Financial Management: Meaning, Scope, Objectives & Functions
February 21, 2025
Return on Invested Capital (ROIC) is another popular metric that is used widely in financial analysis. The reason for its popularity is that like ROA, ROIC can be used by both equity and debt holders. Also, like ROA, it provides data about return to the company as a whole and is not affected by leverage. […]
In the previous article, we have learned about what self-financing i.e. bootstrapping is. We have also learned about what are the various advantages of using the bootstrapping technique. However, despite the advantages listed in the previous article, relatively few startup founders actually go the bootstrapping route. This is because of the fact that bootstrapping also […]
An initial public offer (IPO) is a method of selling securities wherein the entire lot of securities is offered for sale to the general public. An IPO is often used by companies when they want to sell their securities to smaller investment organizations and even retail investors. In the past few years, IPOs have seen […]
The double entry system of bookkeeping is said to have revolutionized growth in modern business. It is only because businesses are able to keep track of their growing scale of transactions efficiently that they grow further. This has been facilitated by a well designed, error preventing accounting system called the double entry system. Here are […]
The post-pandemic economic environment across the world has bearish undertones. During the pandemic, many countries had lowered their interest rates to unsustainable levels. As a result, they are now witnessing record inflation numbers. The central bankers across the world have started tightening the monetary policy. This means that the risk-free interest rates are likely to […]
Capital Structure is referred to as the ratio of different kinds of securities raised by a firm as long-term finance. The capital structure involves two decisions-
For instance - There are two companies A and B. Total capitalization amounts to be USD 200,000 in each case.
The ratio of equity capital to total capitalization in company A is USD 50,000, while in company B, ratio of equity capital is USD 150,000 to total capitalization, i.e, in Company A, proportion is 25% and in company B, proportion is 75%. In such cases, company A is considered to be a highly geared company and company B is low geared company.
It is based on the thought that if the rate of dividend on preference capital and the rate of interest on borrowed capital is lower than the general rate of company’s earnings, equity shareholders are at advantage which means a company should go for a judicious blend of preference shares, equity shares as well as debentures. Trading on equity becomes more important when expectations of shareholders are high.
Preference shareholders have reasonably less voting rights while debenture holders have no voting rights. If the company’s management policies are such that they want to retain their voting rights in their hands, the capital structure consists of debenture holders and loans rather than equity shares.
While equity capital cannot be refunded at any point which provides rigidity to plans. Therefore, in order to make the capital structure possible, the company should go for issue of debentures and other loans.
Bold and adventurous investors generally go for equity shares and loans and debentures are generally raised keeping into mind conscious investors.
During the depression period, the company’s capital structure generally consists of debentures and loans. While in period of boons and inflation, the company’s capital should consist of share capital generally equity shares.
Interest on debentures has to be paid regardless of profit. Therefore, when sales are high, thereby the profits are high and company is in better position to meet such fixed commitments like interest on debentures and dividends on preference shares.
If company is having unstable sales, then the company is not in position to meet fixed obligations. So, equity capital proves to be safe in such cases.
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