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Capital structures: the method of financing the resources through the blend of debentures, equity, and other securities - Essay Example

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Capital structures: the method of financing the resources through the blend of debentures, equity, and other securities

In this way, capital structure can help to develop a strong balance sheet. An accurate capital structure efficiently raises the strength of large organisations to deal with the losses or fluctuations in the economy (Milken, 2009). Modigliani–Miller Theory of Capital Structure In capital structure of an organisation, the Modigliani–Miller theory develops the root of contemporary thinking. Modigliani and Miller had anticipated that a large organisation has a specific set of projected cash flows and when the organisation selects certain percentage of liability and equity to fund the resources, it distributes the cash flows within investors. Their theory states that unless there is lack of taxes, liquidation expenses and irregular information in effective market, the value of organisation is unaffected by the way it is funded. The two major principles of Modigliani–Miller theory is conjecture of taxation and no taxation. If there are no taxes, raising leverage will not provide any advantages with respect to value formation; and if there are taxes such advantages will accumulate, in case leverage is introduced or amplified, as per interest tax protection (Bloomsbury Information Ltd, 2009). Modigliani and Miller had addressed the issue of taxes in an organisation’s capital structure more precisely. They had stated that if interest expenses on liabilities are omitted from commercial taxes it can help to make additional profit by lessening of tax payments. The additional profit can be divided onto investors through higher returns. They also stated that an organisation can make greater ‘profit after tax’ by raising the debt–equity ratio and this extra profit would lead to higher overhead of the shareholders without...
According to the research findings capital structure in any large company discusses the method of financing the resources through the blend of debentures, equity, and other securities. The capital structure of an organisation is an arrangement or formation of the liabilities. The objective of capital structure is to combine the undying bases of capitals in such a way so that it can increase the value of common stock of an organisation. The capitals of an organisation which create fixed expenses in the form of long-term debt and equity capital can be mixed with shared equity in the percentage which is utmost suitable to the share market. Through capital structure this mix can be developed which in turn increases the value of common stock. Cost of capital in large organisations refer to the cost of funds and it is used for evaluating the companies because it can provide the minimum return which an investor can anticipate for investing wealth to the organisation. In financial management of large organisations, cost of capital plays a significant part in decision making. Cost of capital is used as an assessing instrument for accepting a proposal for investment. Any large organisation opts for those projects that can provide reasonable return on investment and that are not below cost of capital. Through cost of capital, organisations can evaluate the financial performance and define the suitability of all investment prospects. Cost of capital is important in planning an organisation’s capital structure. ...Show more

Summary

This research will begin with the definition of Capital Structure. Then it will demonstrate an importance of Capital Structure in Efficient Financial Management of Large Companies, Modigliani–Miller Theory of Capital Structure and argument against Modigliani-Miller Theory…
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Capital structures: the method of financing the resources through the blend of debentures, equity, and other securities essay example
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