Articles Relating to Capital Structure-Essay

1658 Words Dec 20th, 2008 7 Pages
Contents :-

Introduction on Capital Structure……………………..5
Summary and Evaluation of Articles…………………6
Conclusion………………………………………………………..8
References/Bibliography………………………………….9 Introduction On Capital Structure :-

In the field of finance capital structure means a way an organization or firms finances their assets by the way of some mix and match of Equity, Debt or Hybrid Securities.
The modern thinking on capital structure is based on the Modigliani-Miller theorem given by Franco Modigliani and Merton Miller. The theorem suggests that in a perfect market the total value of the company remains the same depending upon how is that company financed. This theorem proves the importance of capital structuring by the firms throughout
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The optimal capital structure can be obtained by the trade off between tax benefits and the cost of distress. The present value of the tax shield initially increases as the firm borrows more. At moderate debt levels the probability of financial distress is trivial; so the present value of the cost of financial distress is small and tax advantages (interest expenses deduction) dominates [Modigliani and Miller, 1963; Miller, 1977] and [DeAngelo and Masulis, 1980]. But later on some point the profitability of financial distress rises instantly with substantial borrowings and the cost of distress starts diminishing. If the firm is uncertain of benefits from the corporate tax advantage then the tax advantage of debt decreases and at last vanishes. This theoretically reaches the optimum capital structure.
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

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