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

Capitalism Structure - Essay ExampleWhen a company is going to colonization due to bankruptcy, it has to repay the debt capital first. The equity shareholders will be paid back their investment only after setting off the secured creditors, debenture holders, preference shareholdersetc. So the companies should deeply analyze financial implications before winning capital structure decisions. In United Kingdom, a secured creditor can even proceed with liquidating the company and claim the amount due to him by the company. Even 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 conclave (capital structure) of their financial structures in order to accommodate bankruptcy code considerations. This as sumes importance since the interests of equity holders would be compromised or endangered if debt capital is allowed to mount beyond average proportions or as needed by the organisation. Increase in equity capital does not endanger the companys existence or survival, however creditors and loan syndicates could distinguish 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 inattention. 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 good overcome the problems which may arise due to unfavourable bankruptcy code. So while deciding on the capital structure, an optimum combination should be selected. part 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 skylark of an asset (such as a specialized machine) that makes it useful for one or few specific purposes and which, therefore, cannot easily be sold off quickly 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 sell 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 protective cover for funds borrowed, can use more debt capital in the capital structure. Because at the time of bankruptcy it will not face any worry in repa ying the loan or borrowed money as it can sell off such assets. Whatever combination is used in the capital structure, the verifiable of the company should be to increase the wealth of the equity shareholders. If the bankruptcy code of a country 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