This article explains the assumptions and key aspects of approaches to capital structuring, including the Net Income Approach, Net Operating Income Approach, Traditional Position, Modigliani-Miller (MM) Theory, Pecking Order Theory, Irrelevance Theory, Relevance Theory, Trade-off Theory, and Agency Costs Theory. Overview of Capital Structure Theories Capital structure theories explore the relationship between a company’s capital…
A company’s capital structure is influenced by various factors, including its size, profitability, growth prospects, and the availability of funds. Additional factors include the company’s credit history, tax position, and the cost of debt. Factors that affect a company’s capital structure can be broadly categorized into two groups: Internal Factors: External Factors: In conclusion, capital…
Leverage and gearing are financial terms that refer to the use of debt by a company to increase investment exposure and potential returns. These terms are often used interchangeably; however, regional preferences exist. In British English and European finance, the term “gearing” is more common, while American finance typically uses “leverage.” Leverage refers to the…
Capital structure is the combination of debt and equity used by a company to finance its operations and growth. It is a core component of a company’s financial strategy, determining the optimal mix of debt and equity to fund business activities. Striking the right balance between these components impacts costs, risks, and growth potential. A…
A currency forward contract is a customized, written contract between two parties that sets a fixed foreign currency exchange rate for a transaction, set for a specified future date. Currency forward contracts are used to hedge foreign currency exchange risk. They are most commonly made between importers and exporters headquartered in different countries. A forward…
Duration is a key financial metric used to measure a bond’s sensitivity to interest rate changes, also reflecting the risk of retirement liabilities. In investing, duration represents the number of years required to recover a bond’s true cost, calculated based on the present value of all future coupon and principal payments. Key Properties of Duration…
The Reserve Bank of India (RBI) has released a Master Direction consolidating guidelines for banks and financial institutions regarding credit information reporting. Issued on January 6, 2025, this directive aims to establish a standardized framework for reporting and disseminating credit information while safeguarding the confidentiality and security of sensitive credit data. Key Highlights of the…
The Current Yield on a bond represents the percentage return an investor can expect to earn over the next year if they purchase the bond at its current market price. It provides a snapshot of the bond’s income-generating potential relative to its market value. Formula for Current Yield The current yield is calculated using the…
Bonds: A bond is a debt instrument issued by a company or the government to raise capital by borrowing from investors. The investors in bonds are debt holders (lenders/creditors). The bond issuer is obliged to pay bondholders interest (the coupon) at a pre-decided rate and to repay the principal on a due date known as…
What is Debt? Debt refers to an amount of money borrowed by one party from another. It typically involves a borrower who owes money to a lender. While the terms “loan” and “debt” are often used interchangeably, a loan is a specific type of debt with defined repayment terms. Common Forms of Debt Types of…
