Theories of Capital Structure - 1053 Words

Assignment: Capital Structure PART A 1. Apple Corporation has 2.5 million shares outstanding with a market value of $2.00 each (expected return = 16%) and debt with a market value of $1, 000,000 and a return of 10% Required a. What is the return on the capital of Apple Corporation? [Show all workings and formulae) [7.5 marks] 2. Samsung generates pre-tax earnings of $2,000,000 per year. Currently it has issued 1 million shares which sell for $10 each. Samsung has no debt in its capital structure. It is proposing a deal, which will allow it to borrow $5 million at 8% and buy back 500,000 shares and cancel them. Required a. What will be the share price after the deal? b. What is the weighted average cost of†¦show more content†¦The risks of working with other students Some assessment tasks are explicitly designed for group work, and it will be made clear that a group answer is expected from you. All other tasks are intended as an assessment of your individual comprehension and performance, and group answers are not permitted. In individually assessed forms of assessment your work must be different from that of every other student. Plagiarism can occur in assignments and any examination where the questions are issued to students in advance. In both cases it is possible for you to ask other people about how best to answer the questions or complete the necessary tasks You should be aware that different modules and subjects may have different requirements. In some subjects, answers to questions may, for example, require every student on a module to employ or refer to the same diagram(s), concepts and the like in order to construct an acceptable answer. You should note, however, that even in these circumstances your explanations of what the diagrams mean, and any other writing referring to any common diagrams and concepts should all be in your own words. Moreover, the situation may be very different on other modules, where the submission of work that has a very similar structure, or the use of very similar materials such as concepts, diagrams, quotations and the like, to that of another student, may lead to you being accused ofShow MoreRelatedThe Theory Of The Capital Structure8603 Words   |  35 PagesThe theory of the capital structure is an important reference theory in enterprise’s financing policy. Whether or not an optimal capital str ucture exists is one of the most important and complex issues in corporate finance. How an organization is financed is of paramount importance to both the managers of firms and providers of funds. This is because a wrong mix of finance is employed the performance and survival of the business enterprise may be seriously affected. Though the literature teens withRead MoreCapital Structure theories2159 Words   |  9 Pagesï » ¿Capital Structure Theories Capital Structure Capital Structure is the proportion of debt, preference and equity capitals in the total financing of the firm’s assets. The main objective of financial management is to maximize the value of the equity shares of the firm. Given this objective, the firm has to choose that financing mix/capital structure that results in maximizing the wealth of the equity shareholders. Such a capital structure is called as the optimum capital structure. At the optimumRead MoreTheory of Capital Structure14250 Words   |  57 PagesTheory of Capital Structure - A Review Stein Frydenberg £ April 29, 2004 ABSTRACT This paper is a review of the central theoretical literature. The most important arguments for what could determine capital structure is the pecking order theory and the static trade off theory. These two theories are reviewed, but neither of them provides a complete description of the situation and why some ï ¬ rms prefer equity and others debt under different circumstances. The paper is ended by a summary where theRead MoreCapital Structure Theory Essay1198 Words   |  5 Pagesï » ¿Caleb Johnson Capital Structure Theory Working Capital Management Dr. Woodward 10/14/14 Capital Structure Theory Part a. (Capital Structure) Capital structure is very important. Not only does it influence the return a company earns for its shareholders but can also be a determining factor on whether or not a firm survives a recession. A company’s capital structure is a mix of their short-term debt, long-term debt, and equity. A firm’s capital structure is the way the firm finances all of itsRead MoreTheories of Capital Structure Essay1163 Words   |  5 Pages2. Literature Review: Capital structure is termed as an important area in financial decision making. It has relationship with other variables of financial decisions. Capital structure is composed of debt and equity capital that is used by the organizations to run its operations. The debate on capital structure has been started after provision of theory of Irrelevance by Modigliani and Miller. Modigliani and Miller (1958) concluded that financial leverage has no affect the market value of firm.Read MoreA Study On Capital Structure Theory Essay1997 Words   |  8 PagesLiterature Review Capital structure theory has long been a controversial issue in the finance literature. The two Novel laureates, Franco Modigliani and Metron Miller (here after called M-M) were the first to present a formal model in 1958 on valuation of capital structure in corporate finance theory and is still the cornerstone of modern corporate finance. MM were the first to take a sharp look at the relationship between Capital Structure and the cost of capital. In their seminal papers (1958Read MoreCapital Structure and Agency Theory2813 Words   |  12 Pagesdecisions, the optimization of capital structure has a great influence on the performance of the companies, for a reasonable capital structure can decrease the financing cost, take advantage of the financial leverage and play an important role in corporation governance. Given the importance of capital structure, this essay will firstly discuss the ways that capital structure affects corporation value, then it will introduce the influencing factors of capital structure and how to effectively manageRead MoreModigliani And Miller s Capital Structure Theories2536 Words   |  11 PagesModigliani and Miller s Capital Structure Theories The Modigliani-Miller theorem is the basis for modern thinking on capital structure. The basic theorem that, under certain market process (the classical random walk), in the absence of taxes, bankruptcy costs and asymmetric information, i.e., in an efficient market, the value of a company is not affected by the way the company is financed. No matter whether the capital of the company is obtained with the issue of shares or debt. No matter what theRead More Critically assess the Pecking Order Theory of Capital Structure1767 Words   |  8 PagesThere is no universal theory of the debt-equity choice, and no reason to expect one. In this essay I will critically assess the Pecking Order Theory of capital structure with reference and comparison of publicly listed companies. The pecking order theory says that the firm will borrow, rather than issuing equity, when internal cash flow is not sufficient to fund capital expenditures. This theory explains why firms prefer internal rather than e xternal financing which is due to adverse selection, asymmetryRead MoreAnalysis of Trade-Off and Pecking Order Theory on Companys Capital Structure2615 Words   |  11 Pageshas a growing concern whether pecking order or trade-off theory can give better determination on firms’ â€Å"optimal† capital structure in different scenarios. In trade-off theory, it helps to determine the debt proportion and maintain optimal balance in order to maximise company’s market value. However, pecking order theory promotes that companies tend to issue debts when company has internal financial deficit or deviation from target capital leverage. Hence, it shows mixed evidences such as Shyman-Sunder