CAPITAL STRUCTURE

Capital Structure

Capital Structure

1) Elaborate how the paper advanced understanding of the particular issues?

In this paper, the author has tried to assess whether firms actively engage in rebalancing of their capital structure in order to make the capital structure optimal or not. The companies have to consider the cost benefit analysis of going for either one of the mode of finance. They assess the cost of each mode that is debt or equity and then make the decision.

The capital structure in a firm is a source of financing for the firms. The structure whose main components are debt and equity is the basis of capital structure in firms. The policy of capital structure is also concerned with the returns and risks in the firms. The risk of debt reduces the returns of the firms. The risk of debt reduces the earnings of the firms. However, there are usually associated higher rate of returns with the higher level of the corporation debts. The higher risks that are associated with the high levels of the corporation's debt bring down the stock prices of the corporations. However, there is also a possibility that the price of stock increases with the increase in the expected rate of return that is again associated with the raised levels of debts in the corporations.

Thus, the corporations are mainly concerned with the optimum level of the capital structure in order to maintain balance between the stock returns and the risk. The balance between the risk and return is an important aspect as it increases the possibility of achieving the ultimate goal of the firms to enhance the stock prices. The determination of capital structure is basically the ways of financing the long term expenses of the corporations. It includes the common stock, preferred stock and the retained ...