A company with low gearing is one that is mainly being funded or financed by share capital (equity) and reserves, whilst the one with a high gearing is mainly funded by loan capital. Now the question to address is which of the two (equity and debt) is cheaper to the company? The answer is that cost of debt is cheaper than cost of equity. This is because debt is less risky than equity and the tax advantage of debt over equity as discussed below: Risk: debt is less risky than equity because: the required return needed to compensate the debt investors is less than the required return needed to compensate the equity investors; •the payment of interest is often a fixed amount and compulsory in nature and it….
Category Archives: Capital Structure
Firstly, as we can see from table1, the gross profit margin of Tesco Group increased during the last five years, from 5. 65% to 6. 08%. Since a subtle change (increase or decrease) in profit margin will induce a significant change in the overall profits, a 0. 43% increase from 2002 to 2006 has indeed induced a dramatic increase in the total profits. Secondly, except for 2002, the gearing ratio decreased from 0. 70 to 0. 58, which indicates Tesco’s attempt to reduce the leverage ratio in these years. This trend was coupled with the increase of earnings per share (EPS), from 12. 05p in 2002 to 20. 20p in 2006. Unquestionably, this can increase the confidence of existing investors and equally importantly, it can attract more potential….
The following scenario relates to Q46-50. A meeting was conducted by the board of directors of Brocade Co to discuss the balance of equity & debt financing. The following statements were made by the directors:
Director A: We should keep our weighted average cost of capital at the lowest by keeping the optimum balance of gearing. Director B: The Company is placed in a perfect market & no need to consider the balance of equity & debt. Director C: We should finance the whole operations using only debt sources of finance to gain tax reliefs. Director D: We should choose debt or equity sources of financing only if retained profits are insufficient or unavailable.
Q46. Which director seems to support Pecking order theory? (MCQ)
Director A Director B….
The aim of this report is to analyses the capital structures of foreign affiliates and internal capital markets of multinational corporations based on three main determinants, which are taxes and capital structure, institutions, markets and external borrowing conditions, and internal capital markets. As for the purpose of this report, the capital structure of Dell Computer Corporation will be analysed. “Multinational affiliates are financed with less external debt in countries with underdeveloped capital markets or weak creditors’ rights, reflecting significantly higher local borrowing costs” (Yonezawa, Y. , Yamaguchi, H., Yamamoto, T. , Nambu, T. , 2006). “Instrumental variable analysis indicates that greater borrowing from parent companies substitutes for three-quarters of reduced external borrowing induced by capital market conditions” (Desai, M. A. , Foley, C. F. , Hines Jr. J…..
STRATEGIC ANALYSIS OF TELUS IN THE CANADIAN CONFERENCING MARKET Robbin S. Stephens
Bachelor of Commerce, University of British Columbia, 1980 PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIRMENTS FOR THE DEGREE OF Master of Business Administration In the Faculty Of Business Administration ORobbin S. Stephens 2002 Simon Fraser University August 2002 All rights reserved. This work may not be Reproduced in whole or in part, by photocopy Or other means, without permission of the author APPROVAL Name: Ms. Robbin S. Stephens Degree: Master of Business Administration Title of Project: Strategic Analysis of TELUS in the Canadian Conferencing Market
Supervisory Committee: Dr. E. Bukszar Associate Professor Senior Supervisor Faculty of Business Administration Dr. Carolyne Smart Associate Professor Second Reader Faculty of Business Administration Date Approved: Executive MBA Program Partial….
Some other risk factors include substantial cyclical fluctuation, the effects of unseasonable weather conditions, and the popularity of the outdoor activities. In order to minimize the negative impacts on this business, the company started a series Of strategic initiatives, such as product innovation program, new multi-channel and multi-country direct-to-consumer platform, information management and their enhanced marketing efforts. All those improvement and implementation involve significant investment in SO&A expenses and its fixed cost. Thus it is essential to look back and evaluate their current capital structure and payout policies to exam whether the company would start on carrying debt or whether they have residual cash return to their investors. Despite Columbians regular dividend payouts and stock repurchases, they does not maintain a healthy cash and short-term investment balance. According….
The profit & loss statement of Biro Co is given below:
Cost of Sales (3,000) Gross profit 12,000 Expenses (2,500) Profit before interest & tax 9,500 Interest (2,200) Tax (1,300) Net Profit 6,000If 15% Expenses & 50% Cost of sales are variable costs.
What is the operational gearing of Biro Co. nearest two decimal places using (Contribution ÷ PBIT)? (FIB)95256604000(2 marks). Hutt Co. has a debt of $200m with equity of $400m. The new investors are confused about the gearing level of Hutt Co. If the investors use debt to debt plus equity method which stage of gearing level is Hutt Co at? (MCQ)UngearedNormal GearedHighly GearedLow Geared(2 marks). What will be the effect on the financial risk of a company if the interest covers are as….
1. Introduction (brief introduction) The trade-off theory suggests an optimal mix of debt and equity for a firm to make the cost of capital structure minimum. There are a lot of empirical studies to figure out the determinants of capital structure, these determinants which imply that certain factors influence the capital structure that lead to the minimum cost of capital. So the managers should spent their time and effort to these determinants which can affect the capital structure. However, there are no research studies to show whether the expected minimum cost of capital can achieve the maximum financial performance and make the welfare of shareholders maximum. Therefore, there is no empirical research to study the direct relationship between the determinants of capital structure and the financial performance and….
Questions These questions are the focus of what I am covering on the final exam. Understand the answers to these questions and should not be surprised by anything on the exam. Chapter 14: Capital Structure in a Perfect Market 14-5. Suppose Alpha Industries and Omega Technologies have identical assets that generate identical cash flows. Alpha Industries is an all-equity firm, with 10 million shares outstanding that trade for a price of$22 per share. Omega Technologies has 20 million shares outstanding as well as debt of $60 million. 14-5-a.
According to MM Proposition I, what is the stock price for Omega Technologies? V(alpha) = 10 x 22 = 220m = V(omega) = D + E E = 220 – 60 = 160m p = $8 per share. 14-5-b. Suppose….
Making the right choice for an appropriate capital structure and an effective dividend policy is any firm’s major concern. This is because the decision not only affects the maximization of returns to the various constituents of an organization, but also contributes a lot to the organization’s competitive advantage. For this to be accomplished, firms, through the management put into perspective a number of practical aspects. An appropriate capital structure and dividend policy choice enables firms to maximize on their resources while enhancing the firm value. Practical Considerations Influencing the Choice for a Firm’s Dividend Policy Shareholder Preferences Shareholder preferences play an immense role in influencing the decision for the dividend policy to adopt. As the firm owners, shareholders have expectations which they expect the management and the firm….