3.5 5 Financial objectives - capital structure

Question 1

Capital Structure

Answer 1

Objectives are targets relating to the extent the business is financed by its owners, or money borrowed from external sources

Question 2

What is long term funding also known as

Answer 2

capital employed and it shows where a business has got its money from

Question 3

What does capital employed include?

Answer 3

Share (equity) capital, Debt capital and retained profit

Question 4

What is debt capital

Answer 4

money which has been borrowed (often comes from banks in the form of loans and mortgages, and needs to be repaid

Question 5

How do you work out the proportion of long term funding which is debt

Answer 5

Debt capital / total capital employed x 100

Question 6

What is meant by total capital employed

Answer 6

total money which has been invested to get the business off the ground

Question 7

What is the term used when a company is funded by debt

Answer 7

gearing

Question 8

What is gearing a measure of

Answer 8

Gearing is a measure of risk, because the more debt that has been used to fund the business, the more the business is vulnerable to changes in the interest rates etc…

Question 9

Characteristics of Equity capital

Answer 9

• Does not have to be repaid
• Share may expect but are not entitled to a share of annual profits
• Annual cost of equity capital may vary. one year dividends may be paid, the next shareholders may accept lower dividends to allow the business more funds to invest

Question 10

characteristics of debt capital

Answer 10

• Money borrowed by the business in order to invest
• Money is repaid over a set period of time
• annual interest rate is charged for the loan (usually lower than dividend payments)