Advanced Managerial Finance

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.

3) The interest resulting from the debt also will cost to the company even it is taxable. The interest is fixed base on the level of the debt even the company does not generate profit. This would need to be careful when take on the debt comparing to use its own capital. And the creditor may come to intervene on the business when the company has difficulty to service its debt.

The firm has decided to increase the debt finance component portion from 20% to 30% which is a good decision since the interest payments are 100% tax deductible. The appropriate capital structure would be to

c) Optimization of the capital structure is also consistent with the growth of the company. The optimal capital structure

We would recommend the capital structure with 30% debt. This is because with 30% debt, they would be able to repurchase 19.8 million shares outstanding as well as save 37.8 million in taxes. EBIT is high in this company, and because of this, financial leverage will raise EPS and ROE. However, variability also increases as financial leverage increases, so the company would not want to take on too much debt and become very risky.

As shown in the financial income statement (Exhibit3), Intel Corp. (INTC) has a capital structure consisting most of equity. Intel has very little debt in its capital structure and the cost of debt would have only a marginal effect on the overall cost of capital. The current capital structure of Intel is not optimal yet since optimal capital structure is making minimum weighted-average cost of capital.

Based on the suggestion that the focus should be on market values, compute the weights of debt, preferred stock, and common stock.

However, the Walgreens’ capital structure is similar to its stronger competitor CVS’ capital structure that I defined as the benchmark. CVS has a total liabilities and shareholders’ equity of $54,721.90, where total debt is $23,400 representing the 42.76% and total equity is $31,321.90 which represents 57.24%. Moreover, if we compare 2006 results to 2007, I realize that capital structure

The purpose of the report is to understand the capital structure of the chosen company on the basis of the financial statements of the company which includes the income statement, balance sheet and the cash flow statement of the company and do the capital analysis of the company as well to find out the advantages and disadvantages in working capital of the company and suggest company logical and useful ways for growing their economy.

Adding more debt into capital structure will reduce agency As more debts are added, agency cost of debt cost of equity as managers are left with less free cash flow Lowest agency cost of equity. would be further reduced. that could have been exploited for perk consumption. Since part of the earnings is paid to meet the debt repayments, dividends paid deceases comparing with actual 2011. But this is counter-balanced by increased earnings per share (EPS) as the shares outstanding is reduced Comparing with 20% leverage, dividend continues to decrease but EPS

There is a point in the D/E ratio (usually high) where holders of the risky debt begin to bear part of the firm's operating risk. This happens because as the company acquires more debt, more of that risk is relocated from stockholders to bond holders.

Besides taxes, other main additional factor that could determine capital structure is bankruptcy. The mere possibility of bankruptcy however, would not make debt less attractive. A company is an operation that attracts resources from investors, uses them and generates returns to investors according to certain agreed rules. Bankruptcy is simply a recognition that the promised payments to debt-holders are greater than the value of all the assets. Since equity-holders are residual claimants, at the point of bankruptcy, their claims are worth zero. Thus, control of the assets passes to the debt-holders, who now become the new equity-holders. The fact of bankruptcy does not change the value of the company. Just before bankruptcy,

Capital structure is the way a company finances its assets. Some may be fully equity financed and some will be depends on debt. Same with the previous accounting ratios, it also has 2 categories by measuring the capital structure. From the gearing, we can know that 2014 have a higher percentage of number compare to 2013. During the year from 2014 to 2013, the percentage has increased from 3.07% to 5.92% which means that the risk of the company to lend to is getting higher and it will be more risky to invest in. A low-geared company with a ratio of 10% would be able to pay off debt several times over and would be considered low-risk by both investors and lenders. Companies with higher ratios, upwards of 50% for example, represent a greater risk, because even a brief period of reduced profits or a sudden increase in interest rates could mean bankruptcy and loan default. So, the company needs to lower the gearing percentage to have a greater financial

It makes no differences in value of firm and cost of capital with the changed of capital structure. (Modigliani & Miller, 1958). However Proposition II of Modigliani and Miller (1958) explain that companies with more debt have a higher expected return on equity. It can be concluded that the risk is higher for shareholders, since the firm use more loans from outsider. Based on theory without tax, Franco Modigliani and Merton H.Miller revised the theory. In preposition I of MM theory with tax, a company with more debt can make the tax payments become lower, because the interest can be subtracted that can cause the value of a firm increases. The second preposition with tax clarifies that leverage add more risk to companies, but the tax “shield” reduces something of that risk and debt also increase the cost of capital. However this MM theory is highly controversial as the implication of these theories is that firm need to use debt as much as possible. In fact, the more debt could cause a higher bankruptcy

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