Debt and Equity in Capital Structure
1.0 INTRODUCTION
This report is specifically centered as a financial report. In general, a financial report is a report which touches upon the financial statements, activities or terms of a person, business, company, organization or nation. In finance, who owns a business firm? The shareholders are individuals who have bought shares of stock, which indicate ownership in the firm. Even if your business is a one-person shop, you are the shareholder. If the business is a huge conglomerate, then it has a Board of Directors made up of the shareholders who own shares of the firm based on how much money they have invested. Because the shareholders own the firm, they are entitled to the profits of the firm. Thus the general aim of a company is not only to maximize profits but to maximize shareholders’ wealth. One of the ways of maximizing shareholders’ wealth is to make appropriate and the correct decisions on investment and financing capital as well as focusing on the correct financial decisions. The main objective of this report is to examine the two major segments in finance which are capital structure decisions and financing sources.
This report is broken down into 5 very specific areas of the 2 main segments, which are capital structure decisions and financing sources. The first section of this report touches upon the definitions of debt, equity as well as the definition of capital structure. The report also provides an in depth view of the pros and cons of debt and equity. All of this is done to better understand the importance of studying the debt and equity structure of a company. The second part of this report centers on the definition of a startup company as well as the determinants of a capital structure of these startup companies.
The importance of the Modigliani – Miller (MM) Theory is undeniable. It has influenced many financial aspects and financial theories in the world. Thus this report also touches upon the MM Theory in the third part of this report.
This report is specifically centered as a financial report. In general, a financial report is a report which touches upon the financial statements, activities or terms of a person, business, company, organization or nation. In finance, who owns a business firm? The shareholders are individuals who have bought shares of stock, which indicate ownership in the firm. Even if your business is a one-person shop, you are the shareholder. If the business is a huge conglomerate, then it has a Board of Directors made up of the shareholders who own shares of the firm based on how much money they have invested. Because the shareholders own the firm, they are entitled to the profits of the firm. Thus the general aim of a company is not only to maximize profits but to maximize shareholders’ wealth. One of the ways of maximizing shareholders’ wealth is to make appropriate and the correct decisions on investment and financing capital as well as focusing on the correct financial decisions. The main objective of this report is to examine the two major segments in finance which are capital structure decisions and financing sources.
This report is broken down into 5 very specific areas of the 2 main segments, which are capital structure decisions and financing sources. The first section of this report touches upon the definitions of debt, equity as well as the definition of capital structure. The report also provides an in depth view of the pros and cons of debt and equity. All of this is done to better understand the importance of studying the debt and equity structure of a company. The second part of this report centers on the definition of a startup company as well as the determinants of a capital structure of these startup companies.
The importance of the Modigliani – Miller (MM) Theory is undeniable. It has influenced many financial aspects and financial theories in the world. Thus this report also touches upon the MM Theory in the third part of this report.
References: Banerjee, A. (2008) Private equity in developing nations. Journal of Asset Management, 9 (1), p.158-170. Available at: http://kdiprivateequity.wikidot.com/private-equity-in-developing-countries [Accessed: 11 Apr 2013]. E. Stiglitz, J. (1969) A Re-Examination of the Modigliani-Miller Theorem. The American Economic Review, 59 (5), p.784-793. Giesecke, K. and R. Goldberg, L. (2004) In Search of a Modigliani - Miller Economy. Journal of Investment Management, 2 (3), p.1-5. Available at: http://www.barra.com/support/library/credit/modigliani-miller.pdf [Accessed: 11 Apr 2013]. M. Robb, A. and T. Robinson, D. (2008) The Capital Structure Decisions of New Firms. Ewing Marion Kauffman Foundation, 2 (1), p.6-10. Available at: http://www.kauffman.org/uploadedFiles/Capital_Structure_Decisions_New_Firms.pdf [Accessed: 8th April 2013]. Roxburgh, C. et al. (2011) The emerging equity gap: Growth and stability in the new investor landscape. McKinsey Global Institute, 1 (1), p.2-5. TheFreeDictionary.com (2000) Start-Up Company. [online] Available at: http://financial-dictionary.thefreedictionary.com/Start-Up+Company [Accessed: 11 Apr 2013].