. The next market penetration strategy would be to develop new and fresh ad campaigns to compete with competitors new ads. The last strategy suggested would be of Forward Integration. This strategy would put Henri Bendel stores in more large cities. These five strategies have brought themselves to light through the TOWS Matrix.
Brealey, Richard A., and Myers, Stewart C. Principles of Corporate Finance. Sixth ed. McGraw Hill, New York, © 2000.
Higher leverage is very likely to create value for a firm considering capital structure change by exerting financial discipline and more efficient corporate strategy changes.
Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.
What do you understand by the phrase “stakeholder analysis”? Attempt a stakeholder analysis of an organisation that you are closely associated with.
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
Ÿ Capital structure/investment - This information is taking from the Balance sheet, but also from the Profit and Loss Account. This is examining the sources of finance the company has used and also looking at it as a potential investment opportunity. There are certain features, which must be present if financial information is to meet the needs of the user. The two most important features are that: Ÿ The information should be relevant to those who are using it.
In order to maximise firm value under this model, the firm should seek to borrow until that tax benefit from an extra £1 of borrowing equals the cost arising from increased likelihood of financial distress. It is clear that this theory regards the capital structure as highly relevent to firm value, and supports a real world scenario more strongly than M&M as it allows for bankruptcy costs. On an empirical level this perhaps explains why there are differences in capital structures between different
During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program that had been proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis’s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task.
Leverage refers to debt or to the borrowing of funds to finance the purchase of assets in a company. Business owners can use either debt or equity to finance or buy the company's assets. Using debt, or leverage, increases the company's risk of bankruptcy. It also increases the company's returns specifically its return on equity. Leverage is a key point for an investor or a firm because it helps them to invest or operate. However, it increases the level of risk. If an investor uses leverage to make an investment and the investment moves against the investor, his or her loss is much greater than it would've been if the investment had not been leverage. Leverage itself magnifies both gains and losses. In the business world, a company
1. There are many types of businesses that make their products from nature. To begin with, Extractors are the businesses that take resources from nature to make their products. For example, farmers would grow items and sell them to extractors, so they could make their products they need to sell, Another example, is oil. We need oil for gas, so businesses take oil from nature to produce gas. In conclusion, the types of business can produce many things.