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Essay / Research Paper Abstract
This 5 page paper answers question of capital structure of a firm, looking at the advantages and disadvantages of debt, why an investor may require a higher return for a company with a high level of debt and what is meant by an optimal capital structure. The paper ends by looking at three different types of for, to assess the type of capital structure that is most likely to suit their needs. The bibliography cites 6 sources.
Page Count:
5 pages (~225 words per page)
File: TS14_TECSquest1.rtf
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Unformatted sample text from the term paper:
debt. Debt may also be most costly to service than other forms of capital found in equity categories. High debt ratios may be interpreted by investors as increasing risk
to the investor and there are likely to be more charges over assets, which may limit the future ability to raise capital through debt, which may be a future constraint
(Chadwick, 2007). Where there are higher debt levels there may also be terms attached to loans requiring a firm to remain within debt equity ratios, this may not usually be
a problem, when there are difficult condition and equity is used to support operations this can cause problem complying with the loan terms. However, there are some advantages, there is
no negative impact on ratios such as earnings per share and the debt can be cost effective to raise compared to raising equity, such as through a share issue, there
is no dilution of dividends (if they are paid) or shareholder power and debt can be renegotiated and add value to the organisation in the long term to a greater
degree than see with equity (Elliott and Elliott, 2007). Question 2 There is a strong argument made by Modigliani and Miller that there should not be any
impact on the cost of capital regardless of the underlying capital structure and that the weighted average cost of capital should remain the same. However, as far as the shareholders
are concerned, and as seen in questions 1, where there is a higher level of debt there is a higher risk. As the debt level increases there is an increasing
level of risk from bankruptcy. The basis risk and reward equation stipulates that were investors face an increased risk they required a higher return as a way of compensating for
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