CAPITAL STRUCTURE

Capital Structure

Abstract

In this study we try to explore the concept of “Capital Structure” in a holistic context. The main focus of the research is on “Capital Structure” and its relation with “Capital Structure Issues”. The research also analyzes many aspects of “Capital Structure” and tries to gauge its effect on “Capital Structure Issues”. Finally the research describes various factors which are responsible for “Capital Structure” and tries to describe the overall effect of “Capital Structure” on “organization”.

Table of Content

Introduction1

The Theory of Modigliani and Miller Capital Structure3

Optimal Capital Structure4

The Method used in the Optimization of Capital Structure5

Property Approach5

Comparative Approach6

Income Approach6

Conclusion7

How Capital Structure Choices Affect a Firm's Return on Investment (Roe) And Its Risk Profile.

Introduction

Capital structure implies a combination of funds that meet the overall need of an organization and at the same time help to the organization to survive in the overall market. When considering about the most appropriate capital structure decisions that should be undertaken, there is no clear answer to it since every firm's need and demands in terms of financial assistance and financial support are different in their own ways. For instance, the financial structuring of an advertising campaign shall greatly differ from those of setting up the physical infrastructure of setting up a pharmaceutical or a steel plant at the edge of the city (Myers, 1984). When we consider about the amount of capital that should be undertaken when it comes to properly setting up, establishing and initiating the functioning and rolling of an organization, there are two major sources of funds that are normally included as per the context of design the capital structure of an organization (Myers, 1984).

These include debt and equity. Debt implies the funds that are being extended by a financial institution (such as a bank) that help us intended a security or collateral to a bank and then eventually pay the bank in the form of interest. On the other hand, it is also suggested that individuals who look forward to adopt equity know that this is a source from which individuals look into the sources of funds and monetary backing that is extended by the people or investors or stakeholder joined and considered with the organization (Baker, 2002). As world practice shows, the development only through their own resources (that is, by reinvesting profits into the company) reduces certain financial risks in business, but it greatly reduces the rate of increment in the size of the business, first of all revenue. In contrast, raising additional debt in the correct financial strategy and high-quality financial management can dramatically increase the income of owners of the company on their invested capital (Baker, 2002The reason is that the increase in financial resources with proper management leads to a proportional increase in sales and net profits often. This is especially true for small and medium-sized companies.

However, an overloaded leveraged capital structure imposes excessive demands on his return, as increasing the likelihood of defaults and rising risks for ...