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Capital Structure - Coggle Diagram
Capital Structure
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Operating gearing
Operating gearing measures the proportion of fixed costs a company has relative to its variable costs
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In times of growth, a high proportion of fixed costs and a low proportion of variable costs can be advantageous
There is a cost advantage for producing a higher level of output also referred to as economies of scale
Higher fixed costs means greater operational gearing that makes a company's profits sensitive to change in sales revenue
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The higher the operational gearing, the higher the sensitivity of profit to a change in sales
The higher the fixed costs, the higher the operating gearing
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Financial gearing
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A measure of a company's financial leverage and shows the extent to which its operations are funded by interest bearing lenders vs shareholders
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Effect on EPS
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It affects the risk, returns and controls associated with equity capital
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Real world approaches
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Real world factors
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Capital structures can be affected by other factors such as grwoth, market conditions and tax exposure
Companies consider the signalling effect of raising new finance by assessing the impact of the new finance on a company's SOFP or P&L
Profitable companies drift wy from their optimal gearing over time whereby the level of debt-equity ratio decreases as accumulated retained earnings help to increase the value of squirt
After determining the finance required for an investment or project, a company must consider the use of various sources of finance
Capital structure refers to the mix of equity and debt financing that shows how the company or its overall operation is finance, it is concerned with the balance between equity and non current liabilities