Anyone pay envelope bad a motor beside your home equity flash?
I’m thinking about paying off our saloon with our home equity line of credit. It have a lower rate than the car loan ( i know, i don’t have the best credit). We’re not looking at moving soon, if ever. And what’s really making me…

Anyway to buy a home using a cosigner if you already own a primary residence (for sale) but near maxed equity?
I’m trying to sell my home, but I may owe more than it’s worth in this housing marketplace. I have a primary mortgage and a home equity loan and my equity is maxed out. I also have close…

Are Double-wide mobile homes a obedient investment or do they depreciate near time fairly than increase equity?
Mobile homes depreciate in value much duplicate way cars do. Much depends on where one lives and what sort of point is used in construction of the double wide structure. Generally speaking, however, they tend to be poor investments, react to…

Are Home Equity Flexlines suitable to rob to salary past its sell-by date big interest credit cards? I would one and only use $9000.?
yeah i think so I assume when you utter “fledxline” you’r talking about a home equity chain that is like a credit card. Be fussy as it gives you the opportunity to spend more. If…

Are home equity shares a upright investment vehicle?
I would like to find partners for the properties that I own. largely no, poor management, does not have same tariff advantages of REITs. good luck.

Are near any benefits beneath the bankrupcy law if you hold a home equity string of credit. Is house protected?
There is no benefit. Remember, home equity loans are a secured debt, which give them a priority status. They do not excuse a portion of the debt the way they do with credit card debts….

Are nearby home equity loans base strictly on the home’s equity and not factor close to credit reports, etc?
All loans are based on Credit, Capacity to repay, and the collateral. Even a reverse mortgage the was mentioned within a previous answer. Home equity lines are adjustable to an index that the lender uses. Usually it is the prime rate….

Are relations ever denied HELOC or Home Equity Loans when they enjoy plentifully of equity surrounded by their home?
Say someone wanted a 30K Home Equity Loan and they had 200K surrounded by equity in their home. Would they get the loan everytime regardless of credit ranking and other factors? Your ability to repay any amount will be the…

Are we allowed to use our Roth IRA to payment rotten a Home Equity Line of Credit?
No. It can be used for purchasing home, medical bills, teaching, etc. You have to show the proof that you need this money to settle for tuition bills, etc. Yes…. But there are rules. You can verbs out…

At the failure of the year adjectives the interest we payed on mortgage and home equity we can receive support?
No, jsut as some of the othes have said, you can only roll interest paid on your 1040 form..In MOST cases, intersest on equity loans can be listed if the money you recieved on the Equity Loan be actually…

Bank cancelled home equity. Can someone comfort me?
Today me and my parents found out that the bank cancelled our home equity line of credit because the utility of the property went down. My mom is sick so she cant help out and even if i work similar to ive been doing i wouldnt make up the difference we entail every…

Bankruptcy and home equity?
Looking at filing, I think chapter 13, for credit cards, and medical bills, total almost 30K, There has never been a past due payment on any, credit score is 720, bit income have went to the wayward, and want to address vigorously, before collection agencies. I also have in the order of 100k equity in my…

Bankruptcy cross-examine concerning 2 homes and equity.?
Hello, My father owns a home in Nevada with aproximately $80,000 surrounded by equity. The home that we live in, in Stockton, CA is going into foreclosure due to several circumstances. My father is the title owner of both homes and have amassed aproximately $50,000 in debt in yesteryear 3-4 years. …

Best finncial institution for home equity strip of credit rate?
The one that will give you one at the terms that are the most favorable for you at the time you borrow the money. There are closely of lenders out there. They all constantly adjust the rules – mostly to suit them, not the borrower. So, know what…

Best home equity lender on row?
i would like to secure a home refinance loan beside extra money in my hands. Do not business with anyone online. Most of them, especially around here are cons.

