StickyKurtosis
Kurtosis refers to the measurement of the degree to which a given distribution is more or less ‘peaked’ relative to the normal distribution. The concept of kurtosis is very useful in decision-making. In this regard, we have 3 categories of…
Competing Stakeholder Interest in Capital Structure Decisions
Capital structure decisions impact stakeholder groups differently. Increased leverage increases the risk to all stakeholders but only results in a higher return for shareholders. Debt vs. Equity Conflict Debtholders have a contractual and prior claim to cash flows and firm…
Modigliani–Miller Propositions
A firm’s capital structure is the mix of debt and equity the company uses to finance its investments. A capital structure decision aims to determine the financial leverage that will maximize the company’s value by minimizing the weighted average cost of capital…
Company’s Capital Structure over its Life Cycle
The maturity, capital intensity, market position strength, and the stability and nature of a company’s operation are all elements that influence its capital structure and ability to support debt. As a general rule, companies begin as capital consumers; that is,…
Factors Affecting Capital Structure
Both internal and external forces influence the capital structure of a corporation, and it varies among countries and sectors. These factors include: $$\begin{array}{|l|l|}\hline \textbf { Internal Factors } & \textbf { External Factors } \\\hline \text { Business model characteristics…
Short-term Funding Choices for a Company
The objectives of a short-term borrowing strategy include: Ensuring there is the capacity to handle sudden cash needs; Maintaining sufficient credit sources to fund cash needs; Ensuring the interest rates obtained are competitive; ensuring that the company’s effective cost of…
Peer Comparison of Company’s Liquidity
A company’s liquidity determines its creditworthiness and capacity to borrow at cheaper rates and with better credit conditions, increasing its flexibility. A corporation is more likely to go bankrupt or into financial difficulties the less liquid it is. The primary…
Relationship between Working Capital, Liquidity, and Short-Term Funding Needs
Successful businesses aim to strike a balance between funds set aside for current assets and the risk of current asset shortages. Each company has different needs for working capital. Retail enterprises, for example, focus on inventory and receivables, whereas software…
Financing Working Capital
Current assets less current liabilities equals working capital. $$\text{Working capital = Current assets – Current liabilities}$$ A company’s short-term assets and obligations are managed through what we call working capital management. Its objective is to prevent excess reserves that might…
Real Options Relevant to Capital Investment
Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date. Likewise, real options are capital allocation options that allow managers the right, but not…
