Strategy and Finance: Factors, Measures, and Optimal Capital Structure

Running head: STRATEGY AND FINANCE
Strategy and finance
Name of the student
Name of the university
Student ID
Author note

1STRATEGY AND FINANCE
Table of Contents
Factors that influence the capital structure of the company.......................................................3
Measuring capital structure ratio................................................................................................4
Advantages of equity financing.................................................................................................7
Optimal capital structure............................................................................................................7
Using preference share as capital...............................................................................................8
Reference..................................................................................................................................10

2STRATEGY AND FINANCE
Next is the UK based retailer that was established in the year 2982 and offers
designed, exciting, excellent quality, beautiful footwear, clothing and accessories and various
home related products. The company mainly distributes its products through 3 major
channels – Next international retail that have more than 200 main franchise stores, Next
Directory that is its home shopping sector having more than 4.5 million customers all over
from UK and overseas and Next retail that is the chain of more than 540 stores in Eire and
UK. Main financial objective of the company is to provide long term returns to the
shareholders through combination of sustainable earning growth per share and payment of the
cash dividends (Fischer 2016). The company believes that the objective can be achieved
through the following strategies – developing and improving the ranges of products, the
success for which will be measured through sales performances, increasing the profitable
Next Directory consumers and their spending in UK as well as through international sales in
online and focussing on the customer satisfaction and services in directory stores as well as
retail stores (Nextplc.co.uk 2018).
Capital structure is the part of financial structure and it refers to the percentage of
various long term financing sources. Capital structure is concerned with the way a firm
decides to segregate the cash flows in broad components – fixed component that is kept for
meeting the debt capital obligations and the residual component that belongs to the equity
shareholders. Generally, the capital structure has 2 components – the debt component and the
equity component. Each component of the capital structure has its own cost to the company
(Namvar and Phillips 2013). Various decisions associated with asset financing are crucial for
each business and the finance manager always finds it tough to decide about the optimum
capital structure or the proportion of debt and equity that will be most beneficial to the
company. However, there shall be appropriate mix of equity and debt to finance the assets of
the company. Generally, the capital structure is designed keeping in mind the shareholder’s
interest. Therefore, rather than collecting total fund from shareholders, a part of long term
capital can be borrowed in form of bond or debentures though paying fixed annual charges.
Though these charges are expenses to the company, this financing method is applied for
protecting the shareholder’s interest in better way (Kurt and Hulland 2013).
Need to have a proper capital structure are as follows –
It maximizes the firm’s market value that means if a firm has its capital structure
properly designed the total value of ownership interests and claims will be maximised.

3STRATEGY AND FINANCE
It maximizes the market price of the company’s share through increasing the EPS of
ordinary shareholders. It will also help in increasing the dividend payment to the shareholders
(Konstantelos and Strbac 2015).
It enhances the company’s ability to search for new investing opportunities that will
improve its wealth generating capacity. With appropriate gearing the company can also
increase the confidence level of debt suppliers.
It increases the growth and investment rate of the company through increasing the
opportunity of the firm in engaging into future investment that will generate more wealth
(Midrigan and Xu 2014).
Usually the firms use 2 sources for fund – equity and debt. As the new company is not
able to collect more funds through borrowing it has to depend on equity. However, after
establishing the credit worthiness in the market its structure of capital starts getting complex.
A typical complex pattern of capital structure may include – (i) long term debentures and
equity or, (ii) preference shares and equity shares or, (iii) long term debentures, preference
shares and equity (Stanyer 2014).
Factors that influence the capital structure of the company
Primary factors that have an impact on the decision of capital structure are as follows
–