Accounting Financial Analysis Report Capital Structure

Question: Write about theAccounting Financial Analysis Report for Capital Structure. Answer: Introduction A capital structure of a company is the source of funds that are generated by the company to invest the same in the operations and earn profits out of it. It is the decision made by the companies wherein the company have to maintain a balance between the funds that will be borrowed from the market and the funds that will be invested by the company itself. In this report it is discussed that how the investment policy will be managed by the company. Also the ancient theory of Miller and Modigliani who presented the in depth details of capital structure is also discussed in the report. The discussion on the importance of debt favouring and of an equity oriented structure is also discusses. Miller ad Modiglianis theory- Capital Structure Choices Affect a Companys Real Investment Policy A company spreads its business by applying its assets for the generation of revenue from it. After the revenue is generated, payment of taxes is done and the remaining money is retained in the business. It depends on the structure of the company, if the company is an equity base, then the retained amount will be distributed amount the shareholder in the form of dividend. In case the company has debts which are to be repaid by the company, then it be the obligation to repay the same first ad den the remaining part of the earning will be distributed to the shareholders. The discussion was made in order to understand the basic structure of the company. The money that is used by the company for funding the operations is the capital structure (Ardalan, 2017). The allocation of the earning in form of investments in order to earn profits is decided keeping in mind the capital structure of the company. The total market value of the company is dependent on the capital structure (equity and de bt) of the company. It is observed that the when the company have a higher debt structure or it believes in increasing the amount of debt in the company. Then the value of the earning will increase till a point but after that it will increase the cost of the company resulting in reducing in the final market value (Tesfaye and Minga, 2014). Miller and Modigliani where the two experts who studied the concept of capital structure and its effect on the investment of the company in depth. According to the concept which was shared by them the value of the company in the market completely depends on the risk factor and on the financial instruments that are underlying in the derivate market i.e. the underlying assets (Hackbarth and Mauer, 2012). It was considered that the value is not dependent on the method that is considered to fund its investments. The theory was established in a situation of assumptions. No taxes, no transaction and bankruptcy cost, no different cost borrowing for the company and investors. No effect of the debt obligation on the earnings of the company was some of the assumptions associated with the theory. This means that no matter how much are the borrowing of the company there will be benefits of tax out of the payment of interest. There is no benefit from the increase in the debt of the company; the s tructure opted for the capital of the company does not affect the value of the shares of the company (Baker and Martin, 2011). On a whole this would mean that the capital structure of the company would not be relevant for the share prices or the investments of the company. In the real world scenario there is no stage where there are no taxes, no transactional cost, no bankruptcy cost and no difference in the rate of borrowings. Taxes are right of the government and with the payment of taxes there are various benefits that are available for the company. In the real world the companies are more successful with the high debt ratio in the capital structure (Zhang and Zou, 2016). Which helps in generating the funds for the company? With this the company earns profits with investing less amount of its own in the capital. Also this affects the value of the company as a whole. The cost at which the money is borrowed from the market is different for different person depending on their creditability of paying the same back (Peter, Tatiana and Natali 2014). Hence, it is not viable that the cost of borrowings is same for the company and investors as this cost affects the decision of investment in future projects. It is observed that no investor have a complete kno wledge about the information that is accessed by the companies. This will make it difficult for the companies to work in the market. Therefore, the concept of symmetric information with the companies and investors is not viable for the working (Cortez and Susanto, 2012). Investments that are made by the companies are to a great extend dependent of its capital structure. If the company has a structure in which the share of the equity is more, then the earning remained after the distribution of dividend will be more as compared to structure in which there is more debt ratio. This gives an upper hand to the companies to decide over the investment strategy as the availability of funds will be managed according to the capital structure (Apos, Mello and Farhat, 2008). Conclusion During the preparation of the project it was observed that the theory of Miller and Modigliani was based on assumption which does not stand relevant in todays scenario. The capital structure of the company which is the combination of debt and equity by the way of which the company raises its funds to operate the working, is a help for it to make decisions of investments and maintain better profit margins. It is also observed that the perspective of the business working today is not just equity base but also the companies make it viable for them to borrow monies from market and repay the same within time. References Ardalan, K., 2017, Capital structure theory: Reconsidered. Research in International Business and Finance, vol. 39, pp 696-710. Baker, H., Martin, G., 2011, Capital Structure and Corporate Financing Decisions Theory, Evidence, and Practice (Robert W. Kolb Series). Chichester: Wiley. Cortez, M., Susanto, S., 2012, The determinants of corporate capital structure: evidence from Japanese manufacturing companies. Journal of International Business Research, vol. 11, no 3, pp 121-134. DAmp;Apos, Mello, Ranjan, Farhat, Joseph., 2008, A comparative analysis of proxies for an optimal leverage ratio. Review of Financial Economics, vol. 17, no 3, pp 213-227. Hackbarth, D., Mauer, D., 2012, Optimal Priority Structure, Capital Structure, and Investment. 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