Introduction:. Capital Structure Plays A Significant Role

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

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

The relationship between capital structure and firm value has been discussed frequently in the literature by different researcher accordingly, in both theoretical and empirical studies. It has also been discussed that whether the firm has any optimal capital structure that has been adopted by an individual firm, or whether the proportions of debt usage is completely irrelevant to the individual firm value.

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

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.

Every company for example Wal-Mart worries about its profitability. One of the most regularly utilized implements of financial ratio analysis is profitability ratios which are utilized to figure out the bottom line of the company. Profitability measures are vital to corporation managers and owners alike. If a small industry has outside stockholders who have put their own money into the corporation, the primary owner surely has to show profitability to those equity stockholders. (Blanchard, 2008)

Generally, firms can choose among various capital structures in order to maximize overall market value of the company. It is proposed however, that

When analyzing Microsoft’s capital structure the percentage of liabilities that construct the firm’s total assets is 42.87%. Showing that less than half of the firm’s total assets are represented by liabilities. Now the percentage of the total assets that are represented by stockholders’ equity is 57.12%. Showing that stockholder’s equity represents slightly more than half of

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.

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).

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

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