Capital Essay Example | Topics and Well Written Essays - 3500 words

Capital - Essay Example The results of the strategy are dependent of the performance of the companies. Basically, the concept of capital gearing is designed to provide competitive advantage and to provide long-term benefits to the consumers. Actually, the proposal of the board of directors appears to be right. Capital gearing is an instrument that tends to decrease the cost of capital. Simple computations will suggest that gearing is increased in three ways: increase in net assets, decrease net borrowings, and decrease shareholder funds. Cost of capital is reduced by minimising issuance of stocks and issuance of borrowings. In addition, not venturing to internal financing also maintains the level of capital cost. Theoretically, the proposal is sound because capital gearing will definitely decrease the value of capital. Basically, it will depend on the strategy of the firm on which item to concentrate. The notion provides an interesting subject that has to be analysed before the gearing is finally approved. Actually, the board of directors failed to notice an important component of the equation. The corporate tax was secluded for the computation. Thus, the calculation has to be corrected by inserting the missing part of the equation. The increase in gearing has resulted to a decrease total capital by 1%. Ignoring the importance of the corporate tax was crucial in the actual results. Despite of the minimal change in the results, the managers was still right in doubting the computations. The small change in the decrease in cost of capital was favourable for the company. The impact of the decrease will be observed in the benefits provided to all stakeholders, in particular the investors. Assuming that the cost of equity and cost of debt do not alter, estimate the effect of the share repurchase on the company's cost of capital and value. Basically, this method of gearing will have more substantial effects to the cost of capital. As mentioned, gearing is possible when the assets of the company are greater than the debts and equity. Share repurchase will definitely affect the cost of equity. Perhaps this notion contradicts to the earlier statement that the equity cost retains its value. Even with the repurchase shares, the cost of capital will not affected. In the previous discussion, it was mentioned that internal financing also promotes gearing. By doing such, the company can use its earnings to repurchase the share. Basically, the company will not resort into borrowings and will not use the available equity as means to do the repurchase. The internal investment will have similar effects to the company in terms of the reduction of capital cost and benefits gained. Although, it is