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Describe how you would determine and apply the organizational value in relation to capital structure.

  1. Describe how you would determine and apply the organizational value in relation to capital structure.
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Here , first we need to understand the capital structure of a business .

It is the capital which is essential to run a business and we can source it from mainly -

(I) Owner's equity and

(II) Debt equity

(I) Owner's equity-

(a) Money invested in business initially

(b) Previous year profit

(II) Debt equity - Debt equity is the equity we borrow from certain institutions and individuals by paying interest on the same.

Debt equity is considered to be cheaper because of interest or cost of money is tax deductible expense and when it is borrowed at a reasonable interest rate.

There is another way of financing the business which can be called vendor financing , it means a business sell it's goods and realizes the cash before paying to its vendor. This way of financing is the most productive method.

We can determine capital structure's health by a tool named debt equity ratio = Debt/equity. Higher ratio shows much credible business to lend or invest money in and vice a versa.

But it doesn't mean optimum productivity of investment further a business needs to apply it's capital in a manner that it can achieve following goals -

(I) To maintain business's credibility to raise funds.

(II) Minimise the cost of money borrowed.

(III) Minimizing financial risks.

(IV) Optimum productivity on capital invested by owner.

a business needs to be structured it's capital and application of the same in a manner that it can achieve above four goals.

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