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Optimal Capital Structures
Submitted by astellr on April 19, 2008
Category: Business
Words: 3647 | Pages: 15
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The purpose of this assignment is to explore the theories relating to "Optimal Capital Structure". These theories will be covered in detail limited to the extent of the availability of word content allowed for in this assignment. This will then lead to a practical analysis of the capital structures of two well known Australian companies being:
• Wesfarmers Pty Ltd (asx code: WES)
• Publishing and Broadcasting Limited (asx code: PBL)
Specifically, I will compare and contrast differences and similarities that may be applicable and provide possible explanations utilising appropriate theoretical models as to why these companies have different capital structures
Firstly, let's explore what is meant by "Optimal Capital Structure". Why would this be important?
Many companies exist to purely maximise the wealth of shareholders. However the reality is that companies are faced with numerous forces which both dictate and or influence key decisions and or resulting structural (financial/organisational/strategic) decisions. These forces are primarily 3 distinct "constituencies"(Bruce et al 1991 Pg 2)
1. Market Constituency (companies customers)
2. Organisational Constituency (employees)
3. Capital Market Constituency (Investors/Lenders).
These constituencies can enforce or effect outcomes that can conflict inhibit or maximise returns to all. Constraints and or hurdles may be placed on the company by either of these forces which could and can create ...