Deprecated: mysql_connect(): The mysql extension is deprecated and will be removed in the future: use mysqli or PDO instead in /home/a26f9f83/public_html/articles/includes/config.php on line 159
The Target Capital Structure > NetSparsh - Viral Content you Love & Share

The Target Capital Structure

Firms can choose whatever mix of debt and equity they desire to finance their assets, subject to the willingness of investors to provide such funds. And, as we shall see, there exist many different mixes of debt and equity, or capital structures - in some firms, such as Chrysler Corporation, debt accounts for more than 70 percent of the financing, while other firms, such as Microsoft, have little or no debt.

In the next few sections, we discuss factors that affect a firm's capital structure, and we conclude a firm should attempt to determine what its optimal, or best, mix of financing should be. But, you will find that determining the exact optimal capital structure is not a science, so after analyzing a number of factors, a firm establishes a target capital structure it believes is optimal, which is then used as a guide for raising funds in the future. This target might change over time as conditions vary, but at any given moment the firm's management has a specific capital structure in mind, and individual financing decisions should be consistent with this target. If the actual proportion of debt is below the target level, new funds will probably be raised by issuing debt, whereas if the proportion of debt is above the target, stock will probably be sold to bring the firm back in line with the target debt/assets ratio.

Capital structure policy involves a trade-off between risk and return. Using more debt raises the riskiness of the firm's earnings stream, but a higher propor- tion of debt generally leads to a higher expected rate of return; and, we know that the higher risk associated with greater debt tends to lower the stock's price. At the same time, however, the higher expected rate of return makes the stock more attractive to investors, which, in turn, ultimately increases the stock's price. Therefore, the optimal capital structure is the one that strikes a balance between risk and return to achieve our ultimate goal of maximizing the price of the stock.

Four primary factors influence capital structure decisions:

1. The first is the firm's business risk, or the riskiness that would be inherent in the firm's operations if it used no debt. The greater the firm's business risk, the lower the amount of debt that is optimal.

2. The second key factor is the firm's tax position. A major reason for using debt is that interest is tax deductible, which lowers the effective cost of debt. However, if much of a firm's income is already sheltered from taxes by accelerated depreciation or tax loss carryforwards, its tax rate will be low, and debt will not be as advantageous as it would be to a firm with a higher effective tax rate.

3. The third important consideration is financial flexibility, or the ability to raise capital on reasonable terms under adverse conditions. Corporate treasurers know that a steady supply of capital is necessary for stable operations, which, in turn, are vital for long-run success. They also know that when money is tight in the economy, or when a firm is experiencing operating difficulties, a strong balance sheet is needed to obtain funds from suppliers of capital. Thus, it might be advantageous to issue equity to strengthen the firm's capital base and financial stability.

4. The fourth debt-determining factor has to do with managerial attitude (conservatism or aggressiveness) with regard to borrowing. Some managers are more aggressive than others, hence some firms are more inclined to use debt in an effort to boost profits. This factor does not affect the optimal, or value- maximizing, capital structure, but it does influence the target capital structure a firm actually establishes.

These four points largely determine the target capital structure, but, as we shall see, operating conditions can cause the actual capital structure to vary from the target at any given time. For example, as discussed in the Managerial Perspective at the beginning of the chapter, the debt/assets ratio of Unisys clearly has been . much higher than its target, and the company has taken some significant correc- tive actions in recent years to improve its financial position.

Analia Jones is a Business Developer Manager of http://www.my-mortgege-loans.co.uk
http://www.my-mortgage-loans.com
http://www.2-structured-settlement.com

In The News:

This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news

Legal Talk Network

Non-Qualified Structured Settlements & Taxes Part Two
Legal Talk Network
In part two of Ringler Radio's podcast on non-qualified structured settlements, host Larry Cohen and co-host Cindy Chanley talk with returning guest, tax attorney Robert Wood from Wood LLP, about the tax implications of structuring a settlement in a ...


Legal Examiner

What is a Structured Settlement?
Legal Examiner
A structured settlement is a planning solution used by some people who receive a settlement from a personal injury or wrongful death lawsuit or a workers compensation claim. Those who decide to structure will receive compensation from their settlement ...


