CAPITAL STRUCTURE Flashcards
What are capital structure objectives
Capital structure objectives are targets relating to the extent the business is financed by its owners, or the money borrowed from external sources - When the business is starting up, the owners will most likely fund the majority of the start up costs, if not all of them.
What is long term funding also known as
Long term funding is also known as ‘Capital employed’, and it shows where a business has got its money from. - This includes: Share (or equity) capital, debt capital, and retained profits
What is share/ equity capital
Share or equity capital is money that has been invested by shareholders or owners of the business
What is debt capital
Debt capital is money that has been borrowed - Usually by banks, but their are other sources as well
What is retained profit
Retained profit adds to the capital employed if that money gets reinvested in the business
How to work out the proportion of long term funding that is debt:
Debt capital divided by total capital employed multiplied by 100
How to workout the amount of debt used to fund capital in the business
The proportion of long term funding that is debt:
Debt capital divided by total capital employed multiplied by 100
For example:
Total capital employed: £100,000
Share capital: £55,000
Debt Capital: £45,000
= 45K divided by 100K X100 = 45 - You could express it as a percentage, so = 45%
This is know as gearing
What is gearing
This is a measure of risk, because the more debt that has been used to fund the business, the more the business is vulnerable to changes in the interest rate. - Could also put off potential shareholders. - They would also struggle getting more loans from the bank if they were over 50%
What could put inventors off investors, in relation to debt
Shareholders could also be put off of investing if the business doesn’t have any debt capital - They might think the owners aren’t hungry enough for success, or they are too worried that they won’t be able pay the money back (because sales of profits are low)
What is equity capital
Money invested into a company by shareholders
Equity capital does not have to be repaid
Shareholders may expect, but are not entitled to a share of the annual profits
Therefore, the annual cost of equity capital can vary. One year high dividends may be paid, the following year the shareholders may accept lower dividends to allow the business more funds to invest
Shareholders are entitled to a say in how the company is run, and different shareholders may have different objectives for a company
