Whether the policy, of the company is adequate to increase the company’s value
“Whether the policy of the company is adequate to increase the company’s value” can only be found taking into account both qualitative and quantitative assessments of the capital structure.
Financial advantage characterizes the level of risk and sustainability of the company. It is noteworthy that the lower the advantage, the lower the amount of debt in the capital structure of the company. On the other hand, borrowing can increase the rate of return on equity, i.e. Earn extra income on equity. The objective of management of the organization is to optimize capital structure – determine the optimal ratio of debt to equity. Researchers propose different approaches to determine the optimal structure, e.g. Sarkar Sudipto, 2011, suggest the model, which consider three decisions” (i) when to invest, (ii) how large an investment to make, and (iii) how to finance the investment” (Camara, 2012 p. 1).
Pawlina G., 2010 supports the MM theory and in her research evidence underinvestment problem in a period of financial distress “at the time of the company’s expansion”. Further, she points to disadvantage of private debt relative to public debt: “private debt can make the underinvestment problem more severe”. The determination of optimal structure in capital structure assessment involves the majority of science factors. The selection of capital structures within the company depends on the specified attributes that enable the determination of benefits and costs aspects associating with equity and debt financing (Pawlina, 2010 p. 1).
The choice aspect between specified equity and debt financing does not guarantee substantial effects of the company’s value or capital availability. The perfect capital markets are assumable with conditions that no taxes, no brokerage, investors, no bankruptcy cost and corporations are capable of borrowing at the suggested rate with every investor having specified information regarding the future investment of the company opportunities. In the qualitative and quantitative assessments of the capital structure, interest as the deductable expense enables the conclusion that debt is less expensive with a preferred stock encouraging the company to make employment of more debts in the specified capital structure. The company tendency of having target on optimal capital structure involves no consensus on optimal target determinants (Sarkar, 2011 p. 1).
The company’s progressive business decisions associates directly with its current financial condition. The resulting work on capital analysis enables the determination of the company’s ability of sustaining its operations within the specified line of business. The major, significant imperative areas under consideration in the capital structure of the company include investment and valuation, working capital management and capital cost. The operational procedure of the company within the specified areas is examinable with relation to the reviewed financial data. Following the collection and calculation of the considerable potential areas and the financial data, identification of with innovative measures are, therefore, implementable to make increments on the company’s value (Bistrova & Peleckiene, 2011 p. 1).
For elaborative understanding of the company’s financial position, the net working capital must be determined. This involves the difference between the company’s current liabilities and the current assets. The company should have a positive capital structure. The company’s capital structure varies continually within the specified operational cycle. The two considered elements in the company operation cycle that absorbs the most cash is the receivables and the inventory. The major, significant cash sources of the company are the equity and payables. The speeding up of the capital structure enables the generation of the company’s cash (Bistrova & Peleckiene, 2011 p. 1).
The company’s value does not undergo alteration through the method applicable in spilt process since its value is through the determination with real assets. The total financing and investment separation imply that upon the use of mixed debt-equity financing enables the value of the company to correspond regarding an option to equity financing. The debt and equity combination are considerably par in essence, therefore, the company’s market value is capital structure independent. The value conservation law, therefore, operates, wherein the value of the asset is preferable irrespective of any specified claims arising (Pawlina, 2010 p. 1).
References
Bistrova, J, Lace, N, & Peleckiene, V 2011, ‘The Influence of Capital Structure on Baltic Corporate Performance’, Journal Of Business Economics And Management, 12, 4, pp. 655-669, EconLit with Full Text, EBSCOhost, viewed 12 November 2012.
Bodie Z., Et al., 2001. Investments. Vol. 1, 5ed., MGH, USA
Camara, O 2012, ‘Capital Structure Adjustment Speed and Macroeconomic Conditions: U.S MNCs and DCs’,the International Research Journal Of Finance & Economics, 84, pp. 106-120, Business Source Complete,.
Pawlina G., 2010. Underinvestment, Capital Structure and Strategic Debt Restructuring. [Online] Available from http://eprints.lancs.ac.uk/45632/1/jcf2010.pdf (Accessed 11.11.2012)
Sarkar, Sudipto, 2011. Optimal Size, Optimal Timing and Optimal Financing of an Investment. Journal of Macroeconomics, December 2011, v. 33, iss. 4
