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Capital Structure - Assignment Example

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This discussion talks that every business starts up its operations with a particular level of funding behind it. In order to perform various operations of business right from the formation stage until the bankruptcy, the company needs finance in order to back its assets…
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Capital Structure
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Download file to see previous pages In company structure, owners are referred to as the shareholders or stockholders and they are entitled to the amount of dividend recommended by the board of directors of that particular company which is the appropriation of the amount of net profit after interest and tax expenditure.
Debt is another form of financing to the business in which debt holders provide the finance in terms of the loan (Brigham and Ehrhardt, 2008). They want their principal to be repaid to them on the expiry of the term of a loan. They are entitled to the specific amount of interest which the business must pay to them. Interest payments are normally computed as applying a certain interest rate to the amount of loan that they provide. These debt holders are not entitled to any amount of profit (Brigham and Ehrhardt, 2008). In case of bankruptcy, these debt holders are preferred over the owners in terms of receipts obtained after disposal of the assets. In company terms, the amount of loan is termed as debt, and loan providers are called as debt holders.
Capital Structure is the term which is used to refer to the capital mix of financing of the company. In simpler words, capital structure depicts the proportion of equity and debt involved in the financing of the company (Baker and Martin, 2011). It describes whether the company is financed by either equity or debt or a combination of both. However, the example of any company fully financed by debt is subject to extreme rarity. In financial terms, the debt to equity ratio represents the capital structure of the company (Baker and Martin, 2011).
Financial Risk along with Business Risk constitutes the overall risk of the company (Roshan, 2009). Typically, a company is exposed to more financial risk when it starts taking more and more amount of debt in its capital structure.  ...Download file to see next pagesRead More
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