Modigliani and Millar hypothesis states that capital structure is irrelevant for the valuation of a firm. It implies that by changing the proportion of debt and equity, the value of a firm does not change. Firm’s value depends on its earnings and risk of its assets rather than financial leverage (debt-equity ratio). As per Net Income Approach there is a relationship between capital structure and firm’s value. In fact capital structure affects firm’s value and its cost of capital.

Sometimes maturity date is not stipulated and its payment is left to the discretion of Board of Directors. Scrip dividend means payment of dividend in scrip or promissory notes. Sometimes companies need cash generated by business earnings to meet business requirements or withhold the payment of cash dividend because of temporary shortage of cash. This course of action would be necessary to keep share prices within limits. Detailed account of significance of stock dividends has been given under the heading stock dividends. Firm with stable policy can very easily formulate long-term financial planning because the finance manager can in that case correctly estimate future supply and demand of capital in the firm.

OPERATIONS MANAGEMENT (MBADS1 –

Between these two cases may fall other business concerns with varying periods of manufacture requiring different amounts of working capital. The average length of the period of manufacture, i.e., the time which elapses between the commencement and end of the manufacturing process is an important factor in determining the amount of the working capital. It becomes difficult for the firm to exploit favourable market conditions and undertake profitable projects due to lack of working capital.

• The income may be conserved for meeting the increased requirements of working capital or future expansion.
• Taxes are paid after collection and in the intervening period serve as a good source of finance.
• More Emphasis on Financial Decisions-This approach is more analytic and less descriptive as the right decisions for a business can be taken only on the base of accounting and statistical data.
• The first one which is granted by the creditors is considered unfit as it affects the credit reputation of the firm.
• The value of firm L is ` 1,10,000 which comprises of ` 50,000 as value of debt capital and ` 60,000 (i.e. ` 1,10,000 – ` 50,000) as value of equity capital.

Thus, not only the present customers but also the Potential creditors are attracted to buy the firm’s product at terms and conditions favourable to them. The customers are directed to remit their payments to the lock-box. The local banks are authorized to open the box and collect the remittances/cheques received from hostile takeover examples in india the customers. Normally, the bank so authorized to collect the cheques, pick up the cheques several times a day and deposits the same to the firm’s accounts. At the same time it is the ultimate output expected to be realized by selling goods and services A firm should hold sufficient cash, neither more, not less.

Financial Management – Financial & Capital Structure

The term wealth means shareholder wealth or the wealth of the persons those who are involved in the business concern. Wealth maximization is also known as value maximization or net present worth maximization. This objective is a universally accepted concept in the field of business. In case of Firm U, the cost of equity will be same as cost of capital because of zero debts. Other rational investors will also engage in this type of arbitrage and make gain without losing out on net earnings.

Hence financial structure is the mix of all sources of funds whether long term such as debt and equity or short term such as bank overdraft, short term loans etc. Maximise the company’s wealth An optimal capital structure will maximise the company’s net worth, wealth, and market value. The wealth of the company is calculated in terms of the present value of future cash flows. The objective of a company is to determine the lowest weighted average cost of capital while deciding on its capital structure. The WACC is the weighted average of its cost of equity and debt. Accounts receivable typically comprise more than 25 percent of a firm’s assets.

Demerits of Holding Inventory

Negative because of the increased risk of default and fewer shares outstanding. Positive as equityholders gain the tax shield on the debt interest. Bondholders require higher rates of return compared with stockholders. Equal but away from breakeven equity is better as fewer shares are outstanding. At breakeven in EPS but above this point debt increases EPS via leverage and decreases EPS below this point.

• Obliviously the results based upon wrong data may not be good.
• The cut-off point for investment is always the capitalisation rate which is completely independent and unaffected by the securities that are invested.
• Find out the Net Present Value by deducting from the present value of total cash flows calculated in above the initial cost of the investment.
• The declaration of dividends involves some legal as well as financial considerations.
• Pay-back period method does not measure the true profitability of the project as the period considered under this method is limited to a short period only and not the full life of the asset.

Thus, due to the market imperfection, after tax cost of capital function will be U-shaped. In answer to this criticism, MM suggested that the firm would adopt a target debt ratio so as not to violate the limits of level of debt imposed by creditors. This is an indirect way of stating that the cost of capital will increase sharply with leverage beyond some safe limit of debt. In short, increased Keis offset exactly by the use of cheaper debt. They advocated that the weighted average cost of capital does not make any change with a proportionate change in debt-equity mix in the total capital structure of the firm.

CARE CREDIT

In case of a loan, a specified amount is sanctioned by the bank to the customer. The entire loan amount is paid to the borrower either in cash or by credit to his account. The borrower is required to pay interest on the entire amount of the loan from the date of the sanction.

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