Capital structure and Capital budgeting

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Capitalstructure and Capital budgeting

Thecapital structure choice is a process whereby a company decides tofinance its assets through the grouping of its equity, hybridsecurities, and debt. The Capital Budgeting is a process thatinvolves the company’s long-term investments such as new plant, newproduct, research development, etc. Capital budgeting enables us toknow whether or not to increase the investments. The funding is madepossible through the capital structure of the company (Murthy,et al. 2011).

Howcapital structure choice influences the capital budgeting analysis

Theprimary goal of capital budgeting is to enable the company to getmore shareholders. If a corporation increases its productivity byexpanding itself then it will have an increase of shareholders. Thecapital structure influences the capital budgeting analysis when theassets accumulated cannot be able to help the company to expand. Ifthe company does not find ways to increase the number of assets, thenit will be hard for it to make a budget analysis and invest ingrowing (Murthy,et al. 2011).

Therole of bankruptcy in the capital structure choices that corporationsmake.

Bankruptcyis the process in which an individual or a company declares legallythat they cannot be able to pay their debts to the creditors. When acorporation is bankrupt a majority of them try to invest more andimprove the productivity of the company so that they can pay theirdebts. The use of the capital structure comes into use whensituations like bankruptcy tend to affect the company (He,et al. 2011).

Isit preferred for capital budgeting analysis to influence the capitalstructure

Beforea business can decide to embark on the capital structure it mustfirst to do a capital budget analysis to know whether it is better toinvest or not. It is important to conduct a budget analysis so as toavoid situations like bankruptcy etc. We have numerous companies thatmuch has been invested, but they end declaring bankruptcy and sellingoff their assets to pay their creditors (BiermanJr, et al. 2012).

Conclusion

Fromthe above statements, it is evident that capital budget analysis andcapital structure depend on each other. Companies need to use thesetwo methods for them to get more shareholders and get more profits.

Reference

BiermanJr, H., &amp Smidt, S. (2012). Thecapital budgeting decision: economic analysis of investment projects.Routledge.

He,Z., &amp Krishnamurthy, A. (2011). A model of capital and crises.TheReview of Economic Studies,rdr036.

Murthy,V., &amp Mouritsen, J. (2011). The performance of intellectualcapital: mobilising relationships between intellectual and financialcapital in a bank. Accounting,Auditing &amp Accountability Journal,24(5),622-646.

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