Capital structure refers to how a company finances its assets through a combination of equity, debt, or hybrid securities. A company's capital structure is the composition of its liabilities, such as a firm financed by 20% equity and 80% debt. The Modigliani-Miller theorem states that in a perfect market, a company's capital structure does not affect its value. However, in the real world, factors like taxes, bankruptcy costs, and information asymmetry make capital structure relevant by affecting a company's optimal financing mix and value. Common capital structure theories examine the tradeoffs between debt and equity financing.
Pre-crisis perspective. Now more than ever it has relevance with the emergence of "Vulture" Hedge Funds (VHF). The VHFs are an important part of the "ecosystem", to achieve a true market equilibrium, unhampered by 'subsidies'.
Pre-crisis perspective. Now more than ever it has relevance with the emergence of "Vulture" Hedge Funds (VHF). The VHFs are an important part of the "ecosystem", to achieve a true market equilibrium, unhampered by 'subsidies'.
Industry balance sheet is becoming more scarce and expensive.
Funds need to take a closer look at the entire liquidity provider space - existing, new and alternatives.
This 'perspective' addresses many of the issues that prime brokers, funds and the entire industry are currently facing.
Corporate Finance - Capital Structure and Market Timing - A study of Indian C...Kushal Agarwal
How market timing and source of resource mobilization affects capital structure. Also many a times capital structure dictates source and timing of mobilization.
Industry balance sheet is becoming more scarce and expensive.
Funds need to take a closer look at the entire liquidity provider space - existing, new and alternatives.
This 'perspective' addresses many of the issues that prime brokers, funds and the entire industry are currently facing.
Corporate Finance - Capital Structure and Market Timing - A study of Indian C...Kushal Agarwal
How market timing and source of resource mobilization affects capital structure. Also many a times capital structure dictates source and timing of mobilization.
Marketing Professional – Jeremy Baker, a skilled marketing professional with 5+ years experience managing marketing campaigns, creative design, and events, is actively seeking employment.
The Oscar Iden Lecture Series. Lecture 3:The State of Individuals. Prof. Car...Wealthbuilder.ie
Over the past 20 years or so I have been reading, studying, talking and writing about the work of my namesake: Prof. Carroll Quigley. For forty years he lectured, finally obtaining a Professorship at the School of Foreign Service, Georgetown University, Washington. During his Presidency Bill Clinton, a former student, quoted Quigley extensively on such matters as history, political structure and foreign policy. Prof. Quigley's seminal work "Tragedy and Hope" was a watershed in contemporary understanding of the history of the West, in general, and the United States, in particular. In this book Carroll Quigley explained his understanding of the realpolitik of power structures of the world and many might say this cost him dearly. However, his perspective on life was that you should endeavour to do your best, regardless of consequences. In 1976, one month before he died, he delivered a series of three lectures on one central topic "Public Authority and the State in the Western Tradition: A Thousand Years of Growth 976-1976. Remarkably, 32 years later, this lecture series is timely.
Black & Latino dominance on Twitter & Facebook, yet omission from Social Medi...Golin
GolinHarris at Social Media Week 2013
Black & Latino dominance on Twitter & Facebook,
yet omission from Social Media Strategy
A discussion on how black and Latino’s have dominated Twitter and Facebook, however lack SM strategies. Discuss best practices for multicultural social media strategies.
#smwmulticultural
Mercer Capital | Valuation Insight | Capital Structure in 30 MinutesMercer Capital
Capital structure decisions have long-term consequences for shareholders. Directors evaluate capital structure with an eye toward identifying the financing mix that minimizes the weighted average cost of capital. This decision is complicated by the iterative nature of capital costs: the financing mix influences the cost of the different financing sources. While the nominal cost of debt is always less than the nominal cost of equity, the relevant consideration for directors is the marginal cost of debt and equity, which measures the impact of a given financing decision on the overall cost of capital. The purpose of this whitepaper is to equip directors and shareholders to contribute to capital structure decisions that promote the financial health and sustainability of the company.
