INTRODUCTION
Financing decisions are one of the most critical areas and the challenging job for the finance managers, because, It has direct impact on the financial performance and capital structure of the companies. The finance manager of every company is always looking to maximize the economic welfare of the owners as represented by the market value of the firm. For this purpose, he has to take number of decisions like investment, financing and dividend decisions. The financing decision is mainly involves two choices. The first is the dividend choice – the distribution of retained earnings to be ploughed back and to be paid out as dividends. The second is a choice of capital structure – the proportion of external finance to be borrowed and the proportion to be raised in the form of new equity
The choice of appropriate source of fund for capital structure is one of the major policy decisions taken by a firm.(Kumar, Anjum & Nayyar,2012) The
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The financing decisions should be made with a view to achieve that target capital structure set by the management of the company. After existence of a company for few years, the financial manager then has to deal with the existing capital structure. Almost every company needs funds to finance its activities continuously. Each time the funds have to be arranged, the financial manager needs to consider the advantages and disadvantages of various sources of finance and selects the best option keeping in view the target capital structure.
Important Capital Structure Determinants are:
Choice of investors:
A Company’s policy generally is to have different types of investors for their securities. Therefore, a capital structure should give enough choice to all kind of investors to invest. Usually bold and adventurous investors go for equity shares and loans & debentures are often raised keeping into mind conscious
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...
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.
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.
We defined several criteria to determine our choice – return, risks and other quantitative and qualitative factors. Targeting a debt ratio of 40% will maximize the firm’s value. A higher earning’s per share and dividends per share will lead to a higher stock price in the future. Due to leveraging, return on equity is higher because debt is the major source of financing capital expenditures. To maintain the 40% debt ratio, no equity issues will be declared until 1985. DuPont will be financing the needed funds by debt. For 1986 onwards, minimum equity funds will be issued. It will be timed to take advantage of favorable market condition. The rest of the financing required will be acquired by issuing debt.
While taking into account the mix of the debt / equity that maximizes the price of the common stock, I assume that the optimal capital structure would be 70% equity and 30% debt.
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
Analyzing the pros and cons of structuring the additional capital funding as a debt rather than equity.
... the study is limited to these 5 companies. No concrete judgment can be reached describing the exact relationship between the ownership pattern and the dividend payout , as many factors come into play while deciding on the dividend decisions. Such qualitative reasoning are hard to judge and include in determining the relationship. We have identified major trends and based our observations on the same.
According to Wrigley (2014), the company has adopted aggressive dividend policy which tends to enhance the number of investors interested in the actions that bring more resources to the company. In other word, Tesco Plc need resources for the investment in business and retained profit which is one of the cheaper forms of financing. It is examined that company reinvest through shares and distribute the less to shareholders. In the view of Brannen et. al (2013), the dividend policy of the company is a criterion of choice of assets where, many investors may be comfortable with the input money in their accounts. Thus, in accordance with the dividend policy adopted each entity will attract investors that it is pleasing. If investors find stocks that match preferences, equilibrium is reached and the value of the shares is unaffected by dividend policy. In accordance of the annual reports, it is examined that future excess cash must be going to the customers but not in the shareholders pockets. The interim dividend of the company is 75% which means
Managers’ decisions on determining the size and time of a company’s next dividend payment are also important for both companies and shareholders. They will affect the company to distribute an appropriate amount of dividends at the right time. This essay will discuss whether theories of dividend payment, such as the dividend irrelevance and signalling effects, are applicable in the real world. It will then describe some key factors that managers should consider when deciding the time and size of a company’s next dividend payment. Finally, it will conclude with the significance of a company’s decision on dividend payments.
There is a range of criteria relevant for a decision of financing a new venture. To construct my list for the evaluation of a new company as an opportunity I have selected to refer to t...
Corporate finance is all about management sources of fund which are separated into two, debt and outside equity. When the firm is solely funded by equity, high cost of capital, or by debt, financial distress or bankruptcy cost, the firm will not reach the optimal capital structure. The combination of debt and equity, trade-off capital structure, should be used and the matter of agency costs must be reduced to maximise value of the firm. The trade-off between tax benefit and bankruptcy cost has already been discussed as if the firm’s debt usage becomes high enough, the marginal increase in the tax shield will be less than the marginal increase in the bankruptcy cost. Agency costs consist of monitoring costs to observe the firm 's executives by shareholders, management 's bonding costs to assure owners that their best interests maximisation value of the firm, and residual losses that result even when sufficient monitoring and bonding exists. Adding additional debt reduces agency costs to equity holders because the manager can buy out outside equity using debt financing as the leverage effectively shifts some agency costs to
Based on this model the author determined that if the rate of return is lower than the company’s discount rate the share price decreases and if it is higher the share price rises. The second model used was the Walter model. According to this model if the Internal rate of return is greater than cost of capital the share price increases and if it is lower it declines. The model also revealed that an insolvent company’s debt to equity ratio is at optimum when it is equal to one. The ratio is not important for an ordinary company as the rate of return equals the cost of capital. The optimum debt to equity ratio for a developing company will be zero. Based on these findings the author determines that factors such as conditions of the industry, demand and supply, domestic, global markets, technology, company life, competition need to be accounted for when valuing stocks. The result of the study suggests that manager’s success in stock valuation depends on the correct understanding of these influential resources and acclaim managers should increase the value of their company’s stock by proper use and combination of these factors. Managers should therefore increase stock values through investing companies, institutional investors, bonus shares and models such as Gordon and
For an organisation to rise fund, they usually tend to look at the stock market and capital market to do it so. This is two markets are usually seemed similar by the investors as they both contributes to the development of an economy. But there are significant difference between them. The capital market is a market that consist of stock market as well as the bond market. As a result, the capital market provides a long-standing finance using the debt capital and the equity capital. Capital markets divided into two sectors known as primary markets and secondary markets. The primary market is where securities are issued for the first time whereas the secondary market is where securities that have been already issued are traded among investors (Difference...
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.