BofA SUSPENDS my home equity dash of credit after I be NEVER unpaid and rewarded thousands contained by interest over years?
What the hell is going on?? I had just only just paid my HELOC down to a $500 balance even though my credit available be $90K. I always paid on the dot, gave them thousands in profitable interest…

Building equity contained by a home cross-examine.?
Building equity in a home Just wondering how I would get the biggest shot for my bucks. Paying down the loan or doing improvements. ie landscaping, kitchen, baths etc. Thanks for all opinion. I think you get the biggest shot for your buck by paying extra principal early in the loan. Find…

Buying a home after getting an Equity Loan?
If you get an equity loan at an owner occupied rate and afterwards find out you need to move 2 weeks later can you buy another home and move in need having legal repercussions? Yes you can move, surely. Your lender will NEVER come and knock on your door to make sure…

Buying a Home for the equity?
So i make about 65k a year and hold a student loan with a balance around 65kat a 6% rate, lol…. So if i be to buy a house with my VA loan which means i dont want money down, should i buy a cheap house and put equity into the house and hope to…

Buying to consent to how does re-mortgage work? do i stipulation to switch my home mortgage provider to borrow on my equity?
You can ask your current lender for a Further Advance if there is enough equity within the property. Buy to Let is buying a property to rent out. need any help e e-mail me. good…

Can 1 out of 2 nation thieve the home equity lacking the other entity consent?
My husband is planning to invest in a commercial homes with his brothers and since he doesn’t enjoy any cash for the down payment, he is planning to appropriate home equity loan to finance the downpayment. My question is, can he sign the papers in need…

Can a creditor put a lein on debtor who owns a home in concert (spouse )with $9k equity next to debt of 64k?
yes they do. GIVE ME ORAL No and Yes. The creditor usually can’t put a lien on a house unless the original loan contract allows such a lien. There…

Can a debt collector physically show up to your home to collect on a home equity mortgage?
I was a collector of unsecured debt for years ( I was the guy that hounds you on the phone ). I know the FTC regulates debt collection through the Federal Debt Collectors Practices Act. I remember my boss recitation me about the Good…

Can a guard flog a home equity to a private individual, i.e. a line partaker who requirements to try to foreclose?
No, they can’t sell your equity.

Can a home equity strip of credit be reduced or wipe stale due to the drop contained by home values?
The exact details alter from institution to institution, but unfortunately the answer is almost always “yes”. Most bank or credit unions have a clause contained by the contract that allows for a revocation or alteration in terms if near…

Can a tentative home buyer build equity surrounded by a home within 5 years?
Maybe yes, conceivably no. If home prices go up, yes. If home prices go down, probably not. If they label extra payments toward principal, probably yes. If they have an interest only loan, no. If they enjoy a 30 year mortgage and only pay…

Can a title company settle/close a second mortgage or home equity loan contained by a borrower’s home?
Most mortgage brokers are going to require you to close your inferior loan at a title company. If your broker is local, they may be able to close it in thier organization, which might save you money. I am not sure…

Can a wall foreclose on a home next to an equity splash used as a down on a second home to be precise contained by foreclosure?
An $80000 equity line was issued on home A to use as down on home B. Home B have a primary mortgage of $310,000 issued by same bank. Home B is underwater by…

Can anyone dispense me philosophy on how to nouns an adoption if a Home Equity Loan is out of the quiz.?
We are trying to adopt a baby from Guatemala and need to borrow nearly $30,000. Does anyone know of any kind of loans with a biddable interest rate? or any other way of getting that much in a legally recognized…

Can anyone inform me the benefits of have 100% equity within your home??
Like what are your options, especially if the value have gone up?? Are the benefits really good? What does it mean when you are geared up to sell? yes dear collateral plus no house pay! NO MONTHLY NOTE, NO MORE MORTGAGE !! It means you owe nil…

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Latest in equity news points an arrow towards the recent outpours in the equity market as the country received equity inflows in several major sectors like housing and real estates, services, telecommunication, automobile and construction industry. India equity news is abuzz with the latest economic trends which have breathed a sigh of relief in the recent times as the recession is finally beginning to cede. However, the global crisis is still not over, despite tae fact that European countries have strengthened their economies and have signaled to the world that the good times are back gain. Transacted on the basis of  National Stock Exchange and Bombay Stock Exchange, the two major stock indices, the Indian equity market has strengthened a lot in the recent times and the recession has provided it with the requisite overhauling. As per the equity news India, the Indian equity market presently offers to be the most lucrative and prospective platform for investors across the globe as the Indian stocks have caught the experienced eyes of the long-time and mid-term investors.

