The goal of the capital structure decision is to determine the financial leverage that maximizes the value of the company (or minimizes the weighted average cost of capital). In the Modigliani and Miller theory developed without taxes, capital structure is irrelevant and has no effect on company value.
Which one of the following is a capital structure decision?
Determining how much debt should be assumed to fund a project is a capital structure decision.
Why is capital structure decisions important?
Capital structure maximizes the company’s market price of share by increasing earnings per share of the ordinary shareholders. It also increases dividend receipt of the shareholders. Investment Opportunity: Capital structure increases the ability of the company to find new wealth- creating investment opportunities.
What is capital structure ratio?
Capital structure refers to a company’s mix of capital, which consists of a combination of debt and equity. Important ratios to analyze capital structure include the debt ratio, the debt-to-equity ratio, and the capitalization ratio.
What are the internal factors affecting capital structure?
1) Cost of capital : – it is a process of raising the funds which involves the cost in planning the capital structure, the use of capital should be capable of earning revenue to meet the cost of capital.
Which one of the following is included in working capital management?
A well-run firm manages its short-term debt and current and future operational expenses through its management of working capital, the components of which are inventories, accounts receivable, accounts payable, and cash.
What does the general principle of disclosure and transparency mean?
What does the general principle of disclosure and transparency mean? a) The company is obliged to reveal all holding companies, strategic alliances, and joint ventures to the government.
What is capital structure and what are the determinants of capital structure?
Based on the data availability, the following determinants of capital structure are analysed in this paper: size, profitability, tangibility, growth opportunities, tax, non-debt tax shields, volatility, and industry classifica- tion.
Does a firm need both components of capital structure?
A company will need to weigh its absolute cost of capital vs. its risk of defaulting, so that an optimal capital structure will include both debt and equity.
Why is the choice of optimal capital structure important for shareholders?
The optimal capital structure of a firm is the best mix of debt and equity financing that maximizes a company’s market value while minimizing its cost of capital. However, too much debt increases the financial risk to shareholders and the return on equity that they require.
What is the importance of capital structure ratio?
Capital structure ratios help investors analyze what would happen to their investments in the worst possible scenario. In case of liquidation senior debt holders have the first claim, then junior debt holders and then in the end equity holders get paid if there is anything left.
Which among the following is not internal factor of capital structure?
The market risk premium is the difference between the expected return on a market portfolio and the risk-free rate. It does not form a part of internal factors affecting the WACC of a firm.
What type of decision is the management of working capital?
short-term decision-making
The management of working capital takes place in the realm of short-term decision-making. These decisions are, therefore, based primarily on profitability, cash flows and their management.