Unit 3

Information about Unit 3

Published on April 21, 2009

Author: prachigupta787

Source: authorstream.com

Content

Unit 3 : Unit 3 Capital structure Meaning : Meaning Capital structure / composition of capital / pattern of securities mix is the second important aspect of financial planning. Once the financial manager has determined the firm’s financial requirements , his next task is to see that these funds are on hand. This capital comes in many forms – long and short term debts , secured and unsecured debts, preference shares , equity shares ,retained earnings and other things. To decide upon the ratio of these securities in the total capitalization is to decide the capital structure. Slide 3: “Capital structure is the permanent financing of the firm represented by long term debts , preferred stock and net worth.” Determinants of capital structure : Determinants of capital structure Nature of Business Stability of earning Amount of funds Rapidity of growth Nature of investors Financial leverage Optimal capital structure : Optimal capital structure “optimal capital structure can be defined as that mix of debts and equity which will maximize the market value of a company and minimize its cost of capital ” Theories of capital structure : Theories of capital structure Net Income Approach Net operating Income Approach The Traditional Approach Modigliani-Millar Approach NET Income Approach : NET Income Approach

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