Capital structure is the proportion of all types of capital viz. The primary focus of this text is the intertemporal structure of capital and the associated set of issues that have long been neglected in the more conventional labor and moneybased macroeconomics. Find all the books, read about the author, and more. According to this approach the wacc and total value of a firm are independent and are not. Understanding the basic concept about the financial management. The capital structure puzzle is unravelled and a clear picture is presented in terms of why capital structure matters. It interacts and transacts with the other entities present in the economic environment. The macroeconomics of capital structure routledge foundations of the market economy 1st edition. The academic discipline of financial management may be viewed as made up of five specialized fields. Bahadur institute of management sciences, university of mysore, india available online at.
Corporate finance lecture note packet 2 capital structure. Candidates who are ambitious to qualify the class 12 with good score can check this article for notes. Capital structure is the mix of ownersupplied capital equity, reserves, surplus and borrowed capital bonds, loans that a firm uses to finance business operations. The theory provides insight into a firms capital structure decision in a capital. Amzn is an ecommerce platform that has grown into one of the worlds largest and most diverse retailers. Capital structure is also referred to as the degree of debts in the financing or capital of a business firm. Capital structure is proxy by total debt ratio and is calculated as total debt divided by total assets capital structure is proxy by total debt ratio and is calculated as total debt divided by total assets abor, 2005. Equity can be defined either in accounting terms as book value of equity or in.
Theory and practice of capital structure in their crosssectional study of the determinants of capital structure, rajan and zingales 1995 examine the extent to which, at the level of the individual firm, gearing may be explained by four key factors, namely, marketto book, size, profitability and tangibility. The book s companion website features regularly updated statistics, graphs and charts, along with study aids including quizzes, case studies, articles, lecture notes and computer models, reflecting the author teams deep commitment to facilitating wellrounded knowledge of. Introduction meaning of capital structure factors influencing capital structure optimum capital structure ebit ebt eps analysis leverages types of. B net operating income noi approach contrary to the ni approach the noi approach suggests that the capital structure decision of a firm is an irrelevant factor to the valuation of a firm i. Debt comes in the form of bond issues or longterm notes.
Financial management also developed as corporate finance, business finance, financial economics, financial mathematics and financial engineering. During the depression period, the companys capital structure generally consists of debentures and loans. Project should not be charged for paintingmachine time 5. Meaning, classification sources available for dividends dividend policy general, determinants of dividend policy. An introduction to cima f3 syllabus 2015 impact of capital structure on ratios as documented in thecima f3 syllabus 2015 textbook. Capital structure refers to the amount of debt market value of debt the market value of debt refers to the market price investors would be willing to buy a companys debt at, which differs from the book value on the balance sheet. Debt ratio ratio of book value of debt to the sum of the book. The study of capital structure attempts to explain how listed firms utilise the mix of various forms of securities in order to finance investment. This paper is based on the following research framework.
Top 4 theories of capital structure learn accounting. Capital structure, dividend policy and valuation b40. Concept based notes financial management mbaii sem prepared by. We just figure out the proportions of capital the company has at present.
For this reason, the cost of equity exceeds the cost of debt. According to khan and jain, finance is the art and science of managing money. Capital structure download ebook pdf, epub, tuebl, mobi. Hi guys, i am sharing with you this excellent ebook on financial management in pdf format. Capital structure in the modern world springerlink. Capital structure and corporate financing decisions wiley. For example, an international bond is valued using the same npv formulas used to value a domestic bond.
There will be three sections of the question paper. Exhibit 3 capital structure within industries, using the book value of shareholders equity in the case of delta air lines and northwest airlines, the book value of shareholders equity is. The goal of this chapter is to discuss the various theories that help to explain the determination of capital structure. If we look at the companys balance sheet, we can calculate the book value. The finance function, the investment decision, capital structure decisions, dividend decisions, management of current assets. Financial management has become a vital part of the business concern and they are concentrating more in the field of financial management.
I will also share the lecture notes on this subject. Class 12 business studies financial management get here the notes for class 12 business studies financial management. Exhibit 3 capital structure within industries, using the book value. The choice between debt and equity is not totally unimportant its effects on real decisions are second or thirdorder. The capital structure puzzle is unravelled and a clear. This site is like a library, use search box in the widget to get ebook that you want. The patterns of corporate capital structures around the world are also discussed. Exhibit 2 different capital structures for different industries, 2003. Financial management ebook,lecture notes,pdf download for. It indicates how the company operation of a business is financed. The traditional school, at one extreme, argues that there is an optimum capital structure at which the value of the firm is highest. These entities include government, suppliers, lenders, banks, customers, shareholders, etc. The capital structure decision can affect the value of the firm either by changing the expected earnings or the cost of capital or both.
Jun 25, 2019 the debt capital in a companys capital structure refers to borrowed money that is at work in the business. Capital structure and corporate financing decisions. Calculate firms weighted average cost of capital 5. The value of an enterprise depends on expected earnings and cost of capital. Equity is inherently more risky than debt except, perhaps, in the unusual case where a firms assets have a negative beta. While in period of boons and inflation, the companys capital should consist of share capital generally equity shares. Cbse notes class 12 business studies financial management. Throughout, the book emphasizes how a sound capital structure. Capital structure meaning and factors determining capital. Definition of a company a company is a corporation an artificial person created by law. Financial management is about analysing financial situation making financial decision setting financial objectives. Chapter iii concepts and theories of capital structure and profitability.
