• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Capital Structure Decision

Extracts from this document...


Capital Structure Decisions The article "Debt is good for you" examines the theories relating to equity and debt financing as the developments in the corporate bond markets. While the article "Debtor's prison: Companies made a fashionable mistake" talks about the relation between the credit ratings of non financial companies with so-called "efficient" balance sheet approach. "Debt is good for you" talks about the different approaches a firm can take when it comes to debt to equity ratio. While the most commonly taught and most commonly talked about theory is the Modigliane-Miller theory which suggested that a firm's overall value should increase as it substitutes debt for equity, the one's preferred by managers are the variations of the trade-off theory which says that the amount of debt a firm is willing to take on depends, among other things, on the business it is in Profitable companies with stable cash flows and safe, tangible assets can afford more debt; unprofitable, risky ones with intangible assets, rather less. ...read more.


As suggested by Corporate-finance theory the value of a company should not be affected by its decision to finance itself with equity or debt. But, in practice, interest payments are generally tax-deductible; dividends are not. These reasons cause a firm to hold less cash on hand and have higher debt to equity ratios. But in recessions this kind of theories backfire causing a rise in default rate which in turn makes it difficult to roll out new debt, in all this the investors downgrade the firm. Reading the articles a financial manger is better having a lower debt to equity ratio than a higher one. The manager depending on the firm's business should have enough cash on hand as well as keep the dividends distributed in check. Per me the manger should use the conservative "trade off" approach as that one takes seems to take the expected future cash flows into account more than the Modigliane-Miller theory. ...read more.


It argues that excessive faith in mathematical models of finance led to unsustainable growth in securitized derivatives. The article looks at the use and abuses of mathematical models. It also asks us the question if risk has gotten ahead of the world�s ability to manage it and whether it can be tamed again. It tries to imply that the banks do not understand the complexity of the securities they were trading in. The article suggests that the government regulators are not up to date to regulate the latest securities created using these complex mathematical models. This suggests that unless a financial manager understands the complexity of the security, which a majority of them don't, they should not use those securities in their capital structure, as the consequences of working with something a person don't understand is not in their hands. As a Financial manager of a company you are suppose to maximize the shareholders profit, hence using the complex securities which the manager cannot understand is taking too much of a risk with shareholders money. ?? ?? ?? ?? ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Markets & Managing the Economy section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Markets & Managing the Economy essays

  1. What are the origins of the Pension Crisis and what can be done to ...

    Matthew Wall of The Times revealed a difference of more than �100,000 between the charges of the cheapest and dearest personal pension firm: someone contributing �200 a month over 30 years would pay �26,677 with Legal & General's Stakeholder Pension, but �53,406 with Scottish Widow's Stakeholders Plan.

  2. The theory of Market Structure

    I would like to describe monopolistic competition, because I would like to talk about telephone service industry. We live in a society were the five elements of pure competition are not available to us, then we are clearly operating in a state other than pure competition.

  1. Herd Behavior in Financial Markets

    herd or disperse, but people are herding for different reasons and their behavior is classified into several models. Herding Models Payoff Externalities Models (also called Network Externalities) - If more people are using facebook, it will attract more people to use facebook.

  2. The General Strike 1926

    However, following the Geddes Axe, there was a slight fall in the cost of living which improved life for a very short while. Another Royal Commission then recommended there be another cut to miners' wages. The working class were often hardest hit by the smallest fluctuation in wages and economics.

  1. Assess whether everyone benefited from the 2003 Budget.

    A further advantage is that it is easier because the company may not have the staff or the resources to design their own questionnaire. A disadvantage of using desk research is that sometimes this type of communication can be expensive if the company hires another company to collect the data.

  2. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers?

    It has focused mainly on developing markets with weak incumbent retailers in Central Europe and the Far East, rather than on mature markets such as Western Europe and the United States. The medium term aim is to have half of group sales outside the United Kingdom.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work