Theory of Extreme Capital Structure Essay Example | Topics and Well Written Essays - 1500 words

Theory of Extreme Capital Structure - examine ExampleTherefore, roof mental synthesis can be defined as the arrangement of chapiter. In line of battle to analyse capital social system, we need to highlight the difference between capital structure and financial structure. The equipment casualty ar interchanged in some circles to mean the same, but they are not quite the same. Financial structure is the sum of all the means the firm maps to fund its activities. Therefore, financial structure comprises of net worth and liabilities of the companionship i.e. curtly and long term. The capital structure on the other hand is financial structure excluding short term borrowing. Capital structure has already been seen as two-fold, with the finance and summation structure. The source of capital is what determines what summation will be purchased. The structure of capital is categorised as follows 1. agree to sources The structure may every be simple or complex. A simple structure c onsists of a single source piece of music the complex is where the sources are more than one. (Although retained earnings is not considered an additional source). This mode is only likely under the fund concept because it is rare for a firm to have one asset, invalidating the asset concept. 2. According to sources This is broadly categorised into internal and external sources. Internal sources comprise of share capital (bonus issue), capital reserve, and reserve and surplus. On the hand the external sources include share capital (bonus issue excluded), share premium, forfeited shares, long term and short-term liabilities and debentures. 3. According to ownership This is either ownership capital or creditorship (debt) capital. self-command capital includes equity share capital and retained earnings while creditorship comprises of debentures, long-term and short-term liabilities. It is concord by all accountants where preference shares should be grouped as they have the both elem ents of ownership and debt. 4. According to cost behaviour This classifies the assets as either fixed cost or variable cost, depending on their write off implications. The fixed cost capital include preference share, long term debt and debentures whereas variable cost capital include equity share and short term liabilities. Firms have different capital structures depending on industry, gild type, and proportion of capital contribution. The theories of capital structure try to ask the pertinent questions in leveraging, valuation, and financial balance. This involves evaluating how a firm can affect its total valuation factoring debt and equity, how debt affects the firms position. This is by use of accounting ratios 1 Where is the firms debt yield, assuming the element of perpetuity of debt 2. E=EBIT-I Where we assume 100% dividend payout and the firms earning are constant with no element of growth. Therefore, the earnings/price ratio gives the market discount rate, which equals the present repute of the series of expected future dividends at the existing market value of the share. 3. Where is the firms boilers suit capitalisation rate. It computation is normally the weighting of the cost of capital as shown below + The theories of capital structure try to explain the relationship between capital, leverage and the firms value. What we want to know is what happens to , and when the detail of leverage (D/V) increases or how is the value of capital