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Asda-the company's capital structure starting from 2008 - Essay Example

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Capital structure refers to the way in which a company is financed by a mix of long term capital such as ordinary share capital, reserves, debentures, etc and…
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Asda-the companys capital structure starting from 2008
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Asda-the company's capital structure starting from 2008

Download file to see previous pages... The cost of debt to a company is therefore relatively less than equity financing. Besides this, debt is considered cheaper by the providers of finance and it attracts tax relief on interest payments. The greater the level of debt, the more will be the financial risk to the shareholder of the company. Hence the return required would be higher. This also helps in establishing the gearing mix of a company. The higher a company is geared, the higher would be the risk involved. There are many factors that contribute towards the availability of different sources of funds {(Goyal et al (2005); Darren (2006)}.
Equity financing is raised by issuing equity shares or rights issue, preference shares issued are not considered as equity issue as they carry a fixed percentage that is to be paid to the preference shareholders and hence in substance preference shares have a debt nature attached to them so they are categorized under debt issue. Equity finance is considered a comparatively more risky approach of raising finance than debt financing, it is also considered more costly to raise equity finance than to raise debt finance (Burton et al, 2003).
Asda is a UK based supermarket chain which deals in clothing, grocery, children toys and other general products used during normal routine. It is a subsidiary of the American Wal-Mart. Asda initiated its business involving Dairy products and later went on to diversify its business. It has been always renowned for its great marketing strategies. It was taken over by Wal-Mart as a subsidiary in 1999. Asda is considered as the second largest retail chain business after TESCO in the United Kingdom. Later in 2009, Wal-Mart made a deal to sell Asda to Corinth Services Limited for an amount of £6.9 million. Since that deal Asda is a subsidiary of Corinth Services Limited (Telegraph.co.uk, 2010).
Gearing is one major issue which has a critical effect onto the capital structure of a ...Download file to see next pagesRead More
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