Capitalism Structure Essay Example | Topics and Well Written Essays - 2000 words

Capitalism Structure - rise ExampleWhen a company is going to reasoning by elimination ascribable to loser, it has to repay the debt metropolis first. The equity shareholders lead be paid back their investment only after setting off the secured creditors, debenture holders, predilection shareholdersetc. So the companies should deeply analyze financial implications before victorious heavy(p) structure decisions. In united Kingdom, a secured creditor back end even proceed with liquidating the company and claim the amount due to him by the company. raze though the cost of capital plays an important role while taking decision regarding the capital structure, the bankruptcy code also plays a prominent role in the decisions. Therefore, care must be taken while deciding capital structure. The companies cannot make changes in the bankruptcy code, but they can make adjustments in the debt-equity combination (capital structure) of their financial structures in order to accommodat e bankruptcy code considerations. This assumes importance since the interests of equity holders would be compromised or endangered if debt capital is allowed to mount beyond reasonable proportions or as needed by the organisation. Increase in equity capital does not endanger the companys existence or survival, however creditors and impart syndicates could call back their loans, or bring action for claim settlements, thus, putting the company at the doorsteps of bankruptcy. The UK bankruptcy code is a creditor-supportive and a debt-friendly code. That means the debt holders will be having right in deciding the liquidation of the companies. If the cash flows generated by the project are insufficient to meet debt payments, the firm is in default. Continuation decisions in default are regulated by the bankruptcy code in place. (Acharya, Sundaram and John, p.2). If a company is taking effective and efficient decision regarding the capital structure, it can easily overcome the problems w hich may arise due to unfavourable bankruptcy code. So while deciding on the capital structure, an optimum combination should be selected. While discussing the effect of bankruptcy code in the capital structure decision, the asset-specificity should also be considered. Asset-specificity can be defined as aspect or feature of an asset (such as a specialise machine) that makes it useful for one or few specific purposes and which, therefore, cannot easily be sold off pronto in a fire-sale. (Asset Specificity Definition. 2009). If a company has low asset-specificity, it can use more debt capital in the capital structure. If the company is in a situation of liquidation or bankruptcy, it can easily cheat off its assets and meet the debts like repayment of creditors, preference shareholdersetc. In other words, if the companies whose assets are fit for providing as security for funds borrowed, can use more debt capital in the capital structure. Because at the term of bankruptcy it will not face any difficulty in repaying the loan or borrowed funds as it can sell off such assets. Whatever combination is used in the capital structure, the objective of the company should be to increase the wealth of the equity shareholders. If the bankruptcy code of a terra firma is debt capital friendly, it is not better for the companies to follow trading on equity (trading on equity refers to using more debt capital