02-06-2012, 01:33 PM
Capital Structure AND Financial Leverage Analysis of Software Industry
capital-structure-financial-leverage-analysis-of-software-industry-1230573195981340-2.ppt (Size: 833.5 KB / Downloads: 45)
Objectives of the Study:
To study as to why the Capital Structure of Software Companies is different from other Industries.
To study the reasons as to why software companies are not using component of Debt Capital to financially leverage their Earnings.
Capital Structure:
Capital Structure is the mixture of sources of funds a firm uses.
Sources of Funds:
Debt
Preferred stock
Common Stock
A firm with a lot of debt in its Capital Structure is said to be highly levered.
Financial Leverage:
Financial leverage occurs whenever a firm finances with interest-bearing debt.
It occurs due to the Fixed Interest Charge.
To ascertain whether management is able to earn more on the debt funds than the funds cost.
If a firm does not have any interest-bearing debt financing, then it does not have any financial risk and cannot realize financial leverage.
How Much Cash Does Your Company Need
HBR Article by Richard Passov.
He proposes that Traditional Capital Structure model should account for complications faced by companies in Knowledge Based Industries.
Knowledge-Intensive Companies experience relatively high volatility of their intangible assets.
Reasons for High Volatility:
Assets are company specific & require considerable investment to exploit,
Intangible assets cannot be hedged.