What is target capital structure?
What is target capital structure?
The target capital structure of a company refers to the capital which the company is striving to obtain. In other words, target capital structure describes the mix of debt, preferred stock and common equity which is expected to optimize the stock price of a company.
Why is target capital structure important?
The target capital structure of a company specifies how much the corporation will borrow, what kinds of debt it will carry and how much money the shareholders must contribute. Capital structure decisions are among the most important strategic selections a company can make.
What factors affect the target capital structure?
The key factors influencing capital structure decisions to be investigated include industry leverage, profitability, firm size, growth opportunities, asset tangibility, expected inflation, and stock market return.
How do you calculate target capital structure?
It is calculated by dividing the market value of the company’s debt by sum of the market values of equity and debt. Ideally, WACC should be estimated using target capital structure, which is the capital structure the company’s management intends to maintain in the long-run.
What are the features of capital structure?
ADVERTISEMENTS: Some of the major features of sound capital structure are as follows: (i) Maximum Return (ii) Less Risky (iii) Safety (iv) Flexibility (v) Economy (vi) Capacity (vii) Control.
What are the factors determining the capital structure?
Factors determining capital structure are given below − Choice of investors. Capital market condition. Period of financing. Cost of financing.
What is capital structure write any five factors which influence the decision of capital structure?
Some of the major factors influencing capital structure are as follows: 1. Financial Leverage or Trading on Equity 2. Expected Cash Flows 3. Stability of Sales 4.
What is a capital structure presentation?
Capital Structure Ppt Template Capital Structure denotes to the amount of debt and/or equity employed by an organization or business to invest its operations and backing its assets. It shows, asset, debt and equity ratio.
Why do we calculate WACC?
The purpose of WACC is to determine the cost of each part of the company’s capital structure. A firm’s capital structure based on the proportion of equity, debt, and preferred stock it has. Each component has a cost to the company.
How is WACC computed?
WACC is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight by market value, and then adding the products together to determine the total.
What is the ideal capital structure?
Capital structures of firms and industries vary widely. The ideal capital structure is one that provides sufficient capital for efficient and profitable operations, a maximum rate of return to the stockholders at a minimum of financial risk, and a minimum dilution of control.
What are the objectives of capital structure?
(1) Simplicity: The capital structure should be simple so that even less educated businessmen are able to understand it. (2) Flexibility: The capital structure should be flexible so that whenever the circumstances so warrant, it is capable of being altered. (3) Profitability: An optimum capital structure is one that is most profitable to the company.
What factors affect capital structure?
This factor may affect the capital structure decisions; there are two types of assets which are: general purpose assets and special purpose assets. The real state companies usually use general purpose assets as it makes good collateral.
What are the types of capital structure?
Types of Capital Structure Equity Capital. Equity capital is the money owned by the shareholders or owners. Debt Capital. Debt capital is referred to as the borrowed money that is utilised in business. Optimal Capital Structure. Financial Leverage. Importance of Capital Structure.
