Theory of Extreme Capital Structure Essay Example | Topics and Well Written Essays - 1500 words

Theory of Extreme Capital Structure - Essay Example Therefore, capital structure can be defined as the arrangement of capital. In order to analyse capital structure, we need to highlight the difference between capital structure and financial structure. The terms are interchanged in some circles to mean the same, but they are not quite the same. Financial structure is the sum of all the means the firm uses to fund its activities. Therefore, financial structure comprises of net worth and liabilities of the company i.e. short and long term. The capital structure on the other hand is financial structure excluding short term borrowing. Capital structure has already been seen as two-fold, with the finance and asset structure. The source of capital is what determines what asset will be purchased. The structure of capital is categorised as follows: 1. According to sources: The structure may either be simple or complex. A simple structure consists of a single source while the complex is where the sources are more than one. (Although retained e arnings is not considered an additional source). This mode is only possible under the fund concept because it is rare for a firm to have one asset, invalidating the asset concept. 2. According to sources This is broadly categorised into internal and external sources. Internal sources comprise of share capital (bonus issue), capital reserve, and reserve and surplus. On the hand the external sources include share capital (bonus issue excluded), share premium, forfeited shares, long term and short-term liabilities and debentures. 3. According to ownership This is either ownership capital or creditorship (debt) capital. Ownership capital includes equity share capital and retained earnings while creditorship comprises of debentures, long-term and short-term liabilities. It is agreed by all accountants where preference shares should be grouped as they have the both elements of ownership and debt. 4. According to cost behaviour This classifies the assets as either fixed cost or variable co st, depending on their expense implications. The fixed cost capital include preference share, long term debt and debentures whereas variable cost capital include equity share and short term liabilities. Firms have different capital structures depending on industry, company type, and proportion of capital contribution. The theories of capital structure try to ask the pertinent questions in leveraging, valuation, and financial balance. This involves evaluating how a firm can affect its total valuation factoring debt and equity, how debt affects the firm’s position. This is by use of accounting ratios 1  Where  is the firm’s debt yield, assuming the element of perpetuity of debt 2.  [E=EBIT-I] Where we assume 100% dividend payout and the firms earning are constant with no element of growth. Therefore, the earnings/price ratio gives the market discount rate, which equals the present value of the series of expected future dividends at the existing market value of the share. 3.  Where  is the firm’s overall capitalisation rate. It computation is normally the weighting of the cost of capital as shown below + The theories of capital structure try to explain the relationship between capital, leverage and the firm’s value. What we want to know is what happens to , and when the degree of leverage (D/V) increases or how is the value of capital

Economy of Bahrain Essay Example | Topics and Well Written Essays - 2000 words

Economy of Bahrain - Essay Example Petroleum production and processing are the main exports of Bahrain. The economic conditions of the country have depended on the price of oil. Bahrain's infrastructure is highly developed. Many multinational firms have their head offices in the country. The country also exports petroleum products. The construction industry is also a major source of revenue for the government. Bahrain has a GDP per capita of $20,500 according to research conducted in 2005. It has a purchasing parity of $14.08 billion. Bahrain is a prosperous country by regional standards. It has pursued a neutral foreign policy and is famous for its tolerance. It is the fastest growing economy in the Arab world. It has a large population of international expatriates. Despite an impressive standard of living, Bahrain suffers from poverty and poor living conditions. At least 20,000 families receive financial assistance from Ministry of Labor and private organizations. Recent studies have found that the poverty income threshold is Bahraini Dinar 209 per month. The poverty level for Bahrain is at least a quarter of the total population. At least 200,000 people suffer from poor living conditions. Many people do not have decent housing. More than 30,000 families with low incomes have inadequate housing facilities. The average income has been increasing but the poverty rate has also increased. The The rise in poverty has been attributed to corruption, poor planning, low wages, influx of foreign workers and income inequalities. Further a small group of wealthy and powerful people dominate the economy. These are considered as major obstacles to real reforms. Large areas of land have been taken over by powerful people. This has caused property prices to increase and put tremendous pressure on low income people. Poverty is clearly causing an adverse impact on society. Crime, divorce rate and increase in workers working in poor conditions are direct results of poverty (Moore, 45). Income distribution Compared with other regional countries, Bahrain has a low poverty rate. However most of the wealth is concentrated in the hands of the Sunni minority. The average daily expenditure is US$13.9 per person in Bahrain. This is compared with an average income of 12.8 dollars. The reason is that Bahrain has a negative savings level at the national level. Bahrain's population does not suffer from poverty compared with regional countries. Research has shown that 12 percent of the population has an average income of less than five dollars per person. The expenditure required by a Bahraini to sustain basic expenses is an estimated US$42 per month. Majority of Bahrain's population lives in apartments while the remaining owns their houses. The average Bahraini also has ownership of electronic appliances and amenities which show that the majority of families enjoy an impressive standard of living (National Accountant, 34). Economic growth rate Bahrain's economic growth rate has increased in 2007. It has been bolstered by high oil prices and increase in non oil exports. The financial sector remains the main part of the economy. The government is also addressing issues like unemployment and rising crime. The economy has registered a 7.0% growth in 2007. The growth rate is expected to