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Exploring Key Concepts In Corporate Finance: Gearing, Risk Management, Capital Structure, And Stock Market Efficiency

Learn corporate finance essentials with this assignment answers document.

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Exploring Key Concepts in Corporate Finance: Gearing, Risk Management,Capital Structure, and Stock Market EfficiencyQUESTIONS AND ANSWERSCompanies should gear as much as possible in order to benefit from the advantages ofcheaper debt therebymaximizing shareholders wealth. DiscussGearing is referred to as the increasing the debt content in the organization. The capital structurein any organization has two most prominent resources for financing the needs. One is the sharecapital that belongs to the shareholders that can be either equity or preference shareholder. Theother method is the debt that is the borrowed amount from the creditors.The basic difference inthese two methods of financing is that the shareholders become the owners of the organizationand the amount contributed by them is not necessary to be returned and the dividend is notnecessarily to be paid. Compared to this the creditors are the lenders and they have to be paid inany case and the yearly interest paid to them is also compulsory, though it can be expensed fromthe P&L(Harris, M., & Raviv, A. 2012).There has to a right mix of the equity and the capital in any organization. For some it is regardedthat the debt can be two times of the equity, but any more than that shall cause seriousconstraints for the success of the organization in will be a bottleneck in the day to day working.The reasons for this are very obvious,as debt cause financial constraint in the growth of theprofits. Every loan comes with the rate of interest and that has to be serviced at regular intervalsand the principal repaymenthas to be also undertaken. If the amount so borrowed is not put themost efficient purpose and is unable to give returns equal and more than the interest than the debtservicing will become impossible and the debt service coverage ratio and the interest coverage

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