In FM, it leverage is used to describe a firm’s ability to use fixed assets cost funds to satisfy to magnify the returns of its owners. Leverage is the ratio of the net rate of return on shareholder’s equity and net rate of return on total capitalisation. Provides a framework for financing decisions of a […]
Best debt to equity ratio for a firm that maximises its value. Optimal capital structure is one that offers a balance between the ideal debt-to-equity range and minimises the firm’s cost of capital. In theory debt financing generally offers the lowest cost of capital due to its tax deductibility, however it is rarely the optimal […]
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 […]
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 […]
Capital Structure Deals with qualitative aspects of finance. Points out how assets are financed. Forms of Capital Structure Equity shares only Equity and preference shares Equity shares and debentures Equity shares, preference shares and debentures
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.
Over Capitalisation Refers to that state of affairs when earning of a company do not justify the amount of capital invested in its business. A company is over capitalised when its earnings are not large enough to yield a fair return on the amount of stock and bonds that have been issued. Over capitalisation means […]
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 […]
Derived from the word capital. In common practice it refers to the total amount of capital employed in a business. Capitalization deals with quantitative aspects of finance. Refers to the long term indebtedness and includes both the ownership capital and the borrowed capital. Means total par value of all the securities, i.e, shares and debentures […]
At the time of promotion/incorporation of a company. At the time of expansion of an existing company. At the time of amalgamation and absorption of two or more companies. At the time of reorganisation of capital of a company.