Capital Structure in Finance - 1782 Words

The term capital structure in finance is the way a corporation finances its assets through the use of equity, debt, or hybrid securities (Ehrhardt Brigham, 2009). While equity and debt have long since been well known economic terms, hybrid securities is a relatively new concept. It essentially combines debt and equity and pays a set rate of return or dividend until a preset date, when the owner has a few options such as converting the securities into shares (Wikipedia). Capital structure is then simply the proportion of the corporations liabilities. For example, if a corporation has $2 billion dollars in equity and $8 billion dollars in debt, the ratio of debt to total financing is 80%, which also means it is 80% leveraged. In reality, there is not only two numbers, but there is a great deal of sources of the debt and equity which yields to the ratio of leverage. Another concept to consider is gearing ratio which refers to the percentage of capital the company uses from outside sour ces other than the companys own revenue, for example by short term business loans. The Modigliani-Miller theorem, which was created by Franco Modigliani and Merton Miller, was essentially the conceptual framework of modern capital structure. Unfortunately, the theorem relies heavily on disregarding many real life variables, however this does not distract from the main point of the theorem. Basically, the Modigliani-Miller theorem states that in a perfect world the modalities in which aShow MoreRelatedOptimal Capital Structure and Stock Price835 Words   |  3 Pages To put it simple way, first we have to understand optimal capital structure is maximizes a firm’s stock price, and the target capital structure is mix of the debt, preferred stock, and common equity the firm wants to have (Eugene and Joel 2009). The capital structure is also showing how a firm use different sources of funds to finances its overall operations and growth the stock price. Capital structure shows that how a firm’s assets have been established debt and equity, it is very important inRead MoreWhy Do Firms Choose Their Capital Structure?1623 Words   |  7 Pagesabout which securities to acquire and how to finance those investments: with equity, debt or a combination of both (Myers, 2001). The study of capital structure tries to clarify this variety of securities and financing opportunities. In accounting terms, this decision is situated on the right-hand side of the balance sheet (Myers, 2001). In his Capital Structure Puzzle article, Myers (1984) poses the question â€Å"How do firms choose their capital structure?†. But even today, there is no right solutionRead MoreArticles Relating to Capital Structure-Essay1658 Words   |  7 PagesContents :- Introduction on Capital Structure†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦..5 Summary and Evaluation of Articles†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦6 Conclusion†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦..8 References/Bibliography†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.9 â€Æ' 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 ModiglianiRead MoreThe Importance Of Corporate Finance For An Entrepreneur1602 Words   |  7 PagesThis research has been conducted to examine the importance of corporate finance to an entrepreneur, and the role it plays in an organization regardless of the structure of a company, or stage of growth. The various forms of ownership are reviewed for startup companies and major corporations to highlight the advantages and disadvantages of each form of ownership, and to illustrate the importance of corporate finance. To provide a balanced view of ownership, less common forms of business ownershipRead MoreCapital Structure Of A Company1285 Words   |  6 PagesSUMMARY/ABSTRACT The Part-I of this paper analyzes the Treasury Manager and his various approaches towards the Capital Structure, by showing arguments for and against each theory. We discuss about four types of approaches that may be taken by the treasury manager while considering the Capital Structure of a Company. We have discussed Rolls Royce PLC’s capital structure strategy and analyzed the capital structure of the company over the past 10 years using an empirical case/research. The Part-II of this paperRead MoreFinancial Capital Structure Essays1549 Words   |  7 PagesContents : Introduction on Capital Structure Summary and Evaluation of Articles Conclusion References/Bibliography 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 perfectRead MoreWorking Capital Management in Healthcare Essay1514 Words   |  7 PagesWorking Capital Management in Healthcare Houma Guy. HCS 579 Health Care Finance September 24, 2005 Working Capital Management in Healthcare Working capital is the money required to finance the day to day operations of an organization. Working capital may be required to bridge the gap between buying of stocked items to eventual payment for goods sold on account. Working capital also has to fund the gap when products are on hand but being held in stock. Products in stock are at full cost, effectivelyRead MoreCapital Structure Of A Company960 Words   |  4 PagesII. INTRODUCTION Capital structure is the proportion of debt and equity in which a corporate finances its business. The capital structure of a company/firm plays a very important role in determining the value of a firm. There are various theories which propagate the ‘ideal’ capital mix / capital structure for a firm. A corporate can finance its business mainly by 2 means i.e. debts and equity. However, the proportion of each of these could vary from business to business. A company can chooseRead MoreEquity Finance And Debt Finance823 Words   |  4 Pagescompany with the risk capital such as preference share owners and ordinary share owners (Freeman and Reed, 1983). Generally, stockholderis one of long-term finance providers with the aim to maximize their wealth.According toBrickleyet al. (1985), long-term finance providers are more likely to focus on the matter whether the financial structure in the company is sound or not and the durability of profitabilityrather than temporary profits that a potentially risky financial structure may bring. In additionRead MoreCapital Structure Of A Firm1670 Words   |  7 PagesThe capital structure of a firm describes the way in which a firm raised capital needed to establish and expand its business activities. It is a mixture of various types of equity and debt capital a firm maintained resulting from the firms financing decisions. In one way or another, business activity must be financed. Without finance to support their fixed assets and working capital requirements, business could not exist. In all aspects of capital investment decision, the capital structure decision