Envisioned to reap in maximum benefits through the Indian equity share, many an investors have invested already to make their fortune as a number of companies like the Tata Tea, Britannia, to name a few, pose to be a promise of a bustling business for the Indian share market. Besides, a number of other leading business houses offer equally beneficial stocks for investing in Indian Equity Market, which as per the equity news, are the fruits to be ripened soon. Foreign investors find it very convenient to trade in the Indian equity market and that is the reason why the foreign investments have seen a whopping rise in the Indian market of equities and have led to its dynamic success. Thus, as the equity news state, the Financial capital markets of India have seen an encouraging growth even in between he turbulent economic times owing to the balanced blend of domestic and foreign investments. No wonder investing in Indian equities is becoming a profitable business with each day.

Home equity on a house remunerated beside change?
Hello. Were looking to buy a home. And pay in full near cash. Will we gain home equity faster that way? Equity is newly the difference between the value of the home and any mortgages. $0 debt = 100% equity. If you do not know the answer to your request…

“Fed Cuts Key Interest Rate” Why does this not affect my mutable rate home equity mortgage?
Your loan’s rate is not tied to the Fed Rate. Yu can call the bank servicing your loan and fired out what your rate is tied to. They will pass you 2 things: 1. Index = this is what the rate is tied to…

100k of home equity to invest….how would you invest it?
I pay 6.8% in interest on my mortgage and I would resembling to invest some of my equity. Given this situation, how would you invest it? It is invested… Do not pull it I would NOT use the equity surrounded by your home for any investment purpose. Keep the…

125% of your homes equity? ?
What does this mean exactly? Can someone give me a number scenerio? Does Virginia give this? I know Texas does. Thanks The bank would loan you 25K against you in that scenario if you owed 100K on the property wouldn’t they? Basically, if your home is worth $100,000; the dune loans you $125,000.

1st home purchase: How to buy beside mortgage or equity smudge? I’m a learner next to PERFECT CREDIT. Help!?
Can someone please spell out the steps to purchasing my first home? I’m 22 with perfect credit. What are the steps and the “tricks of the trade”? Thanks! I do know that near are some programs to help a first time home…

2 question on how to nouns a 2nd property w/equity from existing home using a blanket mortgage?
1) I’m interested in learning the best bearing to purchase a second property, possibly at sheriff sale, using part of (40% ?) the equity surrounded by my primary residence (which I recently paid off) so I don’t own to liquidate as much stock to…

20% Gift Equity Second Home?
I am a mortgage broker. I am looking for a lender that will do a gift equity purchase (80% LTV) on a Second Home not a Primary. If so, please post their info below. doc type? FICO? just stick beside your own home thats how you;ll save 8.000 dollars so stick with your dated home mon…

A friend$300,000 equity within the house but 560 credit rack up son will engineer home equity is it possible?
It would help if you write your question surrounded by English. If you are asking is it possible to obtain a home equity loan on a home with $300,000 of equity, the answer is yes because the house secure the loan….

A give somebody the third degree for mortgage brokers on the subject of home equity?
I own a condo. Can I take out a home equity loan on that condo to make the down contribution on a new property? If so, what happens when I get rid of the condo? Since at that point I believe I have to pay stale…

A give somebody the third degree in the order of Home Equity and buying out my ex after a divorce?
My house is currently appraised at 240,000 and of this $60,000 is equity. In calculating the buyout amount I am doing the following: Equity = 60,000 Realtor’s commission if we sell = 6% of selling price: 14,400 Net…

A home splash of equity of $150,000, contained by which $110,000 have be used, how would I total interest rewarded?
I realize in 2008 there is a home equity decrease of $100,000 that you can use to write off interest on. Is there a special formula to cut stale the interest paid on the extra $10,000? Very interested to know how…

A home worth $123,000 and a mortgage of $72, 400 would own what equity?
a home worth $123,000 and a mortgage of $72, 400 would have what equity? and also.. A home will an assessed value of $178,000 beside a tax rate of $52 per $1,000 would have a property duty bill of what? thanks …

A prior renter within our home who remunerated some (not all) rent is threatening to sue for equity. Is this possible?
An ex girlfriend of my fiancee’s lived in his home (which he has the title for) for approx. 1 year. She have since been evicted and is threatening to sue us for the equity in the home. When she be…

A query roughly speaking home equity?
My fiance’s grandmother passed away a few months ago and her house was left to my fiance & his brother. We are going to move into this house and try to take a home equity loan to pay his brother his half of the inheritance (instead of him getting money from selling the house). However,…

