Financial management is the way you know if you are making a profit. 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 the mix between owners funds and borrowed funds. Objectives the general objective of this study will be to investigate the impact of capital structure on the financial performance of selected commercial banks in ethiopia. Theories of capital structure explained with examples. The composition directly affects the risk and value of the. The capital structure puzzle is unravelled and a clear picture is presented in terms of why capital structure matters.
Freely browse and use ocw materials at your own pace. Pdf capital structure and financial performance of banks. Hi guys, i am sharing with you this excellent ebook on financial management in pdf format. Financial structure in the entire left hand side of the companys balance sheet which includes current liabilities equivalent to asset structure. The impact of capital structure on risk and firm performance. The capital structure theory and its practical implications for firm. It is the employment of an asset source of finance for which. Firm financial management in central and eastern europe marian rizov licos center for transition economics, katholieke universiteit leuven abstract.
Apr 15, 2019 financial structure refers to the specific mixture of longterm debt and equity that a company uses to finance its operations. Capitalization represents permanent investment in companies excluding longterm loans. For a better understanding of the relationship between financial average and the value of the firm, assumptions, features and implications of the capital structure theories are given below. Capitalstructure is an independent provider of insightful firsttomarket news on and analysis of the european subinvestment grade space markets and the north american special situations and distressed opportunities space.
Investment decisions includes investment in fixed assets called as capital budgeting. A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. The capital structure theory and its practical implications for firm financial management in central and eastern europe marian rizov licos center for transition economics, katholieke universiteit leuven abstract. Capital structure a reading prepared by pamela peterson drake outline 1. The capital structure is how a firm finances its overall operations and. Debt comes in the form of bond issues or longterm notes. Capitalization comprises of share capital, debentures, loans, free reserves,etc. Our emphasis is on multiple sourcing of key information to ensure we only publish accurate, valueadded intelligence to. Capital structure is optimal when the proportion of debt and equity maximizes the value of the equity share of the company.
If we assume that the company maintains the same capital structure the mix of debt, preferred stock, and common stock. Capital structure theories introduction capital structure decision is a significant decision in financial management. The firms value is maximised when cost of capital is. Financial management cost of capital capital structure. Capital structure reflects the firms financing strategy, for. This ebook is highly recommended for mba or management students. Capital structure and value of firm financial management. The former consists of capital, reserves and term loans raised from public and financial institutions, while the latter is made up of current liabilities and provisions. While capital structure refers to sources of long term funds. A companys capital structure refers to the combination of its various sources of funding. Financial management ebook,lecture notes,pdf download for mba. This decision in a private enterprise is directed towards the achievement of maximization of the shareholders wealth or value of the firm. Theories of capital structure in practice it is difficult to specify an optional capital structure indeed, managers even feels uncomfortable about specifying an optional capital structure range. Pdf the role of capital structure in companys financing.
The objective of the course is to provide the necessary basic tools for the students so as to manage the finance function. 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 leverage is the extent to which a business firm employs borrowed money or debts. Financial management helps you decide what you can afford in terms of store or office location, inventory purchases, employees, and equipment. Chapter iii concepts and theories of capital structure and profitability. Capital structure capital structure in a perfect market.
Capital structure influences the value of the firm. Flexibility of financial planin an enterprise, the capital structure should be such that there is both contractions as well as relaxation in plans. Capital structure planning definition capital structure of a company refers to the makeup of its capitalization and it includes all longterm capital resources, viz. Financial structure refers to the specific mixture of longterm debt and equity that a company uses to finance its operations. Capital structure is the proportion of all types of capital viz. The combination of debt and equity used to finance a companys projects is referred to as capital structure. Financial management meaning, objectives and functions. The capital structure of a firm is some mix of debt. Since capital structure is the amount of debt or equity or both employed by a firm to fund its operations and finance its assets, capital structure is typically expressed as a debttoequity ratio. Capital structure is defined as the mix of debt and equity securities used to finance real investment. The impact of capital structure on financial performance.
The former consists of capital, reserves and term loans raised from public and financial institutions, while the latter is made up of current. 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. With equity, you do get whatever cash flows are left over after you have made debt payments. Capital structure describes the amount of debt a company uses as opposed to equity, and it is often measured with the ratio of debt to equity. Thus, financial managers worry primarily about whether their firms are using too little or too much debt, not about the precise optimal amount of debt. The impact of capital structure on financial performance of. The term total capital structure denotes mix of owners. Capital structure indicates to the firms financial framework which consists of the debt and equity. However, a company heavily funded by debt has an aggressive capital structure and poses a greater risk to investors. According to khan and jain, finance is the art and science of managing money. Financial policies of the board of directors shall conform to applicable state statutes, local ordinances, and other legal obligations of the system. Notes on capital structure pdf capital structure cost of capital. 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. Capital structure and its 4 important theories ni, noi.
