Definitions [3]
Answer in one sentence.
Define corporate finance.
According to Henry Hoagland, “Corporate finance deals primarily with the acquisition and use of capital by a business corporation.”
Answer in one sentence.
Define working capital.
Gerstenbergh defines it as “The excess of current assets over current liabilities.”
Answer in one sentence.
Define capital structure.
According to R. H. Wessel, “The long term sources of funds employed in a business enterprise.”
Formulae [3]
Formula: Debt-Equity Ratio
\[\frac{\mathrm{Debt}}{\mathrm{Equity}}\] (D/E)
Formula: Proportion of Debt in Total Capital
\[\frac{\mathrm{Debt}}{\mathrm{Debt}+\mathrm{Equity}}\] \[\left(\frac{D}{D+E}\right)\]
Formula: Return on Investment (RoI)
\[\frac{\mathrm{EBIT}}{\text{Total Investment}}\times100\]
Key Points
Key Points: Capital Structure
- Capital structure = Mix of owners' funds and borrowed funds.
- Debt is cheaper but riskier than equity.
- Financial risk increases with higher debt.
- Financial leverage is measured by D/E or D/(D+E).
- Optimal capital structure maximizes shareholders' wealth.
- Favourable Financial Leverage: RoI > Cost of Debt → EPS increases.
- Unfavourable Financial Leverage: RoI < Cost of Debt → EPS decreases.
- Trading on Equity should be used only when RoI exceeds the Cost of Debt.
Important Questions [20]
- Finance is the management of ______ affairs of the company.
- Justify the following statement. The firm has multiple choices of sources of financing.
- Finance is related to money and money management.
- ______ is related to money and money management.
- Match the pairs: Group ‘A’ (a) Capital budgeting (b) Regret Letter (c) Board of Directors (d) Depository Act (e) Final Dividend Group ‘B’ (1) Unsecured Debenture (2) 1956 (3) Investment decision
- Match the correct pairs: Group “A” Group “B” 1 Financial planning a. Dividend 2 Public deposit b. Less applications than expected 3 Private placement c Owned capital
- Company has to pay ______ to government.
- Correct the underlined word and rewrite the following sentence. When there is recession in economy sales will increase.
- Explain the following term/concept. Investment decision
- Explain the following term/concept: Production Cycle
- Explain the following term/concept: Fixed capital
- Distinguish between fixed capital and working capital.
- Explain the following term/concept. Working capital
- Match the correct pairs: Group 'A' Group 'B' (1) Working capital (a) Redeemed capital (2) Equity share capital (b) Secretary (3) Share warrant (c) Shares do not
- Justify the following statement. There are various factors affecting the requirement of fixed capital.
- Discuss the factors determining working capital requirement.
- Fixed capital is also referred as circulating capital.
- Write a word or a term or a phrase which can substitute the following statement. The ratio of different sources of funds in the total capital.
- Write a word or a term or a phrase which can substitute the following statement. The internal source of financing.
- Working capital stays in the business almost permanently.
