capital structure

Examples of capital structure in the following topics:

• Optimal Capital Structure Considerations

  • The optimal capital structure is the mix of debt and equity that maximizes a firm's return on capital, thereby maximizing its value.
  • Capital structure is the way a corporation finances its assets, through a combination of debt, equity, and hybrid securities.
  • In short, capital structure can be termed a summary of a firm's liabilities by categorization of asset sources.
  • One of the major considerations that overseers of firms must take into account when planning out capital structure is the cost of capital.
  • Explain the influence of a company's cost of capital on its capital structure and therefore its value

• Constraint on Managers

  • Managers will have their actions influenced by their firm's capital structure and the resources that it allows them to use.
  • Managers who make decisions about the firm's corporate behavior will have their actions influenced by capital structure and the resources that it allows them to use.
  • Adopting the right kind of capital structure can help combat this kind of problem, however.
  • When the capital structure draws heavily on debt, then this leaves less money to be distributed to managers in the form of compensation, as well as free cash to be used on behalf of the business.
  • Therefore, firms that have debt-heavy capital structures have managers with goals that tend to be more aligned with those of the shareholder.

• Tax Considerations

  • Tax considerations have a major effect on the way a company determines its capital structure and deals with its costs of capital .
  • This leads to a conclusion that capital structure should not affect value.
  • However, we see that in real world markets capital structure does affect firm value.
  • There is much debate over how changing corporate tax rates would affect debt usage in capital structure.
  • A company's decision makers must take taxes into consideration when determining a firm's capital structure.

• Capital Structure Overview and Theory

  • A firm's capital structure is the composition or 'structure' of its liabilities.
  • In reality, capital structure may be highly complex and include dozens of sources.
  • Modigliani and Miller created a theory of Capital Structure in a perfect market.
  • The value of a company is independent of its capital structure
  • Capital Structure shows how a company's assets are built out of debt and equity.

• Cost of Capital Considerations

  • Cost of capital is important in deciding how a company will structure its capital so to receive the highest possible return on investment.
  • One of the major considerations that overseers of firms must take into account when planning out capital structure is the cost of capital.
  • By utilizing too much debt in its capital structure, this increased default risk can also drive up the costs for other sources (such as retained earnings and preferred stock).
  • Management must identify the "optimal mix" of financing–the capital structure where the cost of capital is minimized so that the firm's value can be maximized.
  • Describe the influence of a company's cost of capital on its capital structure and investment decisions

• Factors Controlled by the Firm

  • Decisions about capital structure (ratio of debt and equity) alongside projecting rates of return can give firms some internal control over capital costs.
  • Capital structure refers to the way in which an organization finances operations.
  • This is generally illustrated via a balance sheet, where the overall assets are offset by the capital structure of liabilities and equity.
  • In the above equation, the first segment is measuring the cost of equity coupled with the percentage of the capital structure that is funded by equity.
  • Recognize the strategic considerations of capital structure by understanding weighted average cost of capital and the internal rate of return

• Trade-Off Consideration

  • The trade-off theory of capital structure refers to the idea that a company chooses how much debt finance and how much equity finance to use by balancing the costs and benefits.
  • It is often set up as a competitor theory to the pecking order theory of capital structure.
  • As more capital is raised and marginal costs increase, the firm must find a fine balance in whether it uses debt or equity after internal financing when raising new capital.
  • Therefore, trade off considerations change from firm to firm as they impact capital structure.
  • Trade-off considerations are important factors in deciding appropriate capital structure for a firm since they weigh the cost and benefits of extra capital through debt vs. equity.

• Relationship Between Financial Policy and the Cost of Capital

  • As opposed to strictly using cost of capital, decisions must be made using opportunity cost of capital.
  • Other facets include portfolio theory, hedging, and capital structure.
  • The capital structure of a company refers to the way it finances its assets through some combination of equity, debt, or hybrid securities.
  • Capital structure may be highly complex and include dozens of sources.
  • Explain the relationship between a company's financial policy and its cost of capital

• The Marginal Cost of Capital

  • The marginal cost of capital is the cost needed to raise the last dollar of capital, and usually this amount increases with total capital.
  • Generally we see that as more capital is raised, the marginal cost of capital rises .
  • Usually, we see that in raising extra capital, firms will try to stick to desired capital structure.
  • The Marginal Cost of Capital is the cost of the last dollar of capital raised.
  • Describe how the cost of capital influences a company's capital budget

• The Marxist Critique of Capitalism

  • Capitalism has been the subject of criticism from many perspectives during its history.
  • Criticisms range from people who disagree with the principles of capitalism in its entirety, to those who disagree with particular outcomes of capitalism.
  • Among those wishing to replace capitalism with a different method of production and social organization, a distinction can be made between those believing that capitalism can only be overcome with revolution (e.g., revolutionary socialism) and those believing that structural change can come slowly through political reforms to capitalism (e.g., classic social democracy).
  • In this sense they seek to abolish capital.
  • Capitalism is seen as just one stage in the evolution of the economic system.