Ability of using equity to nouns down deposit on latest home?
Hi Everyone. I have a substantial amount of equity in one of my homes, and am looking to purchase a second home sometime surrounded by the summer. I do not have money for a down payment, however, I do own more than enough for closing costs. I was…

About 3 yrs ago I took out a Home equity stripe of credit for home improvements. ?
I have very little moved out from this loan, and I guess I have no equity now. The nouns charges are high, even with the rate coming down because of the discount. Should I refinance now jsut to get rid of the loan charges?…

Adding equity to your home?
My driveway is dirt and gravel. I’d like to lay concrete and pave it. Will that increase the equity in my home? By how much, do you suppose?? Also, I’d like to add any a front or back porch to the house. Will that increase? The reason I ask is because I’d close to to get…

Advice nearly equity within house and buying another home?
i have a house in the uk next to a mortgage i bought ten years ago for lb150,000 i owe approximately lb124,000 (not accurate) Before all this recent credit crunch it was valued at lb500,000 but i tried to trade it but dispite continually reducing the price i had to withdraw it…

Advice on home equity please?
I own my home, I am single and am a youngish retiree! I would like to do a lot of things, similar to travel, get involved in projects I enjoy a passion for before I am too aged to enjoy the rewards. I have a few nieces and nephews that I would similar to…

After my collapse is discharged, can my creditors collect on the equity within my home?
My wife and I are in bankruptcy but it is give or take a few to be discharged. Since we had less than $30,000 within equity in our home, we were allowed to preserve our home. We are considering selling our home to move closer to…

Am I entitled to the equity accrue while purchasing a home on ground contract for the later six years?
Purchased home 6 yrs. ago and the land contract period is culmination. I am not able to acquire a mortgage on this property now that balloon costs is due. I got behind on payments to the territory contract holder since…

Am I obligated to wages past its sell-by date a second mortgate(home equity smudge of credit contained by $100K)in situation beside foreclosure?
This is my second house, which I was trying to sell for one year, and cannot afford to pay cheque any longer. I plan to take a home equity line of credit for $100K+ and prohibit to pay any…

Americans Now Have Less than 50% Equity within their Homes. Is that Because Lots of People Bought Big Homes?
Or did people take out seriously of home equity loans and spend it on things other than their house? This is because people in times past used their home (when values were rising rapidly) as their personal atm machine. …

Any banks/lenders who will refi a home equity stripe on a modular home?
We have a modular home (pre-built), in UT, and own a variable HELOC and want to change it to a fixed rate but no hill around here will do it because it is a modular home. It’s on a foundation, 5 years old, we owe about $75K…

Any home lenders agreement beside mobile homes for home equity or lines of credit?
Lines of credit are most often handled by your hill. A mortgage lender will usually not do this. It depends on the mobile. If it is in a park, then the come to rest underneath it is rented and your real…

Any hope beside gloomy equity contained by my home and have need of to put up for sale?
I have two mortgages on my home in the Northern VA nouns. 1st is an ARM that reset at the end of 2007, and again last month. The combined payments are $3200 (w/o escrow) and is really difficult to make. …

Anybody know this??what is equity release?i do know you can release some of worth of your home but is 34 too?
young or do you have to be over 60yrs?also if you enjoy a mortgage do your payments go up if you release some of your homes value by taking brass from the company or do they only take the payments…

Anyone hear of Equity Sharing for purchasing a home??
Only in your previous question asking for someone to invest $250k surrounded by the “upscale Bergen County Community”. I’m all ears! What is Equity Sharing for purchasing a home? Do you know? Source(s): Always willing to swot up more!

Anyone know of a lawful source for debt consolidation, in need using home equity?
Try prosper.com Call the American Consumer Counseling Center – unlike a lot of those “debt solution” places, this is a non-profit and won’t take your money. They can administer you some great counseling and advise you on the best options for your fastidious situation. American…

Anyone know the best ways to put equity into your home?
Find the best neighborhood in your area. Then, try to find someone contained by a situation that forces them to move immediately. (I.E. job relocation, facing foreclosure,divorce, lost of job) Make them a proffer lower than their asking price. In most cases that’s instant equity. Good luck. …

More Home Equityquestions please visit : RefinanceFreeFAQ.com

No matter which equity trading strategy you follow; market analysis, equity news, annual reports of various blue chip companies, and other stock related external and internal factors require a deep analysis.

