Capital Structure Evaluation of Sample Firms Essay

Capital Structure Evaluation of Sample Firms - Essay mannikinSuch sustainable growth requires increasing investment in long name assets, which in turn needs to be financed by long term funds. The two conventional long term sources of fund are debt and equity. The proportion of such debt and equity determines the capital structure of the firm.There are benefits and shortcomings of both the financial backing options. While debt funds are considered to be less costly owing to the interest tax shield that they provide, equity funds are considered to be more than expensive owing to its inherent risk write. Though debt funds reduce an placements weighted average cost of capital (WACC), such funding increases the risk profile of the organization owing to long term commitments secured by asset collaterals, which could seriously increase the bankruptcy risk of the organization during an economic downturn.The modern thinking on capital structure is primarily based on the seminal work don e by Franco Modigliani and Merton Miller. The Modigliani-Miller theorem (1958) states that in an ideal world, the value of a firm is autarkical of its capital structure. When a firm increases its gearing ratio, the overall risk to the equity holders increase thus increasing the cost of equity, thereby having no net achievement on the value of the firm. One important aspect of this theorem is that it ignores the bankruptcy and transaction costs, and assumes information is freely available to all firms. The optimum leveraging point of an organization is, therefore, always a source of debate, and has been subject of various continuously evolving theories and models. Some of these recent theories and classical models are examined and validated by analyzing the capital structures of five organizations (PLCs) from intravenous feeding different industry sectors. The firms chosen are as below.Table 1-1Company NameIndustry SectorTESCOFood manufacturing and productsBPOil, gas and talentEx xon MobilOil, gas and energyBHP BillitonMetals and miningBritish EnergyUtilitiesTESCO is a giant in the food manufacturing sector with an annual turnover of 47.3 billion. TESCO was founded in 1919 in the UK, and has since grown to set up footprints across the world in the Asia, Europe, and the US. It is one of the leading food retailers of the world, and has diversified into petrol retailing.BP is primarily in the business of oil exploration and refining, and operates out of some(prenominal) countries. Its other businesses include alternative energy, and shipping. It has an annual turnover of $361 billion.Exxon Mobil is also in the business of oil exploration/ production, gas, and power. Its downstream business includes oil refining, and marketing of open fire products and lubricating oil. Its annual turnover is $390 billion.BHP Billiton is the worlds largest diversified natural resources company with businesses including alumina, aluminum, copper, energy, coal, iron ore, nickel, manganese, oil and gas and uranium, as well as gold, zinc, lead, silver and diamonds. It employs