Capital Structure

FIN 100 - Strayer University

Capital Structure

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Strayer University

FIN / 100

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DATE

Capital Structure and Business Financing

Capital Structure is the proportion of debt, preference and equity capitals in the total financing of the firm’s assets. The main objective of financial management is to maximize the value of the equity shares of the firm. Given this objective, the firm has to choose that financing mix/capital structure that results in maximizing the wealth of the equity shareholders (Graham & Smart, 2012). Such a capital structure is called as the optimum capital structure. At the optimum capital structure, the weighted average cost of capital would be the minimum. The capital structure decision influences the value of the firm through its cost of capital and can affect the share of the earnings that pertain to the equity shareholders.

There are 4 basic Capital Structure theories are:

* Net Income Approach

* Net Operating Income Approach

* Modigliani-Miller (MM) Approach

* Traditional Approach

Business Financing

In business there are several forms to consider when starting the organization, this paper will be focusing on the creation of a general partnership.   A general partnership is one of the simplest forms of business to create because all it really takes is an agreement to form between two or more individuals and that is it.   No complex documents to submit, no issuance of private stock, no bylaws or need for a board of directors (baker & Wurgler, 2002).   Its simplicity is a general partnership' biggest assets although it is not its only one.   Another big benefit to the general partnership is the pass through of tax liability.   From a tax standpoint, the partnership is as straightforward as the sole proprietorship. There is no tax at the partnership level. All tax consequences are passed through to the individual partners(Graham & Smart, 2012). The...