Essay on Capital Structure

When firms go public, their capital structure reflects a number of factors, including market-to-book, asset tangibility, size, and research and development intensity. As firms age, the cross-section of leverage is more and more explained by past financing opportunities, as determined by the market-to-book ratio, and past opportunities to accumulate retained earnings, as determined by profitability. Historical within-firm variation in market-to-book, not current cross-firm variation, is more

Capital refers to the combination of debt and equity used to finance a company to purchase what they need to manufacture their products or provide services based on its operations ADDIN EN.CITE Baker20111(Baker & Martin, 2011)116Baker, H.K.Martin, G.S.Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice2011New JerseyJohn Wiley & Sons9780470569528http://books.google.co.ke/books?id=lq69IY1P5tgC( HYPERLINK l "_ENREF_1" o "Baker, 2011 #1" Baker & Martin, 2011). In the following report, we consider three companies namely Mattel, Clorox and MGM Resorts International whose operations are different and make recommendations for their capital structure which refers to the way the companies finance their assets through combination of debt and equity while considering the nature of business, riskiness of each of the company and the advantages and disadvantages of debt over equity financing.

Secondly, Barclay and Smith noted that the theories of optimal capital structure are not mutually exclusive. Thirdly, he noted that many of the variables that we think affect optimal capital structure are difficult to measure. The literature on the financing decisions of firms in developed economies, the consequent capital structures formed and the effect of these capital structures on the performance of these firms has been quite extensive. In stark contrast, however, to the voluminous nature of this literature in developed economies, there is a relative paucity of studies investigating the same in developing countries. Robinson (2003) pointed out that as developing countries move to liberalise their economies, and large private corporations seek to become leading actors in this industrialization and economic development, the relationship between corporate organization, corporate financing patterns, capital structure and economic and industrial development become issues that required more attention at the academic, organizational and public policy levels.Robinson further noted that a number of pertinent questions still arise. On such question is whether the financing patterns or capital structures of developing country corporations similar to those of firms in developed countries, either currently or at an earlier stage of development of the latter. Secondly, one may want to find out if there are structures and patterns of corporate finance which are

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.

This case, which in all aspects is identical to Case 9, illustrates the capital structure decision for a firm that starts with zero debt. Either Case 9 or Case 10, but not both, should be assigned. The primary analytical tool is valuation analysis, although the case briefly introduces the Modigliani and Miller (MM) with corporate taxes and Miller models. The case also illustrates financial risk by looking at the impact of leverage on ROE.

Capital Structure: “Capital structure is the manner in which a firm’s assets are financed; that is, the right-hand side of the balance sheet. Capital structure is normally expressed as the percentage of each type of capital used by the firm debt, preferred stock, and common equity.” (Capital Structure Decision, 2002)

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

The relationship of borrowed funds to ownership funds is an important solvency ratio. Capital from debt and other creditor sources is more risky for a company than equity capital. Debt capital requires fixed interest payments on specific dates and eventual repayment. If payments to a company's creditors become overdue, the creditors can take legal action which may lead to the company being declared bankrupt. Own capital is less risky. Dividends are paid at the discretion of the directors, and there is no provision for repayment of capital to stockholders. It is generally assumed that the more ownership capital relative to debt a company has in its capital structure, the more likely it is that the company will be able to survive a downturn in business that may force other more financially leveraged companies into bankruptcy. An excessive amount of own capital relative to debt capital may not necessarily indicate sound management practices, however. Equity capital is typically more costly than debt capital. Also, the company may be previous opportunities "to trade on its equity," that is, borrow at a relatively low interest rate and earn a greater rate of return on these funds. The difference between these two

The collaboration between the university professors and Nobel Prize winners, Franco Modigliani and Merton Miller in 1958 have resulted the first and one of the most important theories in the field of capital structure. Franco Modigliani and Merton Miller (MM) have developed a theory that helps us to understand how taxes and financial distress affect a company’s capital structure decision. There were different unclear issues that M&M theorem used their basis in building their assumption. For instance, would a change in financing mix increase the value of a company. There were many other issues taken into consideration which result the two main assumptions as well as there were many other assumptions added in the coming years after the M&M propositions, which have tried to complement

(Dr). T. Velnampy and J. AloyNiresh wrote an article with topic “The Relationship between Capital Structure & Profitability “. The article focuses on the fact that an unplanned capital structure could lead to inefficient use of the funds whereas a strategically planned capital structure maximizes the use of the fund and helps to adapt to economic changes. The authors shows the relationship between the capital structure and profitability of listed banks of Sri Lanka. Descriptive statistical tools were used to define and summarize the behavior of each variable over the period of time .The results of the descriptive analysis shows that the mean of debt/equity ratio is 825.2% which indicates that the debt of banks are 8.25 times more than the total equity which is abnormal in the market as 2 times is perceived to be the maximum ratio for other sectors if the firm is to maintain a safe position. This shows that banks in Sri Lanka depend heavily on debt rather than equity. This can also be seen from the mean value of debt to total fund ratio which is 89% which indicates that banks capital structure is made up of 89% of leverage and only 11% of

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).

The paper of Sundaresan, Wang and Yang (2015), “Dynamic Investment, Capital Structure, and Debt Overhang”, focused on build a dynamic financing framework model based on previous articles. In the paper of Myers (1977), growth options and assets in place were considered as the two factors which combined to the firm. During the growth of a firm, multiple rounds of investments and financing may be involved in the growth stage. Models of investments and dynamic financing in previous literatures did not considered the two factors together. Therefore, many problems still need to be interpreted in investment theory with dynamic financing. This is part of the reason why the authors tried to model the factors

The traditional theory of capital structure describes the existence of optimal debt to equity ratio, where the cost of capital is minimum and the market value of a firm is maximum. The changes in the financing mix can bring positive change to the value of the firm. Before the changes in the financing mix, the marginal cost of debt is less than cost of equity and after the change; the marginal cost of debt is higher than that of equity. This theory supports the combination of the equity and debt ratio of the capital structure of a firm when the market value is at its maximum. The debt in the capital structure of a firm can only be up to a certain point, any increase beyond that point can cause the increase in the leverage and can result in the decrease in the market value of a firm.

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

The capital structure of a company refers to the mixture of equity and debt finance used by the company to finance its assets. Capital structure is the proportion of firm’s value financed with debt. Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings.Short-term debt such as working capital requirements is also considered to be part of the capital structure. Some companies could be all-equity-financed and have no debt at all, whilst others could have low levels of equity and high levels of debt. The decision on what mixture of equity and debt capital to have is called the