The target capital structure

Businesses can choose any combination of debt and equity they want their assets to finance the willingness of investors to provide such means. And, as we shall see, there are many different mix of debt and capital structures or capital - in some companies, such as the Chrysler Corporation, debt accounts for more than 70 percent of the funding, while other companies such as Microsoft, have little or no debt.

In the following sections we discuss factors that influence the capital of an enterpriseStructure, and we conclude a firm should try to determine what should be the best or the best mix of funding. But you will see that determines the exact optimal capital structure is not a science, so that after analyzing a series of factors that make a company a target capital structure I think it's best to use as a guide to raising money in the future. This could change over time change the terms, but in every moment of the company's management has a specificComposition of capital and financing decisions should be consistent with the individual mind this goal. If the actual proportion of debt is lower than the target of new funds to be raised by debt issuing, while if the percentage of debt on the target must be probably sold the company back in line with the target debt / equity ratio .

structural policy instrument involves a trade-off between risk and return. With more debt increases the risk that company earningsElectricity, but a greater share of the debt-tion usually involves a higher return, and we know that the higher risk associated with more debt, the stock tends to lower the price. At the same time, makes the highest returns on the stock more attractive to investors, in turn, ultimately increases the price of the shares. Therefore, the optimal capital structure to one that has a balance between risk and return on strike, our ultimate goal to maximize reachthe stock price.

Four main factors affecting capital structure decisions:

1. The first is the company's business risk, or danger that may be related to the management of the company would be if it used no debt. The larger the company's business risk, the lower the amount of debt that is optimal.

2. The second important factor is the tax situation of the company. A major reason for using debt is that interest is tax deductible, which lowers the real cost of debt. If, however, much more than aCorporate income tax is already protected by accelerated depreciation or tax loss will be low tax burden and the debt will not be as advantageous as it can be to a company with a higher effective tax rate.

3. The third important consideration is financial flexibility or the ability to raise capital on favorable terms, in adverse conditions. CFO know that a steady supply of capital necessary for stable operation, which in turn are essential forlong-term success. They also know that when money is tight in the economy, or when a company met with operational difficulties, a strong balance sheet is necessary to obtain funds from suppliers of capital. It might be useful based on the company's equity capital and to strengthen the theme of financial stability.

4. The fourth factor has to do with the debt management responsibility of attitude (conservatism or aggressiveness) with regard to the loan. Some managers are more aggressive than others,So, some companies are more inclined to use debt in an effort to increase profits. This factor does not affect the optimal, or value-maximizing, capital structure, but can influence the target capital structure of a society.

These four points largely determine the target capital structure, but, as we shall see, operating conditions may cause the actual capital structure than the target at any given time. For example, as discussed in terms of businessAt the beginning of the chapter, the debt / equity of Unisys clearly has been. much higher than its goal, and the company has taken some significant corrections tive actions in recent years to improve its financial situation.

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