The first chapter introduces us to Corporate finance is essential .docxoreo10
The first chapter introduces us to Corporate finance is essential to all managers as it provides all the skills managers need to; Identify corporate strategies and individual projects that add value to the organization and come up with plans for acquiring the funds. The types of business forms are; sole proprietorship, corporation and partnerships. A sole proprietorship form of business possesses different advantages and disadvantages. A partnership maintains roughly similar pros and cons of a sole proprietorship. A corporation is a legal entity that is separate from its owners and managers. Advantages include a smooth transfer of ownership, limited liability, ease of raising capital. The disadvantages include; double taxation, and a high cost of set-up and report filing. The chapter then deals with Objective of the firm, which is to maximize wealth. The final topic is an in-depth look at Financial Securities, which are markets and institutions.
In the second chapter, we are introduced to financial statements, Cash flow and taxes. Financial statements include; the Income statement and the Balance sheet. An income statement is a financial statement that shows a company’s financial performance regarding revenues and expenses, over a particular period, mostly one year. A balance sheet, on the other hand, is a financial statement that states a company’s assets, liabilities and capital at a particular point in time. Under the cash flow, the chapter covers on the Statement of cash flows, indicates how various changes in balance sheet and income statement accounts affect cash and analyses financing, investing and operating activities. A free cash flow shows the cash that an organization is capable of generating after investment to either maintain or expand its database. Under taxes, Corporate and personal taxes are well explained and the scenarios under which they apply.
Chapter Three analyzes Financial Statements. This analysis is broken down into; Ratio Analysis, DuPont equation. The effects of improving ratios, the limitations of ratio analysis and the Qualitative factors. Ratios help in comparison of; one company over time and one company versus other companies. Ratios are used by; Stockholders to estimate future cash flows and risks, lenders to determine their creditworthiness and managers to identify areas of weaknesses and strengths. Liquidity ratios show whether a company can meet its short-term commitments using the resources it has at that particular time. Asset management ratios exemplify how well an organization utilize its assets. Debt management ratios, leverage ratios as well as profitability ratios are explained.
The DuPont equation focuses on several issues. These are; Debt Utilization, Asset utilization and the Expense Control. Consequently, Ratio analysis has various problems and limitations. These include; Distortion of ratios from seasonal factors, various operating and accounting practices can distort comparisons and also it i ...
Debt and equity are the two important sources of finance for the firms. Basically, capital structure of the firm revolves around the judicious mix of the debt and equity. Upon Debt and equity mix much research has been done and many have designed the capital structure in a very different manner.
Capital structure theory can be said as the manner in which a company or organization finance its economic activities. Basically, capital structure of a firm is the combination of equity and debt. It is a very important decision for every organization or business house. This decision revolves around a question “How to make an optimal capital’s structure for the firm?” and what are the factors that influence the decision. Because the capital structure decision ultimately affects the management, investors and lenders. So, it becomes very crucial for the firms. Earlier many researchers have made investigation on the capital structure determinants but still there are loopholes to be filled up. The theory of Capital Structure began with the phenomenal work made by Modigliani and Miller (1958, 1963). It stirred the academic world to pour more thoughts into that and many interesting works came out.
Capital structure refers to the way a firm chooses to finance its assets and investments through some combination of equity, debt, or internal funds. It is in the best interests of a company to find the optimal ratio of debt to equity to reduce their risk of insolvency, continue to be successful and ultimately remain or to become profitable.
DETERMINANTS OF CAPITAL STRUCTURE:
The capital structure of a concern depends upon a large number of factors such as leverage or trading on equity, growth of the company, nature and size of business, the idea of retaining control, flexibility of capital structure, requirements of investors, cost of floatation of new securities, timing of issue, corporate tax rate and the legal requirements. It is not possible to rank hem because all such factors are of different important and the influence of individual factors of a firm change over a period of time.
1. Financial Leverage or Trading on Equity: Financial leverage is one of the important considerations in planning the capital structure of a company. One common method of examining the impact of leverage is to analyse the relationship between Earnings Per Share (EPS) and EBIT. The companies with high level of leverage can make profitable use of the high degree of leverage to increase return on the shareholders' equity.
