The paper "Capital Structure and Sources of Funds" is a great example of a finance and accounting essay. Areas of need that necessitate funding for a company include asset acquirement, investment opportunities and probably debt payments. It is, therefore, important for companies to source money for goal-achieving operations. So, there are different reasons for a capital structure that maximizes stockholder wealth, as the aim of choosing between debt and equity. There are many sources of funds for companies but the assessment considers but just some of the most probable ways.
Capital structure is an essential financial management tool for the creation of shareholder value. Ehrhard (135) suggests that the value of a business depends on the present value of all the future cash flows that current assets will generate. Companies implement the use of restrained earnings, borrowing through debt instruments and issuing new shares as the three main financial exercises of obtaining funds. Capital structure is developed depending to define ways of raising funds from both external and internal sources. It closely relates to a company’ s capital cost and is generally a mix of the long- term sources of funds that the company uses (Khrawish & Khraiwesh 176). Long-Term Sources Equity Shares Also known as ordinary shares, they are usually issued by company owners and ordinarily have a nominal value not much more than $1.
Conversely, it is important to note that a quoted company’ s shares have a market value determined by other factors and have no relationship with the nominal value of those shares. Sourcing from equity shares has the condition that when the equity shares are issued for cash then the price has to be either equal to or more than the shares’ nominal value.
In this form, the company owners, who are basically the shareholders, put funds into the company by paying for new issues of shares and through retained profits. This brings the feature of deferred ordinary shares which are the form that is only entitled to a dividend after a certain period or when the company makes profits above some set value. The second type is rights issues which are a way of raising new share funds by offering shares to existing shareholders.
Ehrhardt, Michael. Corporate Finance: A Focused Approach. Stamford: Cengage Learning, 2013. Print.
Khrawish, Husni. and Khraiwesh, Ali. “The Determinants of the Capital Structure: Evidence from Jordanian Industrial Companies.” Economics and Administration 24.1 (2010): 173-196. Print.