Aggregation of items appearing on the left hand side of the balance sheet minus current liabilities except short term bank loans

refers to the mix of debt, preferred stock and ordinary (common) equity that the firm uses to finance the firm assets.

The finance managers objective in making capital structure decisions is to find the financing mix that maximizes the value of the firm. This structure is called

If a firm not currently at its target it may deliberately raise new money in a manner that moves the actual structure towards the target.

Changes in market value of debt and/or equity capital could result in large changes in it's measured capital structure

suggests that a firm can lower its weighted average cost of capital and increase it's market value by the judicious use of financial leverage.

this theory suggests that there is a tradeoff between cheaper debt and higherpriced equity that leads to an optimal capital structure

one of major determinants of capital structure decisions

There are two elements; Business and Financial Risk

a firm should possess easing power to generate revenues not only to meet its cost of capital but also to finance it's future growth.

Capital Structure decision should always aim and having deby component in total component in order to increase the earning available for equity shareholders

Debt Capital is considered to have better flexibility than equity capital

The debt has tax advantage over equity because interest charges are deductible from income and thereby could reducea firm's tax liabilities

The time which the capital structure decision is taken will be influenced by the conditions of the economy

Refers to riskiness of the firms assets if no debt is used

refers to additional risk placed on the ordinary equity shareholders as a result of using debt

Both Traditional and MM theories share several common assumptions. 1. Financing occurs only to two types of capital: long term debt and common stock 2. The firms investment decision is fixed but capital structure can be change 3. There are no taxes or bankruptcy costs 4. All earnings are paid out as dividends 5. No operating income (EBiT) is constant 6. Business risk is constant

These Factors influencing capital structure; - Control - Risk - Income - Cost of Capital - Financial Leverage - Tax Consideration - Timing - Profitability - Marketability - Company Size - Sales Stability - Operating leverage - Growth rate - Management Attitude

Exercise it's own judgment about the proper capital structure

Factors that affect BUSINESS RISK; - Variability of demand for firm's product - Competition - Variability of sales price - Product obsolescence - Variability of production costs - Foreign risk exposure - Legal exposure and regulatory risk - Degree of oerating leverage

Involves a choice between risk and expected returns associated with the firms financing mix

one commonly used analytical technique used to evaluate various capital structures in order to select the one that maximizes a firm's earnings per share is the

is the level of EBIT where EPS of a firm is the same, regardless of which alternative capital structures are employed.

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