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Financial Management - CAPITAL STRUCTURE THEORIES

Analysing alternate financial plans - CAPITAL STRUCTURE THEORIES

   Posted On :  20.06.2018 03:18 am

Normally capital budgeting decisions are made for replacement of worn out or obsolete machineries.

Analysing alternate financial plans
 
Normally capital budgeting decisions are made for replacement of worn out or obsolete machineries. In case the machineries have not worn out but they have not contributing optimum production quantities, such replacement decisions may also be made.

Sometimes capital budgeting decisions are made for modernization of the plant and machinery. They are also made for replacing manually operated machineries with totally automated machineries. Most of the times, the plant and machinery may need latest technological up gradation.

If they are not technologically up graded, the companies may lose out to those companies which have gone for latest generation technologies as it is always observed latest technology normally result in cost of production going down and naturally the companies which opt for latest technology would be able to better quality products at comparatively lower cost.
 
Many times companies will need to made capital budgeting decisions to take care of their expansion programmes to meet growing existing market requirements. They are also made to penetrate into newer markets – regionally and globally.
 
Having achieved name and fame in the market with their quality products, companies may take up diversification programmes to enlarge their business operations. Capital budgeting decisions are made for them also.
 
The funds needed to meet these capital budgeting decisions can be met through either internal funds generated (by retaining earnings in the previous years) or through debts and financing by banks and financial institutions. Sometimes they are also met through raising fresh external equity
 
These capital structure decisions will also require reviewing and analysing
 
1. Existing capital structure
 
2. Desired debt-equity mix
 
3. Pay out policy
 
Moving over to desired debt – equity mix of any capital structure decisions, a company will need looking into its effect on future returns and effect on risk, both of which will impact the cost of the capital. The cost of capital decides the optimum capital structure and this will facilitate evaluating the value of the firm. 
Tags : Financial Management - CAPITAL STRUCTURE THEORIES
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