StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...

Changes in Firm's Capital Structure add Shareholder Value - Research Paper Example

Comments (0) Cite this document
Summary
The writer of this research will investigate whether the changes in a firm’s capital structure can add shareholder value or do they merely change the level of risk. The paper, therefore, provides an analysis of the market structure with regard to consumer demand…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER91.6% of users find it useful
Changes in Firms Capital Structure add Shareholder Value
Read Text Preview

Extract of sample "Changes in Firm's Capital Structure add Shareholder Value"

Download file to see previous pages The higher the level of debt the higher the level of risk. But nevertheless the higher the level of risk the higher the possible returns on a given level of investment.
Shareholder value comes from the demand for and supply of company shares. If the management of the company were to decide in favor of more equity issues, then depending on the demand for the company shares the company value would rise or fall. With that, the shareholder value also would rise or fall. A risk is inevitably associated with the value of the firm viz. managers or agents always prefer a higher level of debt because it increases the value of the firm or its assets. Indeed the risk also increases though from the viewpoint of the manager it’s irrelevant because equity issues would glut the market with company shares and bring down the value of the company. As a result, the existing shareholders cannot be happier. They would get a windfall if they sold their shares now. Similarly when more debt is issued the company becomes entitled to more tax benefits. That, in turn, increases the value of the firm and thereby the shareholder value.
The capital market structure of the firm can be examined with reference to a number of theories. The Modigliani-Miller Theorem is the earliest of such theories to consider the relevance of capital structure to determine the value of a firm. In recent times these theoretical constructs have been developed in line with an ever increasing tendency to consider the leverage issue of the company. Leveraging by managers to achieve exclusive personal goals is nothing new. In fact, it’s the conflict of interests between the principals or owners (or shareholders) and the agents (or managers) that have thrust the issue of leverage to the fore. In other words, the complex issues revolving around the capital structure of the firm are basically influenced by this conflict in which managers tend to have more information about the probable outcomes of future investments. ...Download file to see next pages Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Changes in Firm's Capital Structure add Shareholder Value Research Paper”, n.d.)
Changes in Firm's Capital Structure add Shareholder Value Research Paper. Retrieved from https://studentshare.org/marketing/1725343-msc-fin-can-changes-in-firms-capital-structure-add-shareholder-value-or-do-they-merely-change-the-level-of-risk-critically-discuss-using-examples-from-both-theory-and-practice
(Changes in Firm'S Capital Structure Add Shareholder Value Research Paper)
Changes in Firm'S Capital Structure Add Shareholder Value Research Paper. https://studentshare.org/marketing/1725343-msc-fin-can-changes-in-firms-capital-structure-add-shareholder-value-or-do-they-merely-change-the-level-of-risk-critically-discuss-using-examples-from-both-theory-and-practice.
“Changes in Firm'S Capital Structure Add Shareholder Value Research Paper”, n.d. https://studentshare.org/marketing/1725343-msc-fin-can-changes-in-firms-capital-structure-add-shareholder-value-or-do-they-merely-change-the-level-of-risk-critically-discuss-using-examples-from-both-theory-and-practice.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF Changes in Firm's Capital Structure add Shareholder Value

Capital structure and firm value

Finally, the relationship between various aspects like credit ratings, target leverage, short term financing etc and their influence on the firm’s financing policy have also been discussed. Introduction The financial managers of a company work towards achieving an optimal capital mix. In large companies there is a separate financial department that takes care of financing issues. The managers strive hard to achieve a right mix of debt and equity as the capital base of the firm determines the cost of capital. The point at which the average cost of capital is minimum, the value of the firm is maximum. This point is referred as ‘optimal’. Methodology The choice of capital structure and firm value is an important topic in financial l...
23 Pages (5750 words) Literature review

Creating Shareholder Value

... started gaining prominence in the 1980s and by the start of 21st century had become a key element in corporate governance in the US, UK, and most of leading European nations like Germany, France and Sweden; so much so that the OECD, in their document released in 1999, emphasised that firms be run first and foremost in the interest of shareholders. They further reinforced this thought in their 2004 release of OECD principles of corporate governance (OECD 2004). As the fad of focus on shareholder value began spreading, the understanding of the concept seemed to have started to erode somewhat as many executives began to focus on quarterly earnings as a key driver of their stock prices. The concept of shareholder value does not, however, imply...
7 Pages (1750 words) Term Paper

