Capital Structure Theories Financial Essay
To understand the company's recent financial decisions and their impact on its long-term financial health, it is necessary to review several theories of capital structure. According to traditional capital structure theory, an organization should “seek to minimize its weighted average cost of capital and maximize the value of its marketable assets.” This is the basic idea behind Modigliani and the famous millers: in perfect markets, changes in capital structure do not affect value. As long as the total cash flow generated by the company's assets remains unchanged by the capital structure, its value is independent of the capital structure. The value of a whole pie does not depend on how it is cut. Tesco's capital structure. Firstly, as we can see from Table 1, Tesco Group's gross profit margin has increased over the past five years. 65 08. Since a subtle change an increase or decrease in profit margin will bring about a significant change in total profit. 43 increase has indeed led to one. Capital Structure Essay Examples. An optimal capital structure is a mix of debt and equity that maximizes a company's value. The optimal capital structure not only ensures that the company's cost of capital is low but also minimizes the financial risks faced by the company. In general, debt financings offer the lowest cost capital. Capital structure is the mix of equity and debt used to finance investments, while corporate investment strategy involves the selection of appropriate investments that will increase its value. Capital structure: an overview. H. Kent Baker, H. Kent Baker. University Professor of Finance and Kogod Research Professor, American University. Look for more articles from this author. Capital structure and corporate financing decisions: Theory, evidence and practice. References Related information Close the Figure Viewer.