Professional Documents
Culture Documents
SUBMITTED TO:
Prof: Muhammad Jameel
SUBMITTED BY:
M.Yasir Riaz
12165
Zubair Mehmood
12160
SUPERIOR UNIVERSITY
LAHORE
Acknowledgement
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Table of Contents
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Capital structure means the total of long-term debt, specific short-term debt, common equity and
preferred equity of an organization is known as capital structure. The capital structure is how a
firm finances its overall operations and growth by using different sources of funds. Debts are
generated from the banks and other lending institutions, where as the common and preferred
stock get through a process of issuing shares to share holders. The capital structure of a firm has
an essential role to check the financial position of that firm.
Detail
The term flexibility gives the finance manager the ability to alter the
firms capital structure with a minimum cost and delay, if warranted by the
changed environment. It should also be possible for the company to
provide funds whenever needed to finance its profitable activities.
Profitability
Solvency
The high debt threatens the solvency and credit rating of the company.
The debt financing should be only to that level which can be serviced fully
and also be paid back.
Conservatism
No company should exceed its debt capacity. As already explained that the
interest is to be paid on debt and the principal sum is also to be paid.
These payments depend on future cash flows. If future cash flows are not
sufficient then the cash insolvency can lead to legal insolvency.
Control
The capital structure should not lead to loss of control in the company.
Feature
Detail
Return
Risk
Capacity
EQUITY CAPITAL
Invested money that, in contrast to debt capital, is not repaid to the investors in the
normal business. It represents the risk capital staked by the owners through purchase of
a company's common stock .
The value of equity capital is computed by estimating the current market value of everything
owned by the company from which the total of all liabilities is subtracted. On the balance
sheet of the company, equity capital is listed as stockholders' equity or owners' equity,
also called equity financing or share capital.
PREFERENCE SHARE CAPITAL
Investors have the opportunity to receive payment first but retain no shareholder privileges
RETAINED EARNINGS
Profits generated by a company that are not distributed to stockholders as dividends but are
either reinvested in the business or kept as a reserve for specific objectives (such as to pay off
a debt or purchase a capital asset).
A balance sheet figure shown under the heading retained earnings is the sum of all profits
retained since the company's inception. Retained earnings are reduced by losses, and are
also called accumulated
earnings,
accumulated
profit,
accumulated income,
accumulated surplus, earned surplus, undistributed earnings, or undivided profits. See
also retention ratio.
DEBENTURE
A promissory note or a corporate bond which is backed generally
the reputation and integrity of the borrower and by the borrower's specific assets.
only
by
TERM LOAN
Asset based short-term usually for one to five years loan payable in a fixed number of equal
installments over the term of the loan. Term loans are generally provided as working
capital for acquiring income producing assets like machinery, equipment, inventory that generate
the cash flows for repayment of the loan.
PUBLIC DEBT
Mortgages or other liabilities which a commercial entity is responsible to pay that back to the
lending institutions.
FACTORE
Business Risk
DETAIL
Excluding debt, business risk is the basic risk of the
company's operations. The greater the business risk,
the lower the optimal debt ratio.
Debt payments are tax deductible. As such, if a
company's tax rate is high using debt as a means of
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Financial Flexibility
Management Style
Growth Rate
Market Conditions
Return on Investment
Cost of Debt
Tax Rate
Regulatory Framework
EXAMPLES:
Example of Financial
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CAPITAL STRUCTURE
DEBTS
EQUITY
BANK LOAN
PREFERRED EQUITY
CONVERTIBLE BOND
COMMON EQUITY
RETAINED EARNING
RIGHT SHARE
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EXAMPLE
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Optimal Capital Structure: A best debt/equity ratio for a company. This is the long-term-debt
to equity ratio that will minimize the cost of capital.
Debt Equity Ratio indicates what proportion of equity and debt the company is using to finance
its assets.
A, XYZ company has want to calculates its debts equity ratio and the data for it is as below its
Debts,
= 15,000,000/ 10,000,000
=1.5%
This shows the debts equity ratio is favorable because the debts financing is higher than equity
and that is cheaper so the capital structure is optimal.
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References
A Book, FINANCIAL MANAGEMENT (6th edition) by M.Y.Khan and P.k.Jain, (page 19.1 to 19.8)
http://econpapers.repec.org/article/eeejbfina/v_3a35_3ay_3a2011_3ai_3a2_3ap_3a3
58-371.htm
http://en.wikipedia.org/wiki/Capital_structure
http://www.managebuddy.com/notes/financial-management/features-of-anappropriate-capital-structure/
http://www.investopedia.com/terms/c/capitalstructure.asp
http://www.linkedin.com/groups/importance-capital-structure-in-creating4092220.S.133746203
http://campus.murraystate.edu/academic/faculty/lguin/FIN330/Optimal%20Capital
%20Structure.htm
http://www.svtuition.org/2013/06/capital-structure-vs-financial-structure.html
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