The financing details a framework for capital structure. The capital structure theory and its practical implications for firm. Capital structuring is an essential function of the management to maintain a sound financial position of the business and fulfil the financial requirements. Capitalization represents permanent investment in companies excluding longterm loans. The tradeoff theory of capital structure postulates that managers attempt to. Companies with unstable sales should opt for equity capital. Capitalization is the total accounting value of the stock, surprises in whatever form it may appear and long term debt essentials of. Whether or not, a capital structure suitable for a particular business depends upon the circumstances and nature of business. Journal of risk and financial management an open access.
The following are the important scope of financial management. A lucid and detailed introductory study notes on the topic capital structure. This ebook is highly recommended for mba or management students. Capital structure is the mix between owners funds and borrowed funds. The capital structure is how a firm finances its overall operations and. Chapter iii concepts and theories of capital structure and profitability. Capital budgeting under risk and uncertainties chapter7. The objective of the course is to provide the necessary basic tools for the students so as to manage the finance function. It is the employment of an asset source of finance for which.
Capital structure is a broad term and it deals with qualitative aspect of finance. Financial management is one of the important parts of overall management, which is directly related with various functional departments like personnel, marketing and production. In the capital structure of a company, broadly, there are mainly two types of capital i. While capital structure refers to sources of long term funds. The objective of the firm should be directed towards the maximization of the value of the firm the capital structure, or average, decision should be examined from the point of view of its impact on the value of the firm. Definition of capital structure 47 financial structure 48 optimum capital structure 49 objectives of capital structure 49. Capital structure decision is a significant decision in financial management. Determining an appropriate mix of equity and debt is one of the most strategic decisions public interest entities are confronted. Therefore, an organization should consider financial management a key component of the. If the companys management policies are such that they want to retain their voting rights in their hands, the capital structure consists of debenture holders and loans rather than equity shares. In financial management, it is a significant term and it is a very important decision in business. Alan wong online in one yearly volume from 2008 until end 2012. It is very important for the financial manager to determine the proper mix of debt and equity for his firm.
Capital structure detailed notes financial management unit 3. Strategic financial management by calicut university. Advanced financial management capital structure cost. Hi guys, i am sharing with you this excellent ebook on financial management in pdf format. Explain the relationship between financial management and financial and management accounting. 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. The capital structure decision can affect the value of the firm either by changing the expected earnings or the cost of capital or both. Financial management covers wide area with multidimensional approaches. Capital structure management a companys capital structure refers to the combination of its various sources of funding. For corporations, it is meant for effective procurement and utilization of funds. This decision in a private enterprise is directed towards the achievement of. Financial management has different implications for corporations and individuals. This report analysis the capital structure, use and effect of leverage, dividend policy, longterm financing policies, working capital management practices, and mergers and acquisition. The capital structure of a company refers to the mixture of equity and debt finance used by the company to finance its assets.
It is concerned with making the array of the sources of the funds in a proper manner, which is in relative magnitude and proportion. Capital structure is a part of the financial structure and refers to the proportion of the various longterm sources of financing. Financial management notes mba pdf download mba 2nd sem. Optimum capital structure f9 financial management acca. Meaning, classification sources available for dividends dividend policy general, determinants of dividend policy. Textbook finance mostly assumes that the interests of the firms managers and. Since october 20, it is published monthly and online by mdpi.
Some companies could be allequityfinanced and have no debt at all, whilst others could have low levels of equity and high levels of debt. Journal of risk and financial management issn 19118074. Capital structure denotes means a firm funds its operations using some blend of equity plus debt. Capital structure factors influencing capital structure optimal capital structure dividend and dividend policy. Reserving some unused good debt capacity is useful to provide flexibility and lead to increase in firm value. In contrast, financial structure refers to the amount of total current liabilities, long term debt, preferred stock, and common equity used to finance a firm. Financial structure refers to the specific mixture of longterm debt and equity that a company uses to finance its operations. Define the types of securities usually used by firms to raise capital. Pdf capital structure choice is an important decision for a firm. Capital structure is defined as the amount of permanent short term debt,1 longterm debt, preferred stock, and common equity used to finance a firm. Theories of capital structure explained with examples. Describe goals for international financial management. Capital structure management capital structure strategy.
The composition directly affects the risk and value of the. Financial goals and strategy, managerial implications of share holder value creation, financial strategy for capital structure, capital structure planning and decision making, dividend policy and value of the firm, dividend policy and valuation of firms, lease financing and hire purchase, financial. The total capital structure of a firm is represented in figure 27. On the other hand, for individuals, it is meant to manage its earnings in order to have good financial health and. Most companies are funded by a mix of debt and equity, including some shortterm debt, some longterm debt, a number of shares of common stock. Financial management ebook,lecture notes,pdf download for. Capital structure is defined as the mix of debt and equity securities used to. An organizations financial management plays a critical role in the financial success of a business. Lecture notes financial management sloan school of. Financial management is an essential part of the economic and non economic activities which leads to decide the efficient procurement and utilization of finance with profitable. Capital structure a reading prepared by pamela peterson drake outline 1. The study of capital structure attempts to explain how listed firms utilise the mix of various forms of securities in order to finance investment.
Financial management corporate fm, personal fm efm. Capital structure theory focuses on how firms finance assets. According to khan and jain, finance is the art and science of managing money. Financial leverage is the extent to which a business firm employs borrowed money or debts. Capital budgeting evaluation techniques 112 chapter6. Capitalization comprises of share capital, debentures, loans, free reserves,etc. Real assets, bond analysis of financial statements. Capitalization can be distinguished from capital structure. The capital structure theory and its practical implications for.
Finance for small and mediumsize entities smes f cost of capital 1. Capital structure and value of firm financial management. The optimal capital structure for a company is one that offers a. Capital structure detailed notes financial management unit 3 1. An optimal capital structure is the best debttoequity ratio for a firm that maximizes its value. Capital structure and its 4 important theories ni, noi. An overview kennedy prince modugu department of accounting faculty of management sciences university of benin nigeria abstract capital structure decision poses a lot of challenges to firms. Notes on capital structure pdf capital structure cost of capital. Financial managers are difficult to exactly determine the optimal capital structure. Financial structure in the entire left hand side of the companys balance sheet which includes current liabilities equivalent to asset structure. I will also share the lecture notes on this subject. From a technical perspective, the capital structure is the careful balance between equity and debt that a business uses to finance its assets, daytoday operations, and future growth. The capital structure should frame in such a way that it maximise returns to its owners.
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