xcellent proj on FUND FLOW AND CAPITAL STRUCTURE

dk2424

New member
What is capital structure?
Capital Structure represents the total long-term investment in a business firm. It includes funds raised through ordinary and preference shares, bonds, debentures, term loans from financial institutions, earned revenue, capital surpluses, etc. The term capital structure is used to represent the proportionate relationship between debt and equity.

The Board of Directors or the financial manager of a company should always endeavor to develop a capital structure that would lie beneficial to the equity shareholders in particular and to the other groups such as employees, customers, creditors, society in general. While developing an appropriate capital structure for its company the financial manager should aim at maximizing the long-term market price per share. This can be done only when all these factors which are relevant to the company's capital structure decisions are properly analyzed and balanced.

Capital structure refers to the way a corporation finances itself through some combination of equity, debt or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20bn dollars in equity and $80bn in debt is said to be 20% equity financed and 80% debt financed. The firm's ratio of debt to total financing, 80% in this example is referred to as the firm's leverage.
An appropriate capital structure is a critical decision for any business organization. The decision is important not only because of the need to maximize returns to various organizational constituencies, but also because of the impact such a decision has on an organization’s ability to deal with its competitive environment.
The capital structure of a company is the particular combination of debt, equity and other sources of finance that it uses to fund its long term financing.
The key division in capital structure is between debt and equity. The proportion of debt funding is measured by gearing.
This simple division is somewhat complicated by the existence of other types of capital that blur the lines between debt and equity, as they are hybrids of the two. Preference shares are legally shares, but have a fixed return that makes them closer to debt than equity in their economic effect. Convertible debt may be likely to become equity in the future.
Considering the division between debt and equity is sufficient to understand the issues involved.
Simple financial theory models show that capital structure does not affect the total value (debt + equity) of a company. This is not completely true, as more sophisticated models show. It is, nonetheless, an important result, know as capital structure irrelevance.
The capital a business needs for investing in its assets comes from two basic sources: debt and equity. Managers must convince lenders to loan money to the company and convince sources of equity capital to invest their money in the company. Both debt and equity sources demand to be compensated for the use of their capital. Interest is paid on debt and reported in the income statement as an expense, which like all expenses is deducted from sales revenue to determine bottom-line net income. In contrast, no charge or deduction for using equity capital is reported in the income statement. Rather, net income is reported as the reward or payoff on equity capital. In other words, profit is defined from the shareowners point of view, not from the total capital point of view. Interest is treated not as a division of profit to one of the two sources of capital of the business but as an expense, and profit is defined to be the residual amount after deducting interest. Sometimes the owners’ equity of a business is referred to as its net worth. The fundamental idea of net worth is this:

Net worth = assets − operating liabilities − debt

Net income increases the net worth of a business. The business is better off earning net income, because it’s net worth increases by the net income amount. Suppose another group of investors stands ready to buy the business for a total price equal to its net worth. This offering price, or market value, of the business increases by the amount of net income. Cash distributions of net income to shareowners decrease the net worth of a business, because cash decreases with no corresponding decrease in the operating liabilities or debt of the business.
 

dk2424

New member
An appropriate capital structure should incorporate the following features:

1. Flexibility: A sound capita1 structure must be flexible. The consideration of flexibility gives the financial manager ability to alter the firm's capital structure with a minimum cost and delay warranted by a changed situation. It should also be possible for the company to provide funds whenever needed to finance its profitable activities.

2. Profitability: A sound capital structure is also one that also possesses the feature of profitability, i.e., it must be advantageous to the company. It should permit the maximum use of leverage at a minimum cost with the constraints.
Thus a sound capital structure tends to minimize 'cost' of financing and maximize earnings per share (EPS).

3. Solvency: A sound capital structure should also have the feature of solvency, i.e., it should use the debt capital only up to the point where significant risk it not added. As has been already observed the use of excessive debt threatens the solvency of the company.

4. Conservation: The capital structure should be conservative in the sense that the debt capacity of the company should not exceed. The debt capacity of a company demands on its ability to generate future cash flows. It should have enough cash to pay creditors fixed charges and principal amount. It should be remembered that cash insolvency might also lead to legal insolvency.

5. Control: The capital structure should involve minimum risk of loss of control of the company.


Types of Business Finance
We have mentioned above, that funds are required by business firms for different purposes — to acquire fixed assets, to provide for operating expenses, and to improve methods of production. Depending on the nature and purpose to be served, we may distinguish between three types of finance. These are:
(i) Long term finance;
(ii) Medium term finance;
(iii) Short term finance.
Sources of Finance
The primary responsibility of financing a business venture is that of the owners of the business. However, loans and credits also meet the financial requirements of business firms. In sole proprietorship business, the individual proprietor generally, invests her/his own savings to start with. She/he may reinvest a part of the profits earned in course of time. She/he may also borrow money on her/his personal security or the security of assets. Similarly, the capital of a partnership firm consists partly of funds contributed by the partners and partly of borrowed funds. If necessary they may also decide to reinvest their own shares of profit. The company form of organization enables the promoters to raise necessary funds from the public, who may contribute capital and become shareholders of the company. In course of its business, the company can raise loans directly from banks and financial institutions or by issue of debentures to the public. Besides, profits earned may also be reinvested instead of being distributed as dividend to the shareholders. Thus, for any business enterprise, there are two sources of finance, that is, funds contributed by owners, and funds available from loans and credits. In other words, the financial resources of a business may be provided by owner’s funds and borrowed funds.
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arul_mba

New member
An appropriate capital structure should incorporate the following features:

1. Flexibility: A sound capita1 structure must be flexible. The consideration of flexibility gives the financial manager ability to alter the firm's capital structure with a minimum cost and delay warranted by a changed situation. It should also be possible for the company to provide funds whenever needed to finance its profitable activities.

2. Profitability: A sound capital structure is also one that also possesses the feature of profitability, i.e., it must be advantageous to the company. It should permit the maximum use of leverage at a minimum cost with the constraints.
Thus a sound capital structure tends to minimize 'cost' of financing and maximize earnings per share (EPS).

3. Solvency: A sound capital structure should also have the feature of solvency, i.e., it should use the debt capital only up to the point where significant risk it not added. As has been already observed the use of excessive debt threatens the solvency of the company.

4. Conservation: The capital structure should be conservative in the sense that the debt capacity of the company should not exceed. The debt capacity of a company demands on its ability to generate future cash flows. It should have enough cash to pay creditors fixed charges and principal amount. It should be remembered that cash insolvency might also lead to legal insolvency.

5. Control: The capital structure should involve minimum risk of loss of control of the company.
 

spjcm

New member
Thnks for the details on funds flow and capital strcture decisions

i am very much interested in the data tell me how to get the download link
 

spjcm

New member
Thnks for the details on funds flow and capital strcture decisions
Could you please tell me how to get the download link
 
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