Analysis of Capital Structure of Ihg

2) The higher ratio of Debt to Total Equity may result to the lower of the debt credit rating. The lower of the credit rating will result to increase of the interest rate which will cost more to the company.

Interpretation: 53% of the total assets are financed through debts; the remaining 39% is financed through equity.

Equity ratio and debt ratio are both designing for capital structure and they are negatively related with each other. The cost of equity is higher than the cost of debt, but shareholders will not require companies to repay them dividends and principals any time. However, companies must pay the debt holders interests and principals each year. And increasing leverage ratio will result in increasing the return to shareholders, yet at the same time, it will increase the repayment commitments and then raise the risk to company and shareholders.

Return on equity measures a company’s profitability by calculating how much profit a company generates with the money shareholders have invested. It is important to consider ROE and not just net income in dollar term because it helps for making comparisons among different investment amounts.

Debt-to-equity ratio is a measure of a firm’s solvency calculated as total debt divided by shareholders equity.

This condition always preferred by creditor in order to lend money. The lower the ratio, the higher the cushion against the creditors' losses in event of liquidation. And the creditor would have willing to lend more money to a company which has low debt ratio than the high one.

The Return on Equity (ROE) demonstrates the amount of net profit generated as a percentage of the shareholders equity. A higher ROE is better as it displays how much profit is generated based on shareholder investment.

Rationale: Higher levels of financial leverage increase the probability of default and of bankruptcy. This reduces credit ratings and increases costs for borrowed funds.

If the ratio is 1:1 this shows the business will have no problem paying its bills as they become due. On the other hand, if the ratio falls under 1:1 such as 0.8:1 the company has fewer liquid assets and this could cause problems.

The return on equity ratio measures the rate of return that the company earns on the

The effect of financial leverage on the cost of equity is prevalent in the Modigliani-Miller capital structure theory. Since the financial leverage increases the cost of equity, it can be considered one of the disadvantages of borrowing. As shown in Appendix A, the cost of equity, at each debt to capital ratio, increases by 0.1% as the financial leverage increases by 10%. With a higher

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.

The return on equity conveys the profits of the company as a rate of return on the amount of owners' equity. ROE uses average owners equity over the specified time period and net income. Historically a ROE of between 10% and 15% were considered average. Recently higher rates in growth industries have been greater.

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.

Debt ratio helps in comparing total assets and total liabilities. If you have more liabilities it means you have lesser equity and therefore an increased leverage position.