Research Paper 6.docx - 1 Research Paper 6 Capital Structure Research Paper 6 Capital Structure BUS 539 Financial Management Romel Besha California

Research Paper 6.docx - 1 Research Paper 6 Capital...

This preview shows page 1 - 5 out of 10 pages.

1 Research Paper 6: Capital Structure Research Paper 6: Capital Structure BUS 539 - Financial Management Romel Besha California Baptist University
Image of page 1
2 Research Paper 6: Capital Structure Abstract This paper will discuss the influence of debt upon the ROE DuPont performance of a company and how the volatility plays a role in debt choices. The valuation of equity along with the various capital structure theories will be discussed in depth to ensure a full understanding of the concept. Lastly, the paper will recommend the optimal capital structure theory with arguments in favor of the decision.
Image of page 2
3 Research Paper 6: Capital Structure Capital structure is a very important part of how a company utilizes their capital in order to increase profits as well as provide shareholders with wealth. Shareholders are commonly used to maximize the capital invested into a company, in return for an ownership interest. Working capital has always been a vital aspect of the business world, it goes hand in hand with profits. By properly managing the capital, a company gains the funds to manufacture their products or services, which will in turn increase their profits and returns to shareholders. This is essentially how businesses work, capital is necessary for a business to operate. The current assets of a company are often considered to be the working capital of the company. They are referred to as such because the assets are often turned over in less than a year, for the benefit of the company. There is also the net-working capital of a company, which is the current assets reduced by the current liabilities. The net operating working capital (NOWC) provides the superior scenario when dealing with the cash flow of a company. The NOWC differs from the net-working capital because the NOWC takes into consideration the removal of interest-bearing notes as they are considered to be long term liabilities (Brigham & Houston, 2018). To offset their liabilities, a company must use their assets, and this is why the NOWC is so important. It measures the ability of the assets to offset the liabilities. Another vital aspect that needs to be taken into consideration, which shows the capital structure of a firm, is the return on equity that the company is able to provide to shareholders. The return on equity is calculated using the DuPont equation which is show below: ROE = Profit margin X Total Turnover X Equity Multiplier = Net Income/Sales X Sales/Assets X Assets/Equity This equation provides the best strategy for a company to follow in regard to investments. This will show the company that the higher the risk on the market, the higher the return may be. The
Image of page 3
4 Research Paper 6: Capital Structure purpose of this equation is to show the analysis of the asset turnover ratio and also the profit margin of a company (Soliman, 2008).
Image of page 4
Image of page 5

You've reached the end of your free preview.

Want to read all 10 pages?

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes