2.3 Capital Structure
Capital structure is a mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different source of funds. The two companies we have chosen are Dutch Lady Milk Industries Berhad and Nestle (Malaysia) Berhad, In this assignment we have analyze two years performance (2012-2013) of both company. We analyzed the composition of the capital structure in detail to estimate their cost of capital, and how their gearing level and cost of capital affect the firm’s value and profitability. Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements also considered part of a firm. A company's proportion of short and long-term debt is considered when analyzing capital structure. When people refer to capital structure they are most likely referring to a firm's debt-to-equity ratio, which provides insight into how risky a company is. To calculate the firm value, we used: V=B+S
B= market value of the debt
S= market value of the equity
When it comes to capital structure analysis, analysts use three different ratios to assess the financial strength of a company's capitalization structure. The first two, debt-to-asset ratio and debt-to-equity ratio, are the popular measurements. Debt-to-asset ratio indicates the proportion of debt used in financing the total assets of a firm. It is computed as: Debt to total assets ratio = Total debt
Where as, Debt-Equity ratio indicates the relative contribution of total debt and owner’s equity in the capital structure of the company; the relative contribution of each to finance the company’s assets. It is computed as: Debt to equity ratio = Total debt Total equity
The debt component includes all liabilities including current...
Please join StudyMode to read the full document