Explain the marginal cost of capital s role in determining the net present value of a. The capital structure of a company refers to a containation of the longtermfinances used by the firm. Pdf a note on corporate strategy and capital structure. Chapter 14 the cost of capital texas tech university. As of december 2015, amazons capital structure relied more. Explain how the marginal cost of capital and the investment opportunity schedule are used to determine the optimal capital budget. In section a there will be 10 short answer questions. Ludwig lachmann 19061990 was a germanborn member of the austrian school of economics.
A company has to decide the proportion in which it should have its own finance and outsiders finance particularly debt finance. It is synonymously used as financial leverage or financing mix. Capital structure and corporate financing decisions provides an indepth examination of critical capital structure topics, including discussions of basic capital structure components, key theories and practices, and practical application in an increasingly complex corporate world. If the capital markets and financing systems are not supportive of hostile takeovers, stockholder power will be diluted. Capital structure and corporate financing decisions wiley online. This reading introduces the theory of capital structure. Study notes by zhipeng yan chapter 1 introduction to corporate finance 1. Initial investment includes capital expenditure and wc 2. Financial management notes mba pdf download mba 2nd sem.
The cost depends on the health of the companys balance sheeta triple aaa rated firm can borrow at extremely low rates vs. Theories of capital structure explained with examples. Dec 20, 2011 capital structure and corporate financing decisions provides an indepth examination of critical capital structure topics, including discussions of basic capital structure components, key theories and practices, and practical application in an increasingly complex corporate world. Modigliani and miller proposition i without taxes the value of the firm is unaffected by its choice of capital structure under perfect capital markets. If we look at the companys balance sheet, we can calculate the book value of its debt, its preferred stock, and its common stock. This book focuses on microeconomic foundations of capital structure theory.
Capital structure means a combination of all longterm sources of finance. The choices and the trade off neither a borrower nor a lender be. This decision in a private enterprise is directed towards the achievement of maximization of the shareholders wealth or value of the firm. It explores the determinants of an optimal capital structurefirst in the context of modiglia. The debt to assets ratio is measured based on book value. It is the employment of an asset source of finance for which. The capm also applies to japanese or mexican stocks. More generally, can you add value on the rhs of the balance by following a good financial policy. The impact of capital structure on risk and firm performance. The relationships between capital structure and corporate strategy in previous u. Debt includes all interest bearing liabilities, short term as well as long term. Chapter 15 b 7 the roe for each state of the economy under the current capital structure and no taxes is. The objective of the firm should be directed towards the maximization of the value of the firm the capital structure, or average, decision should be examined from the point of view of its impact on the value of the firm.
We measure the firms debt to assets ratio as the representative of capital structure in this study. Notes on capital structure pdf capital structure cost of capital. The objective of the course is to provide the necessary basic tools for the students so as to manage the finance function. Introduction to financial management 5 chapter1 introduction to financial management companies do not work in a vacuum, isolated from everything else. Capital market conditionin the lifetime of the company, the market price of the shares has got an important influence. Capital structure theories the debate on optimal capital structure that leads to maximum market valuation and minimum cost of capital is perennial.
The book has been written keeping in mind the general weakness. Calculate the aftertax cost of debt, preferred stock, and common equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. He studied at the london school of economics in the 1930s, taught at the university of wiwatersrand in south africa, and wrote seminal material on austrian capital theory. Lecture 12 capital structure capital structure theory capital structure. Leading theories of capital structure capitalstructure irrelevance this theory holds that firm value and real investment decisions are, with few important exceptions, independent of financing. This ebook is highly recommended for mba or management students. Pdf capital structure choice is an important decision for a firm. These perspectives differ from the taxbankruptcy tradeoff.
Perfect capital markets no taxes, no transaction costs, no bankruptcy costs. A firm with significantly more debt than equity is regarded as highly leveraged. For the econometric analysis, we applied multivariate fixedeffects regressions, as. Capital structure detailed notes financial management unit 3 1. In the traditional view of capital structure, ordinary shareholders are relatively indifferent to the addition of small amounts of debt in terms of increasing financial risk and so the wacc falls as a company gears up. If taxes are considered in this case, it can be seen that at reasonable tax rates, the cost of equity does. After reading this article you will learn about capital structure. Capital structure is the proportion of debt and equity financing of a firm. Meaning of capital structure capital structure refer to the proportion between the various long term source of finance in the total capital of firm a financial manager choose that source of finance which include minimum risk as well as minimum cost of capital. Capital structure theories introduction capital structure decision is a significant decision in financial management. Click download or read online button to get capital structure book now. As gearing up continues, the cost of equity increases to include a financial risk premium and the wacc reaches a minimum value. Capital structure and its 4 important theories ni, noi.
Capital structure factors influencing capital structure optimal capital structure dividend and dividend policy. In this case it will be said that the capital structure of the company consists of. Since interest payments are tax deductible, debt in the firms capital structure will decrease the firms taxable income, creating a tax shield that will increase the overall value of the firm. Italy, ireland, greece, and spain significant discrepancy was established in their capital structures between. Capital structure influences the value of the firm by operating. If the company undertakes the proposed recapitalization, the new equity value will be. Capital structure refers to the permanent financing of the company, represented by owned capital and loandebt capital i. Capital structure detailed notes financial management unit 3. Capital structure notes selfinstructional 126 material used for the mix of capitalization. Capital structure is still a puzzle among finance scholars. Evaluate firms capital structure, and determine the relative importance weight of each source of financing. Capital structure is essentially concerned with how the firm decides to divide its cash flows into two broad components, a fixed component that is earmarked to meet the obligations toward debt capital and a residual component that belongs to equity shareholdersp. The theory of capital structure is closely related to the firms cost of capital.
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