Measuring Shareholder Value

Capital gain is the gain that if gotten above an assets original buying price upon disposal. Any realized capital gain forms an investment that has been disposed of as at a profit. An unrealized capital gain may, on the other hand, refer to an investment which is yet to be disposed of but would lead to a profit if it was disposed of. Assets that can realize capital gains may include options, bonds, shares/stock, or businesses. A buyback kind of program involves a situation where a company repurchases its bond or stock that it had issued previously. In that case, the amount of stock that is outstanding reduces and this gives the shareholders that are remaining a bigger ownership stake of that company in the process. (investorwords....
5 Pages (1250 words) Term Paper

Enlightened Shareholder Value

The concept of shareholder value holds that company directors must tailor their policies to be in line with the interests of the shareholders of the company1. Directors are therefore expected to steer the operations of the company with the maximization of the shareholder’s interests as the main priority. The United Kingdom established the Company Law Review Steering Group (CLRSG) in late 1990s and mandated it to come up with a detailed review of English company law. At the end of its exercise, the CLRSG noted that the country’s legal system, like other Western jurisdictions, prefers shareholder value. The CLRSG indicated that the current legal system reflects the reality that business organizations are run in such a way that the...
9 Pages (2250 words) Essay

Managing Shareholder Value

...Managing Shareholder Value 0 Introduction There are so many multiples being dealt with the broad spectrum of financial management. However when thequestion of finding out whether any real shareholder value has been created arises , the total system fumbles and it may not really be possible for one to find out the real status with regard to the creation of shareholder value. The standard models dealing with the internal financial management of any firm mostly uses the cash flow analysis for review and decisions on capital expenditures. Similarly the system uses the base of earnings and other multiples like EBITDA or rate of return for evaluating and reporting on the financial performance of the firms to maintain the relationship...
8 Pages (2000 words) Essay

Shareholder Value

Some strategic decisions (entering new markets, increasing sales capacity, etc.) need shareholder approval as these may require capital investments that affect profits, while most tactical marketing decisions (like advertisements, promotional campaigns, etc.) do not.
Since shareholders are after increasing the value of their investment (Shareholder Value or SHV), they want higher profits. Since profits result from how much the business sells and spends to generate those sales, it seems logical that SHV is a good framework for evaluating marketing decisions. This paper in effect analyzes the reasoning that making good and correct marketing decisions would increase profits and SHV.
Drucker (1955, p. 36) was among the firs...
8 Pages (2000 words) Essay

Capital Structure and Firm Value

The perfect capital markets are not characterised by any market frictions like trading costs, taxes and the information is easily transmitted between the investors and the managers. M&M made a clear distinction between the financial risk and business risk faced by a firm. While the financial risk refers to the choice of risk distribution between the bondholders and shareholders, the business risk refers to the uncertainty of cash flows of the business. It has been pointed out by Miller and Modigliani that changes in leverage does not cast any significant influence on the cash flows generated by the business. Therefore changes in leverage cannot alter the value of the firm. According to them leverage simply defines the distribu...
13 Pages (3250 words) Assignment

International Business: Shareholder Value

... that the company decides to make to every single shareholder. Shareholder value is created when firms are expected to create a higher rate of return than it would be expected in a normal situation (Stout, 2012, p. 11). From a business perspective, the principles involved in the management of shareholder value are not complex. To begin with, it is critical to ensure that the firm provides lasting economic returns that are above all forms of new capital that the firms effects. In addition, the companies can endeavor to increase earned returns by the capital that has been in place for a long period. To realize these objectives, a firm must put in place three basic factors. First, the firm should seek to grow a healthy business by ensuring...
4 Pages (1000 words) Essay

Failure of Shareholder Value

... oppose virtually anything that seeks to cut down on their profits and shareholder price to the extent that some take their firms through costly compensation claims and government fines for unethical corporate practices (Roth, 2013). As a result, the corporate obsession with prioritizing shareholders interest and the expectation of the society to follow suit has boomeranged on the shareholder’s value in the sense that their gains have been shrinking due to the unsustainable demands on return targets for capital (Ho, 2010). And, although, innovation and productivity of employees are based on maximization of shareholder value, FTSE 100 and S&P500 companies have become blinder to the extent that they encourage their employees to toil more...
8 Pages (2000 words) Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Research Paper on topic Changes in Firm's Capital Structure add Shareholder Value for FREE!

Contact Us