Equity trading strategies

The equity market is thronged by various investors who follow various types of investment strategies. Some follow the fundamental approach and others are more inclined towards psychological strategies. Academic approach is also followed by certain investors in making their portfolios. However, the eclectic approach that combines the features of all the other three is found to be the most suitable in the real time share market. India has a stock market that requires penetrating analysis before any investment strategy is followed.

Fundamental strategy and psychological approach

The fundamental strategy focuses on buying undervalued equity shares and selling overvalues equities. Although fundamental approach is essential to establish benchmarks when you enter the share market, India has an equity market that is very volatile to depend entirely on this strategy. As per psychological strategy, the equity prices are influenced by the mood and psychology of the investors. People following the psychological approach believe that investor’s moods can make the market bullish or bearish. Although this strategy is very useful in certain instances, it can not be relied on completely or in isolation.

Academic strategy and eclectic strategy

Academic strategy states that share prices are highly influenced by the flow of information and past trends of stock prices are not good enough to predict its future prices. Any new piece of equity news or any other relevant information has the power to promptly affect the share prices and make the past records redundant. Stock market is neither so organized as stated by the academic strategy nor it is as speculative as psychological approach assumes it to be. Eclectic strategy combines various strategies to take a balanced equity investment decision.

So, in order to formulate a balanced equity trading strategy, it is advisable to combine all the above strategies and use them according to the existing market conditions.

Equity share market is a dynamic set up that can not be packed up with few rules and strategies. However, this article provides some of the countless underlying concepts on which an investment decision can be based.

Diversification of your equity stock portfolio

One of the major strategies followed by many investors is about hedging risks. Diversification of portfolio allows an investor to hedge his/her investment risks by distributing his/her funds among different kind of securities. For instance, a balanced portfolio is the one that has a combination of regular dividend generating equities, stocks with good growth prospects, and stable equities to protect the amount invested in the share market. There are many online websites that provide guidelines for new investor to make a profitable portfolio.

Strategies for aggressive equity investors

Aggressive investors are vigorous and active players of the share market who devote comparatively more time and effort in management of their portfolio. They have a greater appetitive for risk and in turn they expect higher rewards for their tireless efforts. Some of the strategies for such players are:

Pay more attention to the economy and market than the company you invest in. Monitor and analyze the environment keenly.
Pay attention to growth shares and try to anticipate profits ahead of the share market.
In bullish environment, try to leverage your portfolio and take prompt corrective steps, when required.

Strategies for conservative equity investors

Conservative equity players are not very adventurous and have a comparatively low risk appetite. Some basic strategies that these safe players can adhere to are as follows:

Spend some time listening to equity news in order to look in for safe investment opportunities in the primary equity market.
Avoid investing in certain kinds of shares such as unlisted, manipulated, concerned, and inactive shares.
Avoid short-term switch hitting and follow a strict screening criterion.
Seek advice from portfolio managers or go through guidelines given by online websites.

Investing in direct equity can be far more rewarding than you can imagine- What’s and How’s of Direct Equity Investment Option

What it is like to invest in equities?

When compared to any other asset class, investing in equities is definitely riskier and also more demanding in terms of time. However, as it has been said, “higher the risk, higher will be the return”. Investing in direct equities can be far more rewarding than you can imagine and at the same time prove very exciting. World over, and even in India stocks have outperformed every other asset class in a longer run.

So what is investing in direct equity is all about?

It’s all about growth. As equity investor of a company, you become a part owner of that company and hence participate in its growth opportunities and, more importantly, if it’s benefit from the same. Also, “companies are normally able to find tune themselves to the sinking rate of inflation by either in the beginning their price or by controlling costs. Thus, equity since protection towards inflation. ” To become a successful Equity investor one must follow the following rules:
– Choosing the right company
It is important for an investor to select a right company. This means selecting a company which offers good growth opportunities.

- Investing in the right time
Time is money, this phrase is most appropriate for equity investment. When you are investing in equity timing is most important. If you are investing for short term ( three to six months) the performance of equity shares is mainly driven by a market sentiments than by company’s fundamentals. The current Investment horizon for a British shares shall be one that allows the investor to take advantage of the company’s growth. Keeping this in mind, the ideal period invested should be greater than five years. One would learn that in the long run, the relevance of the right price diminishes. If you choose the right company And have the right timing and you are investing for a long term it doesn’t really matter whether you what our share at low prices or at high price. This is because When a company goes and you hold its shares the power of compounding we come into action. You’re invested money will multiply and will make the any share investment price insignificant. This is a real Investment mantra.

