CAPITAL STRUCTURE

Capital Structure

Capital Structure

Introduction

Companies can choose any combination of debt and equity, wishing to finance their assets, subject to the willingness of investors to provide the funds for business. And, as we shall see, there are several combinations of debt and equity, or capital structures - in some companies, like Chrysler Corporation, debt is more than 70 percent of the funding, while other companies such as Microsoft, have little or no debt. In the following sections, we consider the factors that affect the structure of the company capital, and we conclude a firm should try to determine what your best, or rather, a mixture of funding should be. However, you will find that the precise determination of optimal capital structure is not science, so after examining a number of factors, the company establishes a target capital structure, in its opinion, is the best, which is then used as a guide for fundraising in the future. This objective can change over time as conditions change, but at some point address the capital structure of companies in mind, and individual decisions, funding must meet this goal. Some managers are more aggressive than others, and some companies are more willing to use debt to increase profits (Rajan and Zingales, 1995, 1421). This factor does not affect the optimal or maximum value, capital structure, but may affect the structure of the target company really sets capital. These four points largely determine the target capital structure, but as we shall see, operating conditions may cause the capital structure of the target range at any time.

Capital Structure

The capital structure of a company can be defined as the sum of funds from their own contributions and those acquired through long-term debt, while financial structure is for the whole debt, both current and non-current coupled to assets or domestic liabilities. Capital structure is a collection of funds business from various sources of long-term funding, or more precisely, the ratio of short-term liabilities, long-term liabilities and equity of the organization (Fischer & Heinkel, 1989, 40). When a company expands, it needs capital, depending on what kind of company funding distinguish debt capital or equity. Borrowings are two significant advantages. First, the interest paid is deducted when calculating the tax, which lowers the actual cost of borrowing. Secondly, those who provide the loan, receive a fixed income, and shareholders should not share with them the profit, if the enterprise is successful.

Optimal capital structure

Optimal capital structure is the mix of financing (acquiring money ) that minimizes the cost of capital and thus maximizes the value of the entity using the capital (money) to carry out their activities. Optimal capital structure also has important applications for personal finance and novice investors. In less formal terms, your family needs money to do things, either go to the movies or buying a home, you have two options: you can pay cash or finance through a loan , mortgage or loan bank. Neither option is inherently bad, in fact the mortgage is an excellent ...