The financial structure of a company is designated by the addition of its financing components, determining the specific means that administrators use to obtain future benefits.
Currently organizations in general have an obstacle in front that can sometimes be disastrous for their consolidation and maintenance in the market, this barrier is the financing of their operating activities, either with their own resources or with those of third parties.
In a market as competitive as the one that is currently presented, obtaining resources is extremely difficult, therefore it is necessary to analyze some of the factors that may become relevant in this analysis to obtain capital. Firstly, the types of capital that the entities are worth will be exposed, then the structure of the financial capital of the companies will be analyzed, which is closely linked with their financial situation and with their types of short and long-term financing, additionally The ways of measuring this structure will be defined, ending with the main analysis approaches and theories for these cases.
Capital is the measure of all the cash that has been deposited in a company, regardless of the source of financing, the accounting name or purpose of the business.
Capital
The capital of the companies this meaning with the means that they have in their funds for a permanent or long period of time, mainly these are received from two sources:
- For contributions from the owners, which consists of all the outlays in money, kind or industry that are carried out indefinitely by the people who have in their power the primary rights of the company for its constitution, in this sense their sources of contribution are in the common shares, preferred shares and retained earnings from previous periods. Due to indebtedness with third parties, which includes any type of resource obtained by the entity for long-term loans or credits. A company can only use a given amount of debt financing because of the fixed payments related to it.
These sources of financing have some differences that are obvious, the first is the prescription or the time when the resources are available to the entity, while the first are permanently maintained, the second have an expiration date, another is that creditors do not have a voice in decisions made by administrators regarding the operation and activities of the company, but these creditors have priority over the income and assets of the company in the event of liquidation.
The main forms of Financing of the Company are: Indebtedness, Issuance of Common and Preferred Shares and Retention of Profits to Owners
Capital structure
The theory of capital structure is deeply associated with the cost of capital of the company, within the studies that have been carried out on the subject, there are many appreciations on the "optimal capital structure" without reaching a unification of criteria, some defend the idea that the optimum can be reached, the others, however, are convinced that this is not possible, they have only reached the agreement that a good combination of the resources obtained in debts, common and preferred shares should be obtained and equity instruments, with which the company can finance its investments. This goal may change over time as conditions vary.
The way to determine the "optimal capital structure" is one that maximizes the company's share price linked to the cost of capital, which therefore has to be minimized.
The factors that influence the decisions of the capital structure are mainly the business risk that is inherent to the operational activities of the company (the higher the risk, the higher the return), the tax position of the company due to the interests that are deductible. income, the depreciation method of fixed assets, the amortization of tax losses and the amount of tax rates.
Faced with the types of risk that arise in companies, it could be said that there are three: operational risk, financial risk and total risk, which are closely linked to the company's capacity. Operational risk is the risk of not being able to cover operating costs, Financial risk is the risk of not being able to cover financial costs and Total risk, which is a kind of total leverage. (In later articles this topic will be explored further.)
Approaches: • Traditional • Net income • Net operating income • Modigliani and Miller
Capital Structure Approaches
The guidelines for analyzing the "optimal capital structure" are essentially divided into those that support the theory that this optimum can be consolidated within the company and those who support that this optimum does not exist, then the following approaches are presented:
The traditional approach: This approach proposes that the company can reduce its cost of capital and increase the total value through the reasonable use of leverage, this leads to the fact that the cost of capital is not independent of the capital structure of the company and that it exists an optimal capital structure.
The net profit approach: In this approach, the profits available to common shareholders are capitalized at a constant rate that is calculated by dividing the net operating profits of the company by the total value of the company.
UN = Net Income / Total Capital
The net operating profit approach: The assumption for this approach is that there is an overall company capitalization rate for any degree of leverage. The market capitalizes the value of the company globally and as a result, the breakdown between debt and equity is irrelevant.
The MM approach: The drivers of this approach are Franco Modigliani and Merton H. Miller, these in their studies affirm that the relationship between leverage and cost of capital is explained by the approach to net operating income; they argue that the total risk for all holders of the company's securities is not altered by changes in the capital structure and therefore is the same regardless of the financing mix.
This theory demonstrated under a set of very restrictive assumptions, that due to the tax deductibility of interest on debts, the value of a company will continuously increase as they use more debts and therefore their value will be maximized by financing almost fully with debts.
UAII - UPA Approach: This is based on the separation of the capital structure that maximizes earnings per share throughout the expected interval of earnings before interest and taxes. The main emphasis is not made in calculating the effects of different financial structures on returns in favor of owners.
In conclusion, the capital structure significantly affects the situation of the company and puts it at an advantage or disadvantage compared to the competition, it is evident that the company that has a capital structure very close to the "optimal" and maximizes its value against the others will have a greater chance of establishing themselves in the new competitive market order.
In reality, each company chooses the capital structure that is most convenient for it, since there are internal and external factors that condition the decisions of the top management and the administrators of the entity, for which reason it is recommended to carry out a careful study of that structure. the most profitable, to achieve greater value for the company and its shareholders, bearing in mind that profit maximization is not the only thing that drives the owners of the entities.