Financial and other objectives in notforprofit organisations b financial management environment 1. Jul 23, 20 capital expenditures organizational structure. In order to grasp the capital structure and the cost of capital controversy property, the following assumptions are made. Capital structure is a part of the financial structure and refers to the proportion of the various longterm sources of financing. Capital structure concepts introduction financial management. Financial management notes mba pdf download mba 2nd sem. Financial objectives and relationship with corporate strategy 3. The key issue here is the relationship between cs and firms value. 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. Meaning, classification sources available for dividends dividend policy general, determinants of dividend policy. Difference between capital structure and financial structure. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Sep 28, 2017 capital structure detailed notes financial management unit 3 1. The capital structure theory and its practical implications.
Jun 25, 2019 the term capital structure refers to the percentage of capital money at work in a business by type. For a given decrease in operating earnings, a firm that uses debt to a greater extent in its capital structure that is, a firm that uses more financial leverage, has a greater risk of not being able to satisfy the debt obligations and increases the risk of earnings to owners. Find materials for this course in the pages linked along the left. Financial management free download as powerpoint presentation. Capital structure is also referred to as the degree of debts in the financing or capital of a business firm. In this article we will discuss about the capital structure and value of firm. Capital structure detailed notes financial management unit 3 1. Financial management 4 preface solving particular tasks of economic and financial policy of a company is an important part of management.
The relative proportion of various sources of funds used in a business is termed as financial structure. Finance is a wellrounded guide to this dynamic field. 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. 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, and perhaps shares of preferred. Capital structure is the mix of ownersupplied capital equity, reserves, surplus and borrowed capital bonds, loans that a firm uses to finance business operations. The more debt a company has, the more it has to pay creditors for the use of those funds. Function organization structure of finance financial management goals of financial management financial decisions role of a financial manager financial planning step s in financial planning principles of a sound financial planning.
Determining an appropriate mix of equity and debt is one of the most strategic decisions public interest entities are confronted. A firm mobilizes funds which, depending upon their maturity period, can be classified as longterm and shortterm sources. It is synonymously used as financial leverage or financing mix. After this informative introduction, youll quickly become familiar with the three primary areas of financecapital markets part ii, financial management part iii, and investmentasset management part iv.
Capital structure decision is a significant decision in financial management. Financial management is one of your main avenues to success as a business owner. It means applying general management principles to financial resources of the enterprise. This risk, however, may be the primary source of the firms growth. The study of capital structure attempts to explain how listed firms utilise the mix of various forms of securities in order to finance investment.
Capital structure covers only the long term sources of funds, whereas financial structure implies the way assets of the company are financed, i. Lecture notes financial management sloan school of. The value of an enterprise depends on expected earnings and cost of capital. I will also share the lecture notes on this subject. Capital structure planning capital structure dividend. Thus, capital structure is part of the financial structure, representing the permanent sources of the firms financing. Capital structure factors influencing capital structure optimal capital structure dividend and dividend policy. Capital structure denotes means a firm funds its operations using some blend of equity plus debt. 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. Our goal as financial managers is to estimate the optimum proportions for our company to issue new capital not just in the next period, but well beyond. This study material aims at clarifying basic issues of financial management of a company and deals with factual application of the best known methods. Capital structure theory focuses on how firms finance assets. In the capital structure of a company, broadly, there are mainly two types of capital i. Flexibility of financial plan in an enterprise, the capital structure should be such that there is both contractions as well as relaxation in plans.
Capitalization can be distinguished from capital structure. Corporate finance lecture note packet 2 capital structure. Financial management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. Department of finance, the bucharest university of economic studies. The objectives were to examine the relationship that exists between capital structure and financial performance and to investigate the effect of capital structure on the financial performance of. Financial management ebook,lecture notes,pdf download for. Capital structure management a companys capital structure refers to the combination of its various sources of funding. A lucid and detailed introductory study notes on the topic capital structure. The changes in capital structure and in financial components of a company have a particular importance in choosing optimal financing decision, in determining the impact of changes in capital. 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. It is very important for the financial manager to determine the proper mix of debt and equity for his firm. Capital structure is a broad term and it deals with qualitative aspect of finance. In short, capital structure is the mixture of longterm sources of funds.
Define the types of securities usually used by firms to raise capital. Meaning and definition of capital structure and value of firm. In this context, capital structure and financial structure are often used. Capital structure theories in financial management. Capital structure detailed notes financial management unit 3. If we assume that the company maintains the same capital structure the mix of debt, preferred stock, and common stock throughout time, our task is simple. Each type of capital has its benefits and drawbacks, and a substantial part of wise corporate stewardship and management is attempting to find the perfect. The term capital structure refers to the percentage of capital money at work in a business by type. The capital structure decision can affect the value of the firm either by changing the expected earnings or the cost of capital or both. The study covers a period of five years from 2011 to 2015 and 21 banks are selected for the study. Capital structure management capital structure strategy. The patterns of corporate capital structures around the world are also discussed.
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