Absorption Costing vs Variable Costing

2. Establish how the cost of equity is affected by capital structure decisions by defining financial risk and introducing the levered beta CAPM equation

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.

It also reflect that there is cost of financing with debt reflecting the bankruptcy costs as well as the financial distress in the form of costs of debt. The marginal benefit is increased in decline of debt with the increase in debt leading to the increase in marginal cost. It further optimises the overall value focusing on the trade-off while selecting the amount of debt and equity to be used for financing. This theory can provide the explanation for differences in ratios for debt to equity between industries without reflecting any explanation on the differences within similar industry (Lee, et al., 2009).

Nevertheless, the use of the Optimal Capital Structure (OCS) is the right techniques to be used in order to acquire the right combination of debt and equity that can maximize the

While using debt may add pressure to a company’s ongoing operations as a result of having to meet interest-payment obligations, it helps retain more profits within the company compared to using equity, which requires the sharing of company profits with equity holders. Using debt, companies need to pay only the amount of interest out of their profits. Using equity, on the other hand, the more profits a company makes, the more it has to share with equity investors. To take advantage of such a debt-financing feature, companies often use debt to finance stable business operations in which they can more easily make ongoing interest payments and, meanwhile, retain the rest of the profits to themselves.

The financial structure of a company is represented by the specific mixture of long–term debt and equity that a company uses to finance its operations.

The size of the company will affect the capital structure of company. This is because large companies are generally lower business risk compare to small companies. Thus, large companies can raise the debt capital easily. In this case, the Kellogg is expanding their business and size of company is getting bigger, so they tend to use more debt than other companies.

The course project involved developing a great depth of knowledge in analyzing capital structure, theories behind it, and its risks and issues. Before I began this assignment, I knew nothing but a few things about capital structure from previous unit weeks; however, it was not until this course’s final project that came along with opening

Capital structure refers to the sources of financing, particularly to proportion of debt or leverage/gearing and equity that a business uses to fund it assets, operations and future growth (Jensen and Meckling, 1979). In reality, some company chose to be all-equity financed for their business. Others firms could have low levels of equity and high levels of debt. The debates about capital structure of the capital become extremely controversial since the appearance of M&M theory.

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

Capital structure is defined as the mix of the long-term sources of funds that a firm use. It is composed of equity, debt securities and affect long-term financing of the entity. It is made up by shareholder’s funds, long-term debt and preference share capital. The capital structure mostly focus on the proportions of debt and equity displayed in the company financial statements, especially in the balance sheet (Myers, 2001). The value of a firm can be calculated by the sum of the value of its firm’s debt and equity.

Already in 1958, Modigliani and Miller have pointed the discussion of capital structure towards the cost of debt and equity. According to their first proposition, in a world of no corporate taxes and with perfect markets, financial leverage has no effect on a firm’s value. In their second proposition, they state that the cost of equity equals a linear function defined by the required return on assets and the cost of debt (Modigliani and Miller, 1958).

A firm can choose a mix of three modes of financing i.e. issuing shares, borrowing from the market and use of retained earnings. The ratio of this mix of funds purely depends on the firm and known as optimal capital structure of the firm. This leads to the different capital structure theories. These theories explain their

Talking about the capital structure in Europe one of the articles highlight the capital structure policies used and implemented by firms in Europe and then trying to compare it to the policies used by different countries around the globe on a survey of 313 CFOs on capital structure choice. An international survey was conducted of CFOs on capital structure choices and tried to highlight interesting points relating to how theoretical concepts are being implemented by professionals in UK, The Netherlands, Germany and France and they have compared their result to previous findings from US. The articles suggests that

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 at the center of many other decisions in the area of corporate finance. These include dividend policy, project financing, issue of long term securities, financing of mergers, buyouts and so on. One of the many objectives of