Summary
Summary Capital Structure
- Course
- Institution
Summary of 4 pages for the course Corporate Financial Management at UCT (Complete summary)
[Show more]
2 reviews
By: mthobisikwenzokuhle • 2 year ago
By: maryamgopal • 3 year ago
Seller
Follow
UCTstudent
Reviews received
Content preview
MODULE 12: CAPITAL STRUCTURECapital Restructuring
How changes in capital structure affect firm value
Involves changing amount of leverage a firm has without changing the firms assets
- Increase leverage: issue new debt; repurchase outstanding shares; increase dividends
- Decrease leverage: issue new shares; retire outstanding debt; decrease dividends
Choose capital structure that maximises shareholder wealth by:
a. Maximising firm value
b. Minimise WACC
Business Risk
Risk relating to operations of firm (nature of industry/product range)
Many business risks are out of managers control
Leverage (magnifies returns & risk)
Effects of fixed costs have on return shareholders earn
Fixed costs have to be paid regardless (operating/financial costs)
Limit negative impact of leverage; adopt strategies that are less reliant on fixed costs
E.g.
Manufacture products or outsource (operating leverage)
Adopt optimal capital structure (financial leverage)
Lease/borrow and buy asset (financial leverage)
Operating leverage
Concerned with relationship between firm sales and EBIT
Large fixed operating costs: small changes in revenue = larger change in EBIT
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒 =
𝐸𝐵𝐼𝑇
Financial Risk and Financial Leverage
Financial risk arises from the use of debt in capital structure (interest and capital risk)
Financial leverage refers to the use of debt in capital structures to magnify returns concerned with
relationship between EBIT and EPS.
Large fixed interest costs: small change in EBIT = large change in EPS
Use of debt will cause PAT/ EPS to be levered/geared:
Upwards (+): in economic upswing
Downwards (-): in economic downturns
Optimal Capital Structure
Debt-equity ratio resulting in lowest WACC (maximizing firm value)
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller UCTstudent. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $2.85. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
64438 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now