ACC2015M Financial management Assesment

Running head: ESSAY 0
ACC2015M FINANCIAL MANAGEMENT
JANUARY 3, 2020
STUDENT DETAILS:

ESSAY 1
The Financial Times (29 January 2018) declared certain statistics in relation to the dramatic trend
of de-equitisation in European market as well as the US and emerging markets- ‘De-equitisation,
the shedding by corporate of equity in favour of debt, has been the theme for the past decade as
lower interest rate permitted organisations to borrowing cost were formerly unimaginable.
However, these explanations for de-equitisation are unproductive. This capital structure theory is
known as Modigliani-Miller after the Nobel Prize-winning economists who developed it. As per
this, all things being equal, the organisation’s true value is independent of how this is funded
nevertheless with corporate tax rates in the US and UK cut to levels unimaginable a few decades
ago, the relative benefits of debt issuance are less obvious than they once were.’ In this essay, the
theories of capital structure and connection between theories as well as real-world observations
or empirical evidence is discussed and critically examined. This essay will discuss the role of
financial manager in deciding the optimal capital structure of an organisation.
A capital structure is considered as outstanding equity as well as debt of company. The capital
structure permits the organisation to know what type of financing the organisation utilises for
funding the overall functions along with development. In different terms, the capital structure
states a part of senior as well as subordinated debts, as well as common equity or preferred
equity in a financing. A capital structure is known as the amount of permanent short-term and
long-term debt, common equities, as well as preferred stock used to renders funds for the
company. Therefore, the capital structure is considered as a part of financial structure, which
represent the permanent resources of the financing of organisation. As per the traditional view,
the debt is inexpensive in comparison of the equity. This is main reason that the debt finance is
more preferable over the equity. The investor does not need as high the return (creditor rank

ESSAY 2
ahead of shareholder along with can be offered security). The lower cost of raising debt (bank
arrangement fees or issue costs of a bond) is another reason. The debt can be cheaper for the
reason that the interest is taxation deductible.
Additionally, organisations finance certain functions of business with equity, debt or
combination of both. The weighted average cost of capital is considered as rate that entity is
expected to make payment on the average to every security holder for financing the assets. While
utilising the method of weighted average cost of capital method, cost of good available for sale is
divided by the number of selling units. It produces the weighted average cost per unit. It can say
that the cost of goods available for sale is the sum of net purchase as well as opening stock.
The weighted average cost of capital is normally considered as the cost of capital of entity.
Significantly, it is dictated by the external marketplace and not by administration. The WACC is
considered as the discount rate to calculate NPV of business. The weighted average cost of
capital is utilised to assess the opportunity related to investment, as it is considered to state the
opportunity cost of company. In this way, this is utilised as the hurdle rate by the organisations.
There is significant relationship between capital budgeting theories and real-world observations
or empirical evidence. The organisations operating in the dynamic atmosphere should make
responses to change to beat competitor as well as to withstand, survive along with development
in the marketplaces. The capital budgeting theories are helpful in taking relevant decisions in
relation to the contingency factors. In the present world of social, financial along with geo-
political uncertainty, the strategic financial administration is a procedure of change, in turn
requiring the re-examination of the basic assumption.
As the financial manager has significant role in taking decision of optimal capital structure,
depended on financial proportion, a value of organisation as well as WACC are affected. The

ESSAY 3
four categories of capital structure theories are net income approach, traditional approach, as
well as net operating income and Modigliani and Miller approach. Durand advised the net
income approach. Durand was in favour of the decision of economic advantage. As per the view
of Durand, the changes in financial leverage will make the changes in cost of capital. Therefore,
in a case when ratio of debt in capital structure is enhanced, and weighted average cost of
capital is reduced. In that case, the value of organisation will increase. Next approach is net
operating income approach. Durand also renders net operating income approach. It is not as same
as the net income approach if there is no tax. It is stated by net operating income method that
WACC will be constant. It is also believed that the marketplace assesses the organisation wholly.
In addition, it also discounts at the specific rate that has no relationship to the debt-equity ratio.
In a case when the data related to tax is provided, then it is also recommended that with the rise
in debt financing weighted average cost of capital reduces, as well as values of organisation
would start to increase1.
Furthermore, the traditional approach is not succeed in defining the hard as well as fast fact or
data. As per the traditional approach that the cost of capital is considered as the activity of a
capital structure. The great in relation to the traditional approach is that this approach supports
the optimal capital structure. The optimal capital structure states that at specific proportion of the
equity as well as debt, cost of capital is least and organisation’s value is extreme. On the other
hand, the M&M approach is considered as the capital structure theory named after Franco
Modigliani as well as Merton Miller. The Modigliani and miller approach rendered 2
propositions. The proposition I states that the capital structure is unrelated to the organisation’s
value. The value of 2 recognised organisation will remain similar and value will not influence by
a selection of finance followed for funding the assets. The value of the organisation is relied on
1 Kelvien Brusov Capital Structure: Modigliani–Miller Theory. (Routledge 2018)