Organizational Management and the Capital Structure example

Haven't found the essay you need?

We can write it for you. On time. 100% original.

Order Now
Text Preview

Organizational Management and the Capital Structure

The capital structure of an organization is the mix of financial securities that are used to finance the company’s activities. This mix is mostly made up if ordinary shares, preferential shares and debt. An organization will most likely have several types of ordinary shares that have different voting rights and cash claims in regard to the organization’ s cash flow that is available to the shareholder. The higher the debt level, the more financially leveraged the company is. The extent of financial leverage in the company, structure will have an impact on the value of the organization. In this research paper, we are going to evaluate how an organization’s capital structure choices impact on its real investment policy. We are going to base our arguments on a modern business viewpoint.

The management in any organization should chose a capital structure that comprises of a mix securities which will assist in minimize the costs of financing the organizations activities. Optimizing the capital structure mix will lower the cost of funding the company’s projects as well as maximize the total value of the organization. Modigliani and Miller, professors in the 1950s, argued that the capital structure of an organization will have an effect on its investment policy. They forwarded several propositions to support their point of view. The first proposition states that the capital structure choices of an organization will have no effect on the organization if there are no taxes, no transaction costs and that the real investment policy isn’t affected by the capital structure. The real investment policy in an organization will spell out the methods which a company will use when deciding what projects to invest in.

An organization’s debt value and equity value should be equal to the value of cash flows that are produced by the organization’s investment. The value of equity and debt claims which are represented by the present value of free cash flows that the organization hopes to generate in the future, remains constant when you alter the company’s capital structure since there is no other party, apart from debt holders and shareholders that are receiving cash flows. Restructuring the financial structure of an organization will not have an impact on the value of the company. This holds where a mix of financial transactions happen, changing the capital structure without affecting the real assets or the total cash flows reaching the stakeholders.

Their second proposition states that the cost expected return on the ordinary shares of an organization will be related directly to the debt to equity ratio. This means that the financial leverage of an organization is directly proportional to the cost of equity. When there is an increase in the debt of the organization, then the shareholders will translate this to be a more risky position for the company. For this reason, shareholders will be expecting a higher return on their investment and in this way increasing the cost of equity. This …

Download Full Essay Show full preview


Examples provided by Homework Lab are intended for the motivation and research purposes only. Do not submit any paper as your own piece of work. Every essay example belongs to students, who hold the copyright for the written content. Please, mind that the samples have been submitted to the Turnitin before and may show plagiarism in case of the repeated submission. Homework Lab does not bear any responsibility for the unauthorized submission of the examples.