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Guidance Understanding Equity Capital & Trading

"AFTER HEAVY financial crunches in the economy, Corporate body, is quite CRITERIA perfect mix of capital sources OTHER TO ENSURE GOOD AND RETURNS TO OVERCOME THE LOSS FUND. "

 

Here, some key terms are defined with reference to system of a company:

 

CAPITAL STRUCTURE

The types of securities to be issued and proportion that make up the capitalization is known as capital structure or financial structure.

capital structure refers to the proportion of different types of securities issued by a company for long-term financing. Therefore denotes the capital structure: (1) the types of securities issued (equity shares, preference shares and bonds), and (ii) the relative proportion of each type of security. In other words, the capital structure represents the proportion of Section equity and capital used to finance the operations of a company. A proper balance must be obtained at the following values or sources of financing to maximize wealth of shareholders equity of the company:

(A) shares of equality,

(B) preference shares and

(C) obligations

Characteristics of solid capital structure

A company's capital structure is said to be optimal when the proportion of debt and equity is such that the results in the maximization of profitability for equity shareholders. This structure may vary from company to company depending on the nature and size of operations, the availability of funds from different sources management efficiency, etc.

A solid capital structure should possess the following characteristics:

(I) MAXIMUM RETURNS.

(Ii) less risk.

(Iii) Flexibility

(Iv) ECONOMY.

(V) DYNAMIC.  

 

Financial leverage and capital GEAR

A company can raise capital by issuing three types of values: (a) of the shares, (b) preferred stock, and (c bonds). The preferred shares have a fixed rate of dividends and bonds have a fixed interest rate. The capital stock paid dividends of profits left after payment of interest on bonds, and preferred stock dividends. Therefore, dividends on capital stock can vary year to year. Equity shares are known as equity securities and bonds and preferred stock as debt securities. If the rate of return on fixed income securities is less than the rate of business profits, the stock returns capital will be higher. This phenomenon is known as financial leverage or gearing capital.

Therefore, financial leverage is an agreement fixing the return values taking (bonds and preferred stock) are used to raise cheaper funds to increase profitability for shareholders capital. It should be noted that a lever is used to lift something heavy through the application of less force than otherwise required.

Capital Gear indicates the relationship between various types of securities and the total capitalization. The capitalization of a company is very focused when the proportion of equity to total capitalization is small and is low when oriented social capital dominates the capital structure.

Capital gearing is calculated by setting the relationship between the amount of equity (representing variable values that generate revenue) and the total amount of securities (shares, preference shares and bonds) issued by a company. Here the capital structure of two different companies is presented. Both companies have issued total R values is worthwhile. 20,00,000 equity shares and have amounting to Rs. 5,00,000 and Rs. 15,00,000 respectively. Company A is highly targeted as the ratio of equity to total capitalization is small, ie 25%. But in the case of company B, this ratio is 75%, so it is low gear.

ANALYSIS OF CAPITAL GEAR

Company A

(Rs)

Company B

(Rs)

(A) Equity share capital 5,00,000

(B) 15,00,000 Debentures

(C) Total capitalization 20,00,000

(D) Capital Guidance (a / c × 100) = 5,00,000 × 100

20,00,000

= 25%

High Gear

15,00,000

5,00,000

20,00,000

15,00,000 × 100

20,00,000

= 75%

Low Gear

Securities issued should have several that relationship to the total capitalization of the capital structure that is safer and cheaper.

equity shares to be issued in case of uncertainty of income. Preferred stock, including cumulative, shall be issued when the average wage is expected to be quite good. Debentures must be issued when the company expects earnings significantly higher in the future to pay interest to debenture holders and increase return on capital.

TRADE ON EQUITY

Trading in equity is an agreement by which the financial management raises funds by issuing securities that have a fixed interest rate (or dividends), which is lower than the average wage of the company. This is done to increase the performance of actions capital.

Suppose that a company requires an investment of Rs. Win Rs 10 lakh. 2.5 lakhs @ 25 percent per year to increase this amount, we can consider two proposals, namely (A) to issue one lakh equity shares of Rs. 10 each: and (B) to issue equity shares worth Rs. 2.5 lakhs (ie, 25,000 shares Rs. 10 each), R 8% preferred stock by value. 2.5 lakhs, and 10 percent of liabilities amounting to Rs. 5 lakhs. The tax rate assumes that 40 percent. Earnings per share under the proposed "B" will be greater due to the application of 'trade in equity. As shown in the table below, earnings per share (EPS) under the proposal B is Rs. 4.00, compared to Rs. A 1.50 as proposed due to the use of debt and preference capital raising funds.

EFFECT OF FAIR TRADE

Data Proposal A

Proposition A

Earning before interest and taxes (EBIT) Rs. 2,50,000

Less interest in Bonds (10%) None

Winning after interest and before 2,50,000 Tax

Less Tax (40%) 1,00,000

Winning after interest and taxes 1,50,000

Less preferred dividends (8%) None

Winning available to shareholders 1,50,000

No. 1,00,000 equity shares outstanding

Benefit per share (EPS) Rs. 1.50

Rs. 2,50,000

50,000

2,00,000

80 000

1,20,000

20 000

1,00,000

25 000

Rs. 4.00

About the Author

By:

        Mr. Vishal Saxena            

                Lecturer,

   Dept. Of Commerce & Mgt.

National PG College, Lucknow