《MPAcc财会专业英语》Chapter23.pdfVIP

Chapter 23 (P493-508) The capital structure decision Topic list (P493) • 1 Factors influencing capital structure • 2 Restrictions on capital structure • 3 Gearing • 4 Short-term financing and capital structure Introduction (P493) Financial structure Study guide (P494) Section II- Sources of finance IV: The capital structure decision • Exam guide (P494) 1 Factors influencing capital structure (P494) • (1) Debt finance tends to be relatively low risk for the debtholder as it is interest-bearing and can be secured. The cost of debt to the company is therefore relatively low. • (2) The greater the level of debt, the more financial risk( of reduced dividends after the payment of debt interest) to the shareholder of the company, so the higher is their required return. 1.1 Principles of capital structure(P494) • (1) Capital structure refers to the way in which an organisation is financed, by a combination of long- term capital and short-term liabilities, such as a bank overdraft and trade creditors. The mix of finance can be measured by gearing ratios. • (2) Financial risk can be seen from different points of view: • (a) The company as a whole • (b) Creditors • (c) Ordinary shareholders 1.2 Company circumstances (P495) • (a) healthy competitive position • (b) Cash flows and earnings are stable • (c) Profit margins are reasonable • (d) Operating gearing is low • (e) The bulk of the company’s assets are tangible • (f) The liquidity and cash flow position is strong. • (g) The debt-equity ration is low • (h) Share prices are low 1.3 Matching assets with funds (P495) • Assets that yield profits over a long period of time should be financed by long-term funds. • Short-term assets partly with shout-term funding and partly with long-term funding. 1.4 Long-term capital requirements for replacement and growth (P496) • 1.5 Signallin