Capital Structure and Dividend Policy
Category : Capital Structure, Finance Essays
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Capital Structure and Dividend Policy
In every business, capital structure is the primary important; this is the company’s percentage of money invested in the business. The capital structure of any company shows the large influence and possible outcome of the company’s revenues, it also determines the earnings that will go to the shareholders of the business. Generally speaking, it comprises the invested money, purchased land, equipment, buildings, and other materials that are bought in cash to be used in the business. All the things that can be converted into cash or even used as collateral for business loans are considered as part of the capital structure of the business. The capital structure is how the company finances its entire operations and expansion by utilizing different financial sources whether it’s from equity capital, debt capital, and other form of capital such as vendor financing. Vendor financing is a process of selling goods or products before paying the bill to the vendor. It doesn’t cost anything to the company; instead it gives more return of investments.
Foremost, capital structure includes equity capital, it is the money owned by the shareholders or owners of the company. Usually, equity capital has two kinds, first is the contributed capital- this is the money which has invested in the business by the shareholders or owners. Second is the retained earnings, this represents the profits or earnings of the company that is being kept by the company to use as additional fund for growth, acquisitions and expansions. Another form of capital in the business is the debt capital through long term debt and specific short-term debt. This money which is a part of company’s capital structure is borrowed or loan from the banks or financial institutions to finance the other requirements of the business. Furthermore, capital structure is the firm’s debt-to-equity ratio, which determines if the company is growing or not. Typically, a business is more at risk of bankruptcy if it is more largely financed by debt. Additionally, equity capital is the total value of the asset less all liabilities. Businessmen or entrepreneurs usually start their companies with other stockholders in the business in order to contribute to the increase of the business capital. In this connection, the management of the company is authorized to use the collected money capital to invest in the factories or plants and to purchase equipments and supplies. The stockholders use their money to buy or purchase share stock in the company. By this manner, each stockholder owns a share or percentage of the company through investing their money as part of the capital of the company.
Moreover, the earned capital in the business is also used to build ownership through increasing the company’s assets; it is also used as collateral for business loans. Entrepreneurs and stockholders usually buy or purchase equity through cash capital. At the same time, the owned equipment can also be used as cash capital in the business. In addition, there is other way to purchase equity other than by using cash; many companies that started in giving people or their employees’ shares of stock in payment for their work. This process is called sweat equity.
Nonetheless, dividend policy refers to the company’s regulations and guidelines on paying out systematically and orderly the dividend payments to the shareholders of the corporation. Having a dividend policy is very effective for both the company and the shareholders. Documentation is very important in paying dividend shares because it determines the exact amount of payout profits generated for the specific period. It is easier to monitor and figure out the impact of the dividend policy in the entire operation of the business. In relationship thereof, dividends are payments made by the corporation to its shareholder members when a company earns a profit or surplus. And that money can be used as a retained earnings-meaning it can be invested additionally in the business. Many corporations retain a portion of the shareholders’ profits and what ever money left will be paid to the shareholders as dividends. Equally important, there are various kinds of dividend pay outs. First is the cash dividends, this is paid out to the shareholders in currency through electronic funds transfer or by check; this is taxable. Second is the stock or scrip dividends, this is paid out to stockholders in the form of adding stock shares or issuing stock shares to be added to their investments in the company. Third type of paying out dividend is in the form of property dividends or assets, products or services from the issuing company.
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