As per the general equation of accountancy, the assets of a company are financed either through equity or debt. In the statement of financial position or balance sheet of a company, the total of assets is always equal to the total of liabilities and debt. The decision of how to finance the asset of a company is of prime importance for the management of the company…
Primarily the equity shares are issued at ‘Par value’ but subsequent issues are made at premium. The company can finance its capital and revenue expenditure through the issuance of these shares or through its internally generated funds. The shareholder’s equity, as presented in the statement of financial position, comprises of retained earnings and issued and subscribed shares. Retained earnings are the accumulated profits from the period the company was incepted. These retained earnings or internally generated accumulated funds can also be utilized by the company in financing its assets. Debts are classified into current and non-current. Current debts include items such as accounts payable, accruals etc which arise in the normal course of business and pertain to company’s day to day operations. In order to understand the impact of debt in the capital structure of a company, it is imperative that the company should clearly get acquainted with the concept of debt. There is no universal agreement between the financial analysts all across the corporate sector when it comes to identifying what constitute a debt. It is considered a general notion that the long term debt as appearing in the balance sheet of the company constitutes the debt in the capital structure of the company. However, this definition of debt is way too broad and it includes the credits and short term overdraft of the company as well. The impact of debt on the capital structure can be analyzed from two different perspectives of financial accounting and financial management. Educated investors only invests in companies analyze several ratios such as current ratio, quick ratio and debt to equity ratio. Current ratio is quite important from the investor’s perspective as it tells the state of liquidity of the company and would it be able to pay off its long term debts in the future. The most commonly used liquidity ratio, the current ratio, which is calculated by comparing the current assets and current liabilities. The strengthened the current ratio the more ability the company has to pay its debts and short term obligations over the next 12 months. The asset test, which is also regarded as the quick ratio, is calculated by subtracting the inventory balance from the total current assert balance. Out of the current assets mentioned, inventories are regarded as the one which takes comparatively more time to be converted into cash or cash equivalent. The gearing ratios indicate the level of risk taken by a company as a result of its capital structure. These ratios are a great source of determining the level of financial risk to which the company is exposed and thus helps in reducing it to the optimum. The equity ratio indicates how much of the entity’s assets are financed through the finances generated through the revenue generated from the operations of the entity and raising financing through equity issue rather than acquiring debts or other financial institution. In addition to the above, the cost of raising funds in the form of loan acquired from the bank or financial institutions is substantially less as compared to the cost of raising financing through shares or bonds. The cost of raising equity comprises of printing of shares, cost of listing the equity shares on the stock market ...
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With the ever accelerating pace of change on the wake of globalization the need for strategy has increased manifolds. Every business big or small needs to develop a strategy for successfully running the business. Strategy is provides the long term picture and approach to the business and answers the question why business is being done in certain way.
A key advantage of debt financing lies in the balance of control. When taking on additional debt, management and shareholders maintain the same autonomy in making day-to-day decisions as well as determining the overall direction of the company as they possessed prior to the assumption of debt (Seidman, 2005).
The world is composed of atoms which are the smallest indivisible particles of matter “made up of negatively charged electrons in orbitals around positively charged nuclei” (RBI 1988, p.53). Atoms integrate through interactions between electrons to form units termed as molecules.
A potential investor critically evaluates the rate of dividend paid by the firm before purchasing the firm’s shares. From a company perspective, dividend is a liability and is paid if anything is left after all creditors are paid off. However, it seems that some companies do not pay dividends even though they are run profitably.
There are two types of dividend payment modes. These are cash dividend and stock dividend. In case of cash dividend the shareholders receive dividend cheque from the companies of which they hold the shares.
Other sources include equity and preference shares and retained earnings. Debt is a long term arrangement with a lender by a company to avail finance on a certain set of conditions. The lender may be banks and financial institutions, public, and other corporations issuing debt securities.
The other option is the purchase option where the option is precise about the tenant having a right to buy the property in context at a set price during the lease term. (Kimmons, 2009)
The act of disposing bonds or borrowing funds from a bank is what is referred to
This ratio can be used by the investors and financial institutions while studying the financial condition of any firm. The higher the debt to equity ratio of the firm, the riskier the firm is in term of investment. This debt to equity