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Capital structures: the method of financing the resources through the blend of debentures, equity, and other securities - Essay Example
Finance & Accounting
Pages 13 (3263 words)
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…
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. ...