What kind of returns we can expect from equity?
Taking the longer term perspective of staying invested for a period of ten years and more, you can surely expected equity to give return from 15% to 20%.

What is the risk return trade off for equity?
We have seen from the above study investing in equity in short term is very volatile and risky. If you decide to speculate You can earn up to hundred percent return in the year. But at the same time as a trader you may lose all your money. This makes it very important to learn the risk return trade off. You may find out In a long run than risks get even out and the returns settle at a more reasonable rate of fifteen to 20%

How I should invest in equity?
You can invest in a equity either directly by buying shares or through mutual funds. “

Purchasing shares
The first time the company offers its shares to the public it is called IPO. In an IPO the company sells a certain percentage of its shares to the public at a certain price.

Once the shares were issued to the public through an IPO stock exchange’s facilitate the trading of shares in secondary market . therefore you no longer have to wait For the company to issue shares to you but instead you can buy shares from someone who has already been issued few shares of the company.

For buying and selling of shares you need to have a demat account. Through a demat account you can trade shares online. the broke will charge you brokerage every time you buy or sell shares.

Important point to keep in mind before investing in shares
You must invest in shears only if you have a long term horizon. Here are some tips to make sure your mistakes are kept at a minimum when you are buying and selling shares

Diversify your investments
Do not put all eggs in one basket. As a thumb rule, you should not have more than 10% of your net worth in one stock. Also do not hold in many shares in your portfolio. It is difficult to monitor them. If you want a long-term investor Do not hold more than fifteen to twenty different shares.

Invest intelligently
You don’t have to be a genius to be a successful investor. You need to follow few simple rules in a very disciplined manner. – Before you buy a share, write down all the points why you are buying this share.
– To analyze company’s balance sheets profit and loss accounts and its cash flow statements.
– You see that A share is not making money for you do not hesitate to sell it.

Short term selling is not a crime
If you have decided to sell a share in short term you must have a good reason for doing it. Tax season in court and consideration in a short term selling. But you cannot completely because your investment decision with an objective to save tax.

Resist the temptation to buy a more only because you want to average your cost
Never buy shares of a company just because its prices are falling. There are times when you know that you have bought the company’s share at a very high price only then you shall think of averaging your cost the point of averaging your cost only comes into consideration when you want to hold a share of a company. Do not have that your cost for companies that you want to sell tomorrow.

Do not hesitate to correct the mistake even if it means to sell your shares for a loss
There are times when we buy a share and a very high price. But holding on to the share for a long time is even a bigger mistake. selling such shares Is a far more wise decision than holding on to it.

Tax implication of investing in shares Securities transactions tax (STT)
All shares transaction are taxed. 0.125% is levied on every sale and purchase of a share.

Capital gain tax
If you sell a share between a year of its purchase short term capital gains tax of 10% on its gain. However if you sell, there are year there is there is no long term capital tax.
Tax on dividend
All dividends are tax free.

How an investor is benefited from buying a share?
When an investor buys a share he is benefited in three ways:
1. By distribution of dividends
Dividends is distribution of companies profit among its shareholders. The dividends He’s decided by the board of directors of the company
2. Increase in capital
High growth companies rarely give dividends because they re invest all profits to help sustain growth. The company’s growth is directly on the share price as companies grows the share price also grows.

3. Bonus IssueSometimes the company decides to allow additional shares for free to a shareholder the issue Is a bonus issue. Company does these instead of distributing dividends to its shareholders.

“AFTER HEAVY FINANCIAL CRUNCHES IN THE ECONOMY, FOR A CORPORATE ENTITY, IT IS QUITE SIGNIFICANT TO HAVE A PERFECT BLEND OF VARIOUS CAPITAL SOURCES TO ENSURE GOOD RETURNS AND OVERCOME FROM THE DEPTH OF LOSSES.”

HERE, SOME CRUCIAL TERMS HAVE BEEN DEFINED WITH REFERENCE TO THE FINANCIAL SYSTEM OF A COMPANY:

CAPITAL STRUCTURE

            The types of securities to be issued and proportionate amounts that make up the capitalization is known as capital structure or financial structure.

