I s there a way of dividing a company’s capital base between debt and equity that can be expected to maximize fi rm value? And‚ if so‚ what are the critical factors in determining the target leverage ratio for a given company? Although corporate fi nance has been taught in business schools for more than a century‚ the academic fi nance profession has found it diffi cult to come up with defi nitive answers to these questions. Part of the diffi culty stems from how the discipline has evolved
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Theory of Capital Structure - A Review Stein Frydenberg£ April 29‚ 2004 ABSTRACT This paper is a review of the central theoretical literature. The most important arguments for what could determine capital structure is the pecking order theory and the static trade off theory. These two theories are reviewed‚ but neither of them provides a complete description of the situation and why some firms prefer equity and others debt under different circumstances. The paper is ended by a summary where the
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of Diageo‚ the treasury team was given the task of establishing the cost of capital for each of the different areas the company operated. The team had to create a simulation model which should consider new finance approaches‚ treasury functions to focus on‚ what the firm’s risk footprints will be‚ how to calculate cost of capital and finally how to optimally structure capital. How has Diageo managed its capital structure? Both Grand Metropolitan and Guinness had little debt prior to the merger‚
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Kale et al (1991) suggests that the level of risk is one of the main determinants of a firm`s capital structure. By looking at the trade off theory we might expect a negative association when risk and leverage are concerned. If firms have high earnings volatility‚ for some obvious reasons‚ they would not want to indulge in debt financing. It follows that when firms are exposed to bankruptcy and agency costs greater is the incentive to reduce the level of debt otherwise the more volatile a firm`s
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OPTIMAL CAPITAL STRUCTURE INTRODUCTION This report tries to visualize “OPTIMAL CAPITAL STRUCTURE” and represent the facts that include features of capital structure‚ determinants of capital structure‚ and patterns of capital structure‚ types and theories of capital structure‚ theory of optimal capital structure‚ risk associated with capital structure‚ external assessment of capital structure and some assumption related to capital structure. BROAD OBJECTIVE • To determine features of capital structure
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D61/81594/2012 AGENGA BENTER ARWA D61/81595/2012 Section 1 1. Determine the drivers of capital Structure. The primary factors that influence a company’s capital-structure decision are: Company size Big firms are likely to be more leveraged than small firms. This is due to the huge capital assets that they posses Management style Management style ranges from aggressive to conservative. Conservative management is less inclined to use
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CAPITAL STRUCTURE MANAGEMENT IN NEPAL (A CASE STUDY ON NABIL‚ NIBL‚ NEA‚ NTC & HGICL) Table of Contents: Recommendation I Viva- Voce Sheet II Declaration III Acknowledgement IV List of Figures V List of Tables VI Abbreviation VII CHAPTER I. INTRODUCTION Pg No. 1. Background of the study
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Capital Structure and Profit Capital Structure Definition A unite of a company’s long-term debt‚ specific short-term debt‚ common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Debt comes in the form of bond issues or long-term notes payable‚ whereas equity is classified as common stock‚ preferred stock or retained earnings. Also‚ Short-term debt such as working capital requirements is considered
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Capital Structure Practice Problems 1. Hayfin Enterprises has the following operating results and capital structure: Hayfin Enterprises ($000s) | | | Financial Data | | Revenue | $ 6‚000 | Operating Expenses | $ (4‚500) | EBIT (Operating Profit) | $ 1‚500 | | | Debt | $ 1‚200 | Equity | $ 8‚800 | Total Capital | $ 10‚000 | Interest rate on debt = 9% Share price = $25 (MV = BV) The firm is contemplating
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Capital Structure Decisions: Which Factors are Reliably Important? Murray Z. Frank1 and Vidhan K. Goyal2 First draft: March 14‚ 2003. Current draft: December 20‚ 2003. ABSTRACT This paper examines the relative importance of 38 factors in the leverage decisions of publicly traded U.S. firms from 1950 to 2000. The most reliable factors are median industry leverage (+ effect on leverage)‚ market-to-book ratio (-)‚ collateral (+)‚ bankruptcy risk as measured by Altman’s Z-Score (-)‚ dividend-paying
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