Current Issues In Finance Essay Example | Topics and Well Written Essays - 2500 words

Current Issues In Finance - Essay Example According to the theory of capital structure, the major features of the conception constitute with maximum return with minimum risk, flexibility in resource allocation, adequate liquidity, conservation of reserves, balanced capital flow and leverage, which accumulatively helps in assisting the smooth flow of finances stimulating the overall business operations. It is in this context that according to the theorem presented by Modigliani & Miller, there are various factors on which the managerial decision of configuring an appropriate capital structure is depended (Kumar & Sharma, 1998). The objective of this paper is to discuss about the importance of capital structure with reference to the financial configuration of a Hong Kong based real estate company named Henderson Land Development Company Pvt. Ltd. With this concern, the paper will also attempt to examine the utilisation and importance of capital structure from a generalised points of view narrowing towards its implications on t he company. Modigliani & Miller’s theorem towards capital structure will also be taken into account for the purpose of this study. Description of Capital Structure Capital structure can be defined as the framework or planned method through which a company attempts to control its allocation as well as flow of finances in its operational process mitigating financial interruptions by a considerable extent. According to the theory presented by Modigliani & Miller, capital structure represents the general distinction between leverage and equity describing the conditions under which a firm’s value can prevail unaffected due to the financial decisions taken by the management (Villamil, 2005). It is worth mentioning that from a generalised point of view, it has often assumed that equity propositions and leverage functions of any organisation is highly affected with its financial decisions, both in the short-run and in the long-run as well. As stated by Baker & Martin (2011), à ¢â‚¬Å"capital structure refers to the sources of financing employed by the firm† (pp. 1). It is in this context that there are various available options which are generally availed by organisations to accumulate the required amount of capital or funding for the smooth execution of its organisational operations in the long run. Contextually, the decisions, taken by the organisations in order to accredit its capital structure, have often been witnessed to have a crucial impact over its competencies and the financial risks probably faced by the firm in its long run performances (Baker & Martin, 2011). Although the capital structure related decisions taken by organisations have been frequently considered as one of the major reasons to face noteworthy consequences, especially in the post economic crisis period, the formulation of the capital structure has also been identified to have considerable positive impacts on a company’s financial affairs. Contextually, the major feat ures of capital structure are identified as profitability, flexibility, control and solvency. Profitability can be defined as the process of utilising maximum resources in the business process engaging minimum cost which subsequently gives rise to the profit ratio. In the similar context, flexibility can be discussed as the process in which the capital stru