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Financial instruments and markets - Essay Example

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Capital structure refers to numerous sources of funds employed by a company in order to finance its operations. This mix may involve long-term debt, common equity, short-term debt and preferred equity. Academic observers and market participants have not adequately addressed the question as to how companies determine the fractions of their activities that should be financed by issuing stock and through borrowing. …
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Financial instruments and markets
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Download file to see previous pages This paper computed the above ratios with a view to assessing the capital of Fortescue Metals Group (FMG). According to1, these ratios are used to measure the entitys capital structure, and they show the extent to which the business has borrowed to finance its assets and other resource acquisitions for it to efficiently carry out its normal operations. From Table 1 above, the debt to total equity ratio of Fortescue Metals Group improved in 2014 as $1 of equity had $1.99 of debt from $2.90 in 2013. This was largely attributable to the fall in the amount of the total debt from $15,578M in 2013 to $15,111M in 2014, as well as an increase in the equity from $5,289M in 2013 to $7,583M in 2014. This implies that the capital structure of Fortescue Metals Group improved as it increased the proportion of the equity fund in financing its assets and operations and reduced the debt amount. This improvement was also evidenced in its debt ratio, which indicated that for every $1 of asset financing, the debt amount was $0.67 in 2013 from $0.75 in 2013. Further results showed that Fortescue Metals Group’s debt servicing capacity improved in 2014, compared to 2013. The firms times interest cover increased to 6.25 times from 5.15 times, indicating that the company had no difficulties in generating enough cash flows to pay its interest expenses and even increased in 2014. This paper went further ahead to establish the liquidity position of Fortescue Metals Group using liquidity ratios, which measure an entitys ability to meet its short-term maturing obligations as and when they fall due. ...Download file to see next pagesRead More
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