1. How business performance measures affect the capital structure of the firm?
- Business performance that affects capital structure of the firm includes financial and
nonfinancial drivers. Some examples of these are choice of location, capitalization,
export performance and managerial efficiency have an influence on the firms’ capital
structure. The adoption of best management practices is a source of competitive
advantage, positively related to firms’ performance, growth and survival.
2. What is the impact of financial structure on planning performance evaluation?
We use measures/ratio to evaluate performance valuation. These measures determine the
company’s ability to withstand competition and adverse rising costs, falling prices or declining
sales in the future and capitalization.
● Debt leverage - shows the degree to which a business is utilizing borrowed money.
Companies that are highly leveraged may be at risk of bankruptcy if they are unable to
make payments on their debt; they may also be unable to find new lenders in the future.
Leverage is not always bad, however; it can increase the shareholders’ return on their
investment and make good use of the tax advantages associated with borrowing
● Liquidity - t shows the ability to convert an asset to cash quickly and reflects the ability of
the firm to manage working capital when kept at normal levels.A firm can use liquid
assets to finance its activities and investments when external finance is not available or it
is too costly.
● Net investment - is the total spending on new fixed investment minus replacement
investment, which simply replaces depreciated capital goods. This ratio helps to give a
sense of how much money a company is spending on capital items used for operations
(such as property, plants and equipment).
3. What is the effect of capital structure on discount rate for capital projects?
- The company has a responsibility to give a return to its funding providers.The
company may have raised funds from more than one source of finance, in which
case WACC (Weighted Average Cost of Capital) must be found, which indicates
the minimum rate at which the company should earn from the business in order
to give a return to its finance providers, as per their expectations. The effect of
this are; (1) When the new projects have a similar risk level or the risk level is the
same as the existing projects of the company; it becomes an appropriate and
preferred benchmark rate to decide the acceptance or rejection of these new
projects. (2) Calculation of EVA - When calculating the EVA, WACC serves as
the cost of capital of the company. This is how WACC may also be called a
measure of value creation.
4. What is venture capital?
- Investing in companies that have undeveloped or evolving products or revenue. It lays
particular stress on entrepreneurs attempts and less mature business. A venture capital
fund invests for a very long time, has relatively small number of stocks and seeks very
high returns.
