Question

compare and contrast the types of capital, external assessment of capital structure, the capital structure of non–U.S. firms, and capital structure theory. Based on your current organization, what type of capital structure do they use and how has the company been doing in terms of economic success?

Answer 1

Capital refers to a number of different concepts in the business world. While most people think of financial capital, or the money a company uses to fund operations, human capital and social capital are both important contributors to a company's overall financial health.

1. Financial Capital

Financial capital is necessary in order to get a business off the ground. This type of capital comes from two sources: debt and equity. Debt capital refers to borrowed funds that must be repaid at a later date, usually with interest.

Common types of debt capital are:

• bank loan

• Personal loans

• Overdraft agreements

• credit card debt

Equity capital refers to funds generated by the sale of stock, either common or preferred shares. While these funds need not be repaid, investors expect a certain rate of return.

2. Human Capital

Human capital is a much less tangible concept, but its contribution to a company's success is no less important. Human capital refers to the skills and abilities a company's employees bring to the operation.

Though it's hard to quantify human capital in dollars, most companies know that employee performance can be greatly enhanced by continuing education classes, professional development seminars and healthy-living programs. Many businesses choose to invest in the happiness and well-being of their employees because this investment indirectly benefits the bottom line by cultivating a happier, more efficient workforce.

3. Social Capital

Social capital is an even more intangible asset, referring to the relationships people have to each other, and the desire they have to do things for and with others within their social networks. People tend to do things to help and encourage those in their same social network, creating a cycle of mutually beneficial reciprocity.

4. Natural Capital is any stock or flow of energy and material that produces goods and services. It includes:

•Resources - renewable and non-renewable materials

•Sinks - that absorbs, neutralize or recycle wastes

•Processes - such as climate regulation

If we talk about Pure Financing Terms then we can say

1. Equity Capital or Owners Capital

2. Debt or Loan Capital

In case of equity capital owner invest in the company and make profit and get profit sharing among all investors however in case of debt or Loan capital you need to pay only fixed Interest on Amount.

Capital structure Theory

Capital structure can be a mixture of a firm's long-term debt, short-term debt, common equity and preferred equity. A company's proportion of short- and long-term debt is considered when analyzing capital structure. When analysts refer to capital structure, they are most likely referring to a firm's debt-to-equity (D/E) ratio, which provides insight into how risky a company is. Usually, a company that is heavily financed by debt has a more aggressive capital structure and therefore poses greater risk to investors. This risk, however, may be the primary source of the firm's growth.

External assessment of capital structure

Debt vs. Equity

Debt is one of the two main ways companies can raise capital in the capital markets. Companies like to issue debt because of the tax advantages. Interest payments are tax deductible. Debt also allows a company or business to retain ownership, unlike equity. Additionally, in times of low interest rates, debt is abundant and easy to access.

Equity is more expensive than debt, especially when interest rates are low. However, unlike debt, equity does not need to be paid back if earnings decline. On the other hand, equity represents a claim on the future earnings of the company as a part owner.

Debt-to-Equity Ratio as a Measure of Capital Structure

Both debt and equity can be found on the balance sheet. The assets listed on the balance sheet are purchased with this debt and equity. Companies that use more debt than equity to finance assets have a high leverage ratio and an aggressive capital structure. A company that pays for assets with more equity than debt has a low leverage ratio and a conservative capital structure. That said, a high leverage ratio and/or an aggressive capital structure can also lead to higher growth rates, whereas a conservative capital structure can lead to lower growth rates. It is the goal of company management to find the optimal mix of debt and equity, also referred to as the optimal capital structure.

Also it can be assess basis Leverages Ratio

• Operating Leverages: Relationship between the firm's sales revenue and its earnings before Interest and Taxes.

• Financial Leverages: Relationship between the firm's EBIT and its common stock earning per share EPS

• Total Leverages: Relationship between the firm's sales revenue and EPS.

Capital structure of non–U.S. firms:

The capital structure of non-U.S. companies can be quite different from that of U.S. corporations. These firms tend to have more debt than domestic companies. Several reasons contribute to this fact. U.S. capital markets are more developed than most other countries, providing U.S. firms with more alternative forms of financing. Also, large commercial banks take an active role in financing foreign corporations. Share ownership is more concentrated at foreign companies, which reduces or eliminates potential agency problems and permits companies to operate with higher leverage.

Similarities exist between non-U.S. and U.S. firms with regard to capital structure. Debt ratios within industry groupings generally follow similar patterns, as they do in the U.S., and large multinational companies (MNCs) headquartered outside of the U.S. share more similarities with other MNCs than with smaller firms based in their home country. In recent years, foreign firms have moved away from bank financing, leading to capital structures that are closer in form to that of U.S. corporations.

If we talk about Non- public listed company capital structure which we have are a mixed of

• Equity stock

• Preferential Stock

• Debt

Equity stocks which are the direct investment of owners who are the part of management committee and board and preferential stocks are the right issue given to some major stakeholder and venture capitalist that have funded additional money and also having a debt at fixed percentage from Private lenders.

One of the most important steps in evaluating any given firm, for both investors and lenders, is to analyze debt obligations. Debt is neither fundamentally harmful nor beneficial, and many businesses borrow through standard loans or by issuing bonds. In fact, since the interest payments on debt can be tax-deductible, these often present a more cost-efficient way to expand debt through equity. Incurring debt, becoming more leveraged, becomes problematic when it is done too frequently or in too large a scale.

Also we have maintained good leverages of Debt and Equity which is very important for healthy capital structure for the firm.

For our company

Debt ratio = Total Liabilities / Total Assets              figure of 0.5 or less is ideal

We have maintained 0.7 which sign the good health signal.

Similarly,

Debt-to-equity ratio = Total Liabilities / Stockholders’ Equity

Ideal value should be 1 and we have close to it .