Various Theories/Approaches on Capital Structuring Explained
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…
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Factors Influencing Decision on Capital Structuring
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…
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Understanding Leverage and Gearing
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…
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Meaning of Capital Structuring of a Company
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…
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Calculation of forward exchange rates explained with the illustrations
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…
Key Properties of Duration flow in Measuring Bond Interest Rate Risk
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…
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