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Does the mixture of debt and equity in a firm's financial structure matter? Why?
Finance & Accounting
Pages 8 (2008 words)
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. ...
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