August 21, 2019

What are the factors that determine the capital structure?

Financial leverage or trading on equity The use of long term debt increases, magnifies the EPS if the firm yields a return higher than the cost of debt.  The EPS also increases with the use of preference share capital but due to the fact that interest is allowed to be deducted while computing tax. Growth […]

What are the essential features of sound capital mix?

Maximum possible use of leverage Flexible To avoid undue financial/business risk with the increase of debt The use of debt should be within the capacity of the firm It must avoid undue restrictions in agreement of debt Should have minimum possible risk of loss of control The capital structure should be conservative. It should be […]

What are the remedies for Under Capitalisation?

The remedies for under capitalisation are: Increasing the par value or number of equity shares – leads to decrease in rate of EPS. Capitalise the earnings by issuing bonus shares to the equity shareholders. Where under capitalisation is due to insufficiency of capital, more shares and debentures may be issued to the public.

The theories of capitalisation: The Cost Theory and The Earnings Theory

The theories of capitalisation are: The cost theory The earnings theory The Cost Theory According to this theory, the amount of capitalisation is arrived at by adding up the cost of fixed assets (like plants, machinery, building etc.); working capital required for the continuous operations of the company; the cost of establishing the company and […]