2. Growth and Stability of Sales: The capital structure of a firm is highly influenced by the growth and stability of its sales. If the sales of a firm are expected to remain fairly stable, it can raise a higher level of debt. Stability of sales ensures that the firm will not face any difficulty in meeting its fixed commitments of interest payment and repayments of debt. Similarly, the rate of growth in sales also affects the capital structure decision.
3. Cost o
A superior new replacement to traditional discounted cash flow valuation models
In the aftermath of the financial meltdown, the models commonly used for discounted cash flow valuation have become outdated, practically overnight. To meet the demand for an authoritative guidebook to the new economy, internationally recognized expert Kenneth Hackel has written Security Valuation and Risk Analysis.
1 the role of managerial finance(modified 4)Ahmed Elgazzar
1-The Role of Managerial Finance(Modified 4)
2-Time value of money(modified 1)
3-Capital Budgeting(Modified 1) [Repaired]
4-Stock Valuation(modified 1)
MBA Assignments
1. Capital structure
From Wikipedia, the free encyclopedia
Jump to: navigation, search
"Gearing ratio" redirects here. For the mechanical concept, see gear ratio.
Finance
Financial markets
Bond market
Stock (Equities) Market
Foreign exchange market
Derivatives market
Commodity market
Money market
Spot (cash) Market
OTC market
Real Estate market
Private equity
Market participants
Investors
Speculators
Institutional Investors
Corporate finance
Structured finance
Capital budgeting
Financial risk management
Mergers and Acquisitions
Accounting
Financial Statements
Auditing
Credit rating agency
Leveraged buyout
Venture capital
2. Personal finance
Credit and Debt
Employment contract
Retirement
Financial planning
Public finance
Tax
Government debt
Deficit spending
Warrant (of payment)
Banks and banking
Fractional-reserve banking
Central Bank
List of banks
Deposits
Loan
Money supply
Financial regulation
Finance designations
Accounting scandals
Standards
ISO 31000
International Financial Reporting
Economic history
Stock market bubble
Recession
Stock market crash
History of private equity
This box: view • talk • edit
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 $20 billion in
equity and $80 billion 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
3. leverage. In reality, capital structure may be highly complex and include tens of sources.
Gearing Ratio is the proportion of the capital employed of the firm which come from
outside of the business finance, e.g. by taking a short term loan etc.
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, how a firm is financed is
irrelevant to its value. 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,
taxes, information asymmetry, to name some. 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.
Contents
[hide]
• 1 Capital structure in a perfect market
• 2 Capital structure in the real world
o 2.1 Trade-off theory
o 2.2 Pecking order theory
o 2.3 Agency Costs
o 2.4 Other
• 3 Arbitrage
• 4 See also
• 5 Further reading
• 6 References
• 7 External links
[edit] Capital structure in a perfect market
Main article: Modigliani-Miller theorem
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. 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. That is, as leverage increases, while the burden
of individual risks is shifted between different investor classes, total risk is conserved and
hence no extra value created.
4. Their analysis was extended to include the effect of taxes and risky debt. Under a
classical tax system, the tax deductibility of interest makes debt financing valuable; that
is, the cost of capital decreases as the proportion of debt in the capital structure increases.
The optimal structure, then would be to have virtually no equity at all.
[edit] Capital structure in the real world
If capital structure is irrelevant in a perfect market, then imperfections which exist in the
real world must be the cause of its relevance. The theories below try to address some of
these imperfections, by relaxing assumptions made in the M&M model.
[edit] Trade-off theory
Main article: Trade-off theory of capital structure
Trade-off theory allows the bankruptcy cost to exist. It states that there is an advantage to
financing with debt (namely, the tax benefit of debts) and that there is a cost of financing
with debt (the bankruptcy costs of debt). The marginal benefit of further increases in debt
declines as debt increases, while the marginal cost increases, so that a firm that is
optimizing its overall value will focus on this trade-off when choosing how much debt
and equity to use for financing. Empirically, this theory may explain differences in D/E
ratios between industries, but it doesn't explain differences within the same industry.
