Abstract:
Management of the enterprise should know how the different structure of the capital affects the value of the
additional attracted capital. Therefore ,it is quite understandable their aspiration to reduce the value of the additional
attracted capital by changing the capital structure. At the same time, it is necessary to take into account the following
principles:
Since the borrowed capital is considered a cheaper source (the effect of tax savings on interest, and also, a
lenders’ risk is lower than that of owners, so owners should receive more return on invested capital to compensate for
the risk ).It can be assumed that the increase in borrowed capital and the expulsion of the equity will provide an
opportunity to solve this problem.
At the same time, a significant increase in the share of borrowed capital leans to an increase in financial
risk, since at first, the already significant share of borrowed capital forces lenders to raise interest rales; And
second, increase in the share of the borrowed capital increases the risks to owners, which necessitates an increase in the
required rate of return on equity.
Therefore, in the defined ratio of borrowed and equity, the optimal structure of resources is achieved, which
result in the effect of financial leverage. It shows how much the return on the equity increases as a result of attracting
the borrowed capital into the enterprise. It aries in cases where economic profitability is higher than the interest rate on
the loan or credit.
Description:
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