Financial Analysis revised
Page 22 of 54 pages. Chapter: 13: Module 2.4: Capital Structure and Value...
Session 1: Introduction to Capital Structure
A telecommunication regulator needs to know about capital structure and the value of the firm in order to assess if the firm is adequately financed. Capital structure gives the early warning indications on the firm's financial distress. With a number of firms to be regulated the firm's capital structure becomes important for continued client service.
Important Learning Terms
Capital structure
Break even analysis
Leverage/Gearing
MM model
Degree of Financial Leverage
Degree of Operation Leverage
Degree of Combined Leverage
Introduction
The firm's session structure, the proportions of debt and equity used to finance the firm's assets, has implications for stockholder value. Additionally, capital structure affects leverage, which, in turn, affects the expected return and risk facing owners and creditors of the firm. This session analyzes the co-dependent leverage/capital structure phenomenon when the corporation has both fixed operating and fixed financial expenses in its cost structure.
Capital Structure, Leverage, Leverage Effects, and the Return/Risk Relationship
Definitions: Capital structure is the mixture of sources of funds a firm uses (debt, preferred stock, common stock). The amount of debt that a firm uses to finance its assets is called leverage. A firm with a lot of debt in its capital structure is said to be highly levered. A firm with no debt is said to be unlevered.
Capital structure can be viewed as the permanent financing the firm represented primarily by long-term debt, preferred stock, and common equity but exclu ...