[edit] Pecking order theory
Main article: Pecking Order Theory
Pecking Order theory tries to capture the costs of asymmetric information. It states that
companies prioritize their sources of financing (from internal financing to equity)
according to the law of least effort, or of least resistance, preferring to raise equity as a
financing means “of last resort”. Hence: internal debt is used first; when that is depleted,
then debt is issued; and when it is no longer sensible to issue any more debt, equity is
issued. This theory maintains that businesses adhere to a hierarchy of financing sources
and prefer internal financing when available, and debt is preferred over equity if external
financing is required. Thus, the form of debt a firm chooses can act as a signal of its need
for external finance. The pecking order theory is popularized by Myers (1984)[1] when he
argues that equity is a less preferred means to raise capital because when managers (who
are assumed to know better about true condition of the firm than investors) issue new
equity, investors believe that managers think that the firm is overvalued and managers are
taking advantage of this over-valuation. As a result, investors will place a lower value to
the new equity issuance..
[edit] Agency Costs
5. There are three types of agency costs which can help explain the relevance of capital
structure.
• Asset substitution effect: As D/E increases, management has an increased
incentive to undertake risky (even negative NPV) projects. This is because if the
project is successful, share holders get all the upside, whereas if it is unsuccessful,
debt holders get all the downside. If the projects are undertaken, there is a chance
of firm value decreasing and a wealth transfer from debt holders to share holders.
• Underinvestment problem: If debt is risky (e.g., in a growth company), the gain
from the project will accrue to debtholders rather than shareholders. Thus,
management have an incentive to reject positive NPV projects, even though they
have the potential to increase firm value.
• Free cash flow: unless free cash flow is given back to investors, management has
an incentive to destroy firm value through empire building and perks etc.
Increasing leverage imposes financial discipline on management.
[edit] Other
• The neutral mutation hypothesis—firms fall into various habits of financing,
which do not impact on value.
• Market timing hypothesis—capital structure is the outcome of the historical
cumulative timing of the market by managers.[2]
• accelerated investment effect- even in absence of agency costs, levered firms use
to invest faster because of the existence of default risk[3]
[edit] Arbitrage
Similar questions are also the concern of a variety of speculator known as a capital-
structure arbitrageur, see arbitrage.
A capital-structure arbitrageur seeks opportunities created by differential pricing of
various instruments issued by one corporation. Consider, for example, traditional bonds
and convertible bonds. The latter are bonds that are, under contracted-for conditions,
convertible into shares of equity. The stock-option component of a convertible bond has a
calculable value in itself. The value of the whole instrument should be the value of the
traditional bonds plus the extra value of the option feature. If the spread, the difference
between the convertible and the non-convertible bonds grows excessively, then the
capital-structure arbitrageur will bet that it will converge.
[edit] See also
• Cost of capital
• Corporate finance
• Debt overhang
• Discounted cash flow
6. • Economic capital
• Enterprise value
• Financial modeling
• Financial economics
• Pecking Order Theory
• Weighted average cost of capital
[edit] Further reading
• Rosenbaum, Joshua; Pearl, Joshua (2009). Investment Banking: Valuation,
Leveraged Buyouts, and Mergers & Acquisitions. Hoboken, NJ: John Wiley &
Sons. ISBN 0-470-44220-4.
• Gajurel, Dinesh Prasad. "Capital Structure Management in Nepalese
Enterprises.". http://ssrn.com/abstract=778106.
[edit] References
1. ^ Myers, Stewart C.; Majluf, Nicholas S. (1984). "Corporate financing and
investment decisions when firms have information that investors do not have".
Journal of Financial Economics 13 (2): 187–221.
2. ^ Baker, Malcolm P.; Wurgler, Jeffrey (2002). "Market Timing and Capital
Structure". Journal of Finance 57 (1): 1–32.
3. ^ Lyandres, Evgeny and Zhdanov, Alexei,Investment Opportunities and
Bankruptcy Prediction(February 2007). Available at SSRN:
http://ssrn.com/abstract=946240
[edit] External links
• http://papers.ssrn.com/sol3/papers.cfm?abstract_id=778106
• http://www.westga.edu/~bquest/2002/rethinking.htm
• http://www.listedall.com/search/label/capital%20structure