So, the profit that can be distributed to shareholders (equity financers) are revenue less costs less tax. While developing an appropriate capital structure for its company, the financial manager should inter alia aim . As a result, they may employ a higher proportion of Debt Capital in their Capital Structure. The process facilitates sharing of information as necessary to create alignment across lines of business. The capital structure is a set of principal money that is run for the business and financial-related arrangements in running the business from different sources over a long period. Capital Structure of a firm largely depends on the nature of the business a firm undertakes. 2. Capital structure is a term related to the components of business capital used by it for financing its expenses. Owned Funds: It belongs to the proprietors It includes share capital, free reserves and surplus. The entire capital is raised from shareholders and there is only one class of shares; Advantages: (1) No fixed charges, dividends on borrowings (2) Management can handle earnings as they wish (3) No compulsion to return the equity capital (4) Better public response as equity shares are cheap (6) Additional capital can be raised issuing more shares It is typically measured in terms of the debt-to-equity ratio. Finance manager and other promoters decides which source of fund or funds should be selected after monitoring the factors affecting capital structures. Capital structure= debt/equity. The process meets the strategic needs of the decision makers. The weighted average cost of capital (WACC) is helpful in the capital structure decision. The equity shareholders being the owner of the company and the providers of risk capital (equity), would be concerned about the ways of financing a company's operations. Optimize Capital Structure with Tax Shield. Capital structure is the particular combination of debt and equity used by a company to finance its overall operations and growth. Capital structure= debt/debt + equity. But first, let's talk about capital plan management basics. It is very important for the financial manager to determine the proper mix of debt and equity for his firm. The process gathers both quantitative and strategic input from line of business stakeholders. While planning the capital structure, it should be ensured that the use of the capital should be capable of earning the revenue enough to meet the cost of capital. changes in the credit union's organizational structure, governance structure, business strategy, capital goals and limits, regulatory environment, risk appetite, and other . Capital structure can be calculated as the ratio of debt to equity or proportion of debt out of total capital (debt + equity). A company may choose to look to its owners who have equity to raise the funds, by asking them to forgo their dividend pay-out and instead reinvest their earnings to drive the firm's operations. The company may rely either solely on equity or solely on debt or use a combination of the two. There are three major considerations in capital structure planning, i.e. For Madison, a process with a flexible structure meets several key criteria. Capital structure refers to the relationship between debt and equitythe two main forms of capital in a business. There are various tools, processes and team players to understand before beginning the capital planning process. The right capital structure planning also increases the power of company to face the losses and changes in financial markets. This consists of both the cost of debt and the cost of equity used for financing a business. The following points highlight the top seven factors affecting capital structure planning. EBIT-EPS Analysis: It is needless to say that if we want to examine the effect of leverage, we are to analyse the relationship between the EBIT (earnings before interest and tax) and EPS (earnings per share). Firms that operate in monopoly or oligopoly markets generally have stable income and low business risk as compared to perfectly competitive firms. Factors affecting the Capital Structure . A company must pay taxes on its profits: profits are simply revenues less costs. OR. Capital structure refers to the amount of debt and/or equity employed by a firm to fund its operations and finance its assets. So, capital structure planning makes strong balance sheet. It combines equities, preference share capital, long-term loans, debentures, retained earnings, and various other long-term sources of funds. To reduce the overall risk of company . Deciding the suitable capital structure is the important decision of the financial management because it is closely related to the value of the firm. Debt typically includes short-term. fMM's Proposition I: Key Assumptions Perfect capital markets Capital structure is also termed as debt-to-equity ratio. A ratio that is greater than 1.0 means the company is financed more by debt than equity. Capital Structure, as the name suggests, means arranging capital from various sources in order to meet the need for long-term funds for the business. Several factors affect a company's capital structure, and it also determines the composition of debt and equity portions within this structure. Capital structure refers to a company's mix of capitalits debt and equity. In the absence of taxes, an individual holding all the debt and equity securities will receive the same cash flows ko regardless of the capital kd structure and therefore, value of the company is the same. The right capital structure planning also increases the power of company to face the losses and changes in financial markets. Capital structure planning, which aims at the maximisation of profits and the wealth of the shareholders, ensures the maximum value of a firm or the minimum cost of capital. Debt MM's approach is a net operating income approach. A company's ideal capital structure will depend on its specific situation, including factors like the cost of capital, the business cycle, and any existing debt or equity. The different types of funds that are raised by a firm include preference shares, equity shares, retained earnings, long-term loans etc. Capital structure is the composition of debt and equity. It involves the proper arrangement of owner funds and borrowed funds in right proportion for carrying out the operations in an efficient way towards achievement of goals. Small-sized companies face . The capital structure should be planed generally keeping in view the interest of the equity shareholders and financial requirements of the company. Thus, business risk is the uncertainty inherent in a total risk sense, future operating income, or earnings before interest and taxes (EBIT). shareholder's funds and borrowed funds in proper proportion. CAPITAL STRUCTURE DECISION. capital structure. The mixture of the two is important because each one has its own benefits and limitations. Definition: Capital structure refers to an arrangement of the different components of business funds, i.e. The meaning of Capital structure can be described as the arrangement of capital by using different sources of long term funds which consists of two broad types, equity and debt. Equity is a company's common and preferred stock plus retained earnings. Business risk is caused by many factors. Although, three factors, i.e. Factor # 1. http://www.final-yearproject.com/2011/04/mba-summer-internship-program-sip.html Pawan Bahuguna Follow A company's cost of capital depends, to a large extent, on the type of financing the company chooses to rely on - its capital structure. Some of these factors are as follows: Business Size - The size and scale of a business affect its ability to raise finance. CAPITAL STRUCTURE PLANNING Solution : - Particulars Option 1 Option 2 Option 3 EBIT XX XX XX Less: Interest (WN-2) XX XX XX EBT XX XX XX Less: Tax @___ % XX XX XX EAT XX XX XX Less: Preference Dividend (WN-3) XX XX XX Amount available to Equity Shareholders XX XX XX EPS i.e Earnings Per Share = ( Amount available to Equity Shareholders) ( No of Equity . Owner's funds or Equity includes Preference share capital, equity share capital, retained earnings, reserves, and surpluses. Capital structure refers to the way that a business is financedthe mix of debt and equity that allows a business to keep the doors open and the shelves stocked. Management Control: The capital of the business enterprise is also influenced by the intention of the promoters . 1. The capital structure should be planned generally, keeping in view the interests of the equity shareholders and the financial requirements of a company. After computing the cost of capital, the firm decides about its 'capital structure' as a part of financing policy. The term capital structure refers to the relationship between the various long-term source financing such as equity capital, preference share capital and debt capital. 1. Capital structure planning format 1. So, capital structure planning makes strong balance sheet. Capital structure decision. The mix of debt and equity used to finance the company's future profitable investment opportunities is referred to as capital structure. Capital Structure Planning Definition Capital structure of a company refers to the make-up of its capitalization and it includes all long-term capital resources, viz., shares, loans, reserves and bonds. The 'financial structure' refers to the total amount of funds of an enterprise. risk, cost and control determines the capital structure of a particular business undertaking at a . The debt tax shield is the most powerful tool for optimizing capital structure. They differ on the basis of the cost involved and the . Cost of Capital: The process of raising the funds involves some cost. The optimum capital structure is one that maximizes the market value of the firm. - Gerstenberg 1. risk, cost of capital and control, which help the finance manager in determining the proportion in which he can raise funds from various sources. While debt or borrowed funds include public . capital planning process, so the board is fully informed of any limitations in the process and can effectively challenge reported results before making capital . Just like yearly budgets, goal planning and employee reviews, planning and management of the capital plan should occur in a regular, annual cycle. Tax Planning Tool; The funds taken . Debt and equity capital are used to fund a business's operations, capital expenditures, acquisitions, and other investments. A firm's capital structure is typically expressed as a debt-to-equity or debt-to-capital ratio. Capital Structure Planning Sep. 14, 2009 4 likes 5,046 views Download Now Download to read offline Leadership & Management Economy & Finance Technology Capital Structure Planning for MBA Students Please follow below link for more MBA projects. 2. Business risk is the risk inherent in the operations of the firm, prior to the financing decision. The answer to the question of what is capital structure is that capital is a mixture of both, which a business uses to finance its day-to-day operations, growth, and assets. This structure relates to a combination of shares, equity, preference share capital, and debt securities to long-term loans. Equity capital arises from ownership shares in a company and. A business organization utilizes the funds for meeting the everyday expenses and also for budgeting high-end future projects. Following points shows the importance of capital structure and its planning.
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