Capital Structure Evaluation of Sample Firms

Masters
Essay
Business
Pages 8 (2008 words)
Download 0
This report studies the different classical Capital Structure Models, and also evaluates the recent works in this area. The report shortlists five firms (public limited companies-PLCs) from four different industry segments, and analyses their capital structure and profitability…

Introduction

Such sustainable growth requires increasing investment in long term assets, which in turn needs to be financed by long term funds. The two conventional long term sources of fund are debt and equity. The proportion of such debt and equity determines the capital structure of the firm.
There are benefits and shortcomings of both the funding options. While debt funds are considered to be less costly owing to the interest tax shield that they provide, equity funds are considered to be more expensive owing to its inherent risk profile. Though debt funds reduce an organization's weighted average cost of capital (WACC), such funding increases the risk profile of the organization owing to long term commitments secured by asset collaterals, which could seriously increase the bankruptcy risk of the organization during an economic downturn.
The modern thinking on capital structure is primarily based on the seminal work done by Franco Modigliani and Merton Miller. The Modigliani-Miller theorem (1958) states that in an ideal world, the value of a firm is independent of its capital structure. When a firm increases its gearing ratio, the overall risk to the equity holders increase thus increasing the cost of equity, thereby having no net effect on the value of the firm. ...
Download paper
Not exactly what you need?

Related papers

Dissertation: Capital structure of firms
Table of Content Chapter 1: Introduction 5 Motivation 5 Aims and Objectives 5 Significance of the study 6 Research Questions 7 Research method and data 8 Research Structure 8 Chapter 2: Literature review 9 Global Financial Market 9 History 9 Evaluation of UK capital market 12 Causes of current financial crisis 13 Capital market 15 Source of finance 15 Current capital structure of FTSE 100…
Capital Structure of Public Limited Companies
Table of Content Chapter 1: Introduction 5 Motivation 5 Aims and Objectives 5 Significance of the study 6 Research Questions 7 Research method and data 8 Research Structure 8 Chapter 2: Literature review 9 Global Financial Market 9 History 9 Evaluation of UK capital market 12 Causes of current financial crisis 13 Capital market 15 Source of finance 15 Current capital structure of FTSE 100…
Capital Budgeting
The management has the option of employing different techniques for evaluating the performance of individual project managers, each of which has its own characteristics. This paper makes a critical analysis of the performance evaluation technique adopted by Brand Neue Corporation and suggests that the project creating positive shareholder value based on Economic Value Added (EVA) calculation is to…
Capital Structure Assignment
Perhaps the value of the firm does depend on how its assets, cash flows and growth opportunities are sliced up and offered to investors as debt and equity claims. There are surely investors who would be willing to pay extra for particular types or mixes of corporate securities. For example, investors cannot easily borrow with limited liability, but corporations provide limited liability and can…
Capital Structure Evaluation of Sample Firms
Such sustainable growth requires increasing investment in long term assets, which in turn needs to be financed by long term funds. The two conventional long term sources of fund are debt and equity. The proportion of such debt and equity determines the capital structure of the firm.…
Wal-Mart Capital Structure and Financial Analysis
There are following factors in the Wal-Mart's total capital:…
Capital Budgeting Statistics Project
One of the most important considerations for an investment and financing decision will be proper asset-liability management. Companies will have to face a severe asset-liability mismatch if the long-term requirements are funded by the short-term sources of funds. Such a mismatch will lead to an interest risk thereby enhancing the interest burden of the firm and a liquidity risk with the short-term…