Accounting and finance for Managers Essay Example | Topics and Well Written Essays - 1500 words

Accounting and finance for Managers - Essay Example Capital structure decisions are significant as they determine the company’s profitability and financial flexibility. Therefore, while forming capital structure plans, the financial decision maker must consider the nature of business, external & internal conditions, economic conditions and the future plan of a company. This paper will attempt to analyse the capital structure policies of a public company (listed on stock exchange) along with the merits and demerits of capital structure. The primary focus of this paper will be to evaluate the capital structure policies of the company in context of relevant capital structure theories. The initial sections will have a brief discussion on various capital structure theories. This will be followed by a brief overview of the selected public company so as to understand its nature of business and the prevailing capital structure policy of the company. The overall findings of the project will be discussed in the concluding section. Designing the capital structure of a public company is very much crucial as it helps to reduce financial risk. Besides, the financial managers have to keep redesigning the company’s capital structure for maintaining proper leverage. Gerestonbeg has defined capital structure of a company as â€Å"the composition or make-up of its capitalization† that includes â€Å"all long-term capital resources i.e. loans, reserves, shares and bonds† (Patra, 2006, p.237). Many scholars have developed various capital structure theories for trading off between the owned capital and loaned capital. Some of popular theories of capital structure are trade off theory, pecking order theory, agency cost theory and Modigliani & Miller theory. Out of these theories, Modigliani & Miller theory is the most important and widely accepted capital structure theory. In order to trade off between costs and benefit of debts, the financial managers must choose the optimum level of capital structur e. The cost of capital