In 1958, Franco Modigliani and Merton Miller, two prominent financial economists, constructed a theory of capital structure (usually referred to as the MM) that is widely considered as the most influential financial theory up to this time. Basically, the MM theory assumes perfect capital market conditions where all relevant information is readily available, where there are no transaction costs, and where borrowing and lending rates are the same for all investors. The theory likewise assumes that there are no income taxes, that operating income is constant over time -- i.e., there is no growth -- and that all earnings are paid out as dividends.
In 1963, Modigliani and Miller modified their original work by including corporate taxes. With such taxes, leverage would increase the firms value because interest on debt is a tax-deductible expense and more income accrues to the investors. Consequently, the value of the firm increases. The cost of debt is the after-tax yield (1-tax). This lower cost of debt, combined with the existing cost of equity, will result in a lower weighted average cost of capital the greater the leverage. The benefits of debt financing derive from solely from the tax deductibility of interest payments. This observation would lead one to conclude logically that the company should use more leverage to the extent that all financing will be done through debt. In reality, however, companies do no such thing. While historically the debt/asset ratios have risen overall, companies maintain capital structures that are stable with a some combination of debt and equity at some in-between point. (See Brealey & Myers; Brigham & Gapenski; Keat & ).
Much later, Merton Miller extended the theory by including personal taxes. Personal taxes in the modified model would reduce -- but not eliminate -- the benefits of debt financing. Because the introduction of personal taxes lowers the income to investors, they reduce the value
A UK-listed high-growth company that wants to expand operations or take advantage of a promising investment opportunity is faced with the challenge of how to obtaining additional financing. The chief financial officer of the company also has to make a choice whether the…
The equity investors become part-owners and partners in the business and tend to exercise some control over how the business is run. The capital structure is signified by the firm's debt-equity ratio and gives an insight as to how risky the firm is.
It gives the Weighted Average Cost of Capital (WACC).
Marine cargo insurance is a sub-branch of the marine insurance that takes care of the cargo regardless of whether the cargo belongs to the carrier or to a different party. If the corporation that owns the cargo is different from the carrier of the cargo, marine cargo insurance compensates the owner of the damaged cargo in case some damages occur on the cargo.
They also recommended that an ideal capital structure of a firm is with all debt with cheaper debt finance than higher cost & riskier equity but an optimal capital structure exists in which the terms of debt financing & such other real world problems of debt financing (like bankruptcy due to high debt) and tax savings of the debt financing are balancing factors (Modigliani and Miller.
The author states that evaluating the financial ratios of CVS shows that it has a debt-equity ratio of 28.4% which has impressively improved as compared to where it stood a year ago, i.e. 38.65% in 2005. This shows that CVS is not highly leveraged and comprises of a large proportion of equity in its capital structure.
The governments of respective countries has implemented a number of policies related to this .But The practice of imparting and accepting the fund always invites criticism as the opponents draw attention regarding imperfections, adverse results such as capital intensity of such funds, inappropriate technology ,the possible adverse on income distribution etc.
Net Debt Ratio of a company indicates the extent to which the company has been financed by outside or borrowed funds. Here the debt generally includes all types of debts like subordinate debts, senior debts as well as capital debts. The net debt
The following table includes the descriptive statistics of different financial parameters.
The database that has been used for this empirical analysis and calculation has been retrieved from Data Stream. The database
Respectively, I conjure that varied capital sources are typically based on different costs and thus, needed appropriate analysis for designing an optimal capital structure for raising required finance appropriately (Grundy, n.d.).
In businesses, sources of
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