Law360

Tax Benefits Of Structured Settlements In Employment Cases
Law360
Structured settlements can drastically reduce the plaintiff's tax liability in employment cases. This is because the settlement proceeds are not paid directly to the plaintiff. The money is paid to fund an annuity which then provides a future income ...
Not Your Grandfather's Structured Settlement (Or Is It?)Legal Examiner

all 4 news articles »

Asset Securitization Report

JG Wentworth's next ABS features less exposure to annuities
Asset Securitization Report
The initial collateral for J.G. Wentworth XLII LLC, Series 2018-2 is 97.4% structured settlements, up from 96.6% for the prior deal and the highest concentration of any deal over the past five years. Annuities account for 2.4% of the collateral, down ...


Legal Talk Network

ABA Young Lawyers Help Hurricane Florence Victims
Legal Talk Network
... discussing details with attorney Dan Wade, coordinator of the Disaster Legal Services Program, and Alia S. Graham, program specialist for the ABA's Young Lawyers Division. Visit Ringler to contact a consultant in your area about structured settlements.


Legal Examiner

Qualified Settlement Fund
Legal Examiner
As a qualified settlement fund administrator, we offer professional litigation distribution services, settlement planning, structured settlements, lien negotiation and a host of other valuable services lawyers often do not specialize in. Many attorneys ...


When to Settle
Lawyers.com Blog (blog)
However, in certain circumstances, such as when a worker requires long-term care, the insurance company may agree to a structured settlement that allows the worker to receive regular payments over time. Those receiving workers' compensation benefits in ...


Law.com

#MeToo Takes Aim at Secret Settlements
Law.com
The process should offer clear definitions of outcomes, credible planning, properly structured execution and rigorous monitoring. The process should identify conflicting needs and goals at the time when they should be discovered, the beginning, and it ...


Crypto Payment Processor BitPay Now Supports Settlement In Stablecoins
BlockTribune
“And since each GUSD and USDC stable coin is tied to one US dollar, there is no volatility risk for the business receiving the settlement.” GUSD, which was launched last month by Gemini founders Cameron and Tyler Winklevoss, is structured as an ERC-20 ...

and more »

The San Diego Union-Tribune

County agrees to pay $3 million to settle lawsuits filed by former foster children
The San Diego Union-Tribune
The settlement is structured so that the money will be managed in trust for the plaintiffs, who are now 19 years old. They will not have access to it until they are older. The agreement resolves a lawsuit the brothers filed against the county and 14 ...

Google News

A Structured Lawsuit Settlement Seemed Like a Good Idea at One Time

You are receiving payments spread out over months, years, even... Read More

Offshore Asset Protection Trusts for US Citizens

When it comes to discussing offshore anything and US citizens... Read More

Structured Settlement ? Guaranteed Income for those with Disabilities

Up until twenty years ago, anyone who won a lawsuit... Read More

Structured Settlements Are Like Ants

Ants are powerful creatures. The powerful ant legs are able... Read More

Consider a Structured Settlement?

Structured settlements have been around for a long time however... Read More

What is a Trust and what are the Benefits?

Trusts are becoming a popular way to structure business and... Read More

What is a Structured Settlement

A Structured Settlement is an agreement between a personal injury... Read More

Annuity Transfer - What Are the Risks

Many people who know in the back of their minds... Read More

Lucky

Have you ever looked around and wondered how everyone is... Read More

If This Describes You, Dont Cash out Your Annuity

There are companies that purchase future payments. Personal injury settlements... Read More

Structured Settlements Offer Advantages over Lump-Sum Payments

A structured settlement, which offers injury victims cash payments through... Read More

How To Form a UK Limited Company

When starting a business, a large number of people go... Read More

Structured Settlement as an Investment Vehicle

You always hear people talking about the latest investment vehicle... Read More

The Cash Now Question

If you have ever been in a bind for cash... Read More

When Should You Not Cash Out Your Annuity?

You should not cash out your annuity when it's not... Read More

What is Structured Settlement?

Because it is tailor-made for individual cases, the structure may... Read More

Keeping the Lawsuit End in Mind

2 key points to stay focused on, as you are... Read More

Options for Lawsuit Settlement Winners Receiving Periodic Payments

On January 22,2002, President George W. Bush signed into law... Read More

A Revolutionary Fundraising Opportunity -- Life Settlements

Amid fundraisers' growing concerns about the current charitable giving climate,... Read More

Making Backwards Choices

I was reading this past week about a woman who... Read More

Cash For Structured Settlements - The Smart Way

For most people when they buy a house it is... Read More

Class Action Lawsuits

First of all, let me say that anyone who has... Read More

Surviving High Debt States

Are you more likely to have more debt according to... Read More

The Cost of Not Having Money

The self-esteem factor of not having enough money is underestimated.... Read More

Should You Sell Your Structured Settlement?

The courts have just awarded you a settlement in the... Read More