            Capital structure refers to the proportion of different kinds of securities issued by a company to raise long-term finance. Thus capital structure denotes: (1) the types of securities issued (equity shares, preference shares and debentures), and (ii) the relative proportion of each type of security. In other words, capital structure represents the proportion of equity capital and dept capital used for financing the operations of a business. Proper balance must be obtained in the following securities or sources of finance to maximize the wealth of the equity shareholders of the company:

(a)              equality shares,

(b)              preference shares, and

(c)              debentures

Features of Sound Capital Structure

A company’s capital structure is said to be optimum when the proportion of debt and equity is such that it results in maximizing the return for the equity shareholders. Such a structure would vary from company to company depending upon the nature and size of operations, availability of funds from different sources, efficiency of management, etc.

A SOUND CAPITAL STRUCTURE SHOULD POSSESS THE FOLLOWING FEATURES:

(i)    MAXIMUM RETURNS.

(ii) LESS RISKY.

(iii) FLEXIBILITY

(iv) ECONOMY.

(v) DYNAMIC.  

FINANCIAL LEVERAGE OR CAPITAL GEARING

A company can raise capital by issuing three types of securities: (a) equity shares, (b) preference shares, and (c) debentures. Preference shares carry a fixed rate of dividend and debentures carry a fixed rate of interest. The equity shares are paid dividend out of profits left after payment of interest on debentures, and dividend on preference shares. Thus, dividend on equity shares may vary year after year. Equity shares are known as variable return securities and debentures and preference shares as fixed return securities. If the rate of return on fixed return securities is lower than the rate of earnings of the company, the return on equity shares will be higher. This phenomenon is known as financial leverage or capital gearing.

Thus, financial leverage is an arrangement under which fixed return bearing securities (debentures and preference shares) are used to raise cheaper funds to increase the return to equity shareholders. It may be noted that a lever is used to lift something heavy by applying less force than required otherwise.

       Capital gearing denotes the ratio between various types of securities and total capitalisation. Capitalisation of a company is highly geared when the proportion of equity to total capitalization is small and it is low geared when the equity capital dominates the capital structure.

       Capital gearing is calculated by determining the ratio between the amount of equity capital (representing variable income bearing securities) and the total amount of securities (equity shares, preference shares and debentures) issued by a company. Here capital structure of two different companies is presented. Both the  companies have issued the total securities worth Rs. 20,00,000 and they have equity shares worth Rs. 5,00,000 and Rs. 15,00,000 respectively. Company A is highly geared as the ratio between equity capital to total capitalization is small, i.e., 25%. But in case of company B, this ratio is 75%, so it is low geared.

ANALYSIS OF CAPITAL GEARING

                                                 Company A

                                                    (Rs.)

Company B

 (Rs.)

(a) Equity share capital                5,00,000

(b) Debentures                            15,00,000

(c) Total Capitalisation               20,00,000

(d) Capital Gearing      (a /c × 100) = 5,00,000     ×100

                                                           20,00,000

                                                        = 25%

                                                     High Gearing

15,00,000

  5,00,000

20,00,000

15,00,000    × 100

20,00,000

= 75%

 Low Gearing

The various securities issued should bear such ratio to total capitalization that capital structure is safe and economical.

       Equity shares should be issued where there is uncertainty of earnings. Preference shares, particularly the cumulative ones, should be issued when the average earnings are expected to be fairly good. Debentures should be issued when the company expects fairly higher earnings in future to pay interest to the debenture-holders and increase the return of equity shareholders.

TRADING ON EQUITY

Trading on equity is an arrangement under which the financial management raises funds by issuing securities which carry a fixed rate of interest (or dividend) which is less than the average earnings of the company. This is done to increase the return on equity shares.

       Let us suppose that a company requires an investment of Rs. 10 Lakhs to earn Rs. 2.5 lakhs @ 25 per cent p.a. In order to raise this amount, we may consider two proposals, namely, (A) to issue 1 lakhs equity shares of Rs. 10 each: and (B) to issue equity shares worth Rs. 2.5 lakhs (i.e., 25,000 shares of Rs. 10 each), 8  % preference shares worth Rs. 2.5 lakhs, and 10 per cent debentures worth Rs. 5 lakhs. The rate of tax is assumed to be 40 per cent. The earnings per share under proposal ‘B’ will be higher because of application of ‘trading on equity’. As shown in the following table, the earnings per share (EPS) under proposal B are Rs. 