COPORATE FINANCE Essay Example | Topics and Well Written Essays - 3500 words

COPORATE FINANCE - seek ExampleThis uppercase need not be paid back to the investors as long as the company is in existence. Thus, equity spring is the least risky source of fund from the view site of borrower. At the same time, when the company makes huge profit, the profit left after meeting all obligations powerfulness be make dod among the equity shareholders, and this is the most appealing factor of equity bang-up. That does not mean that company has to open ceiling whenever it makes residual profit (profit left after making all other payments). The decision to distribute or not to distribute divisible profit is ultimately taken by the Board of Directors. The translate to ordinary shareholders (dividend/cost to the company) is paid after meeting all payments like dividend to preference share holders and amour payments to debenture holders and other long term suppliers of funds.Financial needs are continuous for any ontogeny firm. As the needs for expansion and divers ification enhances these days. This capital can come from debt or equity. When companies can finance themselves with either debt or equity, certain questions arise. Is one better than the other If so, should firms be financed with all debt or all equity If the beat out solution is several(prenominal) mix of debt and equity, what is the optimal mix It is generally understood that the optimal capital structure of a firm is the composition of debt and equity which results in the minimum cost of capital. But the determination of an optimal capital structure is not an exact science. Firms generate to first analyze a number of factors such as the firms business risk, its need for fiscal flexibility, shareholder wealth maximization, survival against competition, assurance of a steady source of funds, acquisition and maintenance of a good rating in the market, profitability, and growth rate before deciding upon an appropriate capital structure. All these factors are a pointer to one impo rtant fact, that, companies will have to search for the right capital structure which enhances firm judge trance minimizing costs. The capital required for investment, while often scarce, can be generated from a variety of sources. How firms choose among these various sources and why, have been the source of much debate in financial literature. Many theories have been developed to show the relationship between capital structure and firm value. There are different views on how capital structure influences firm value. both(prenominal) authors argue that there is no relationship between capital structure and the value of the firm, whereas others hold that financial leverage has a positive effect on firm value. There are also some who take the intermediate approach that financial leverage has a positive effect on the value of the firm that is only up to a certain point and thereafter there will be negative effect, another contention that, other things being equal, the greater the le verage, the greater the firm value. According to the sack up income approach when leverage varies, the cost of debt and the cost of equity remain unchanged. Therefore, the weighted average cost of capital declines as leverage increases and the value of the firm will increase.Under the net operating income approach, the overall capitalisation rate remains constant for all degrees of leverage and therefore, the value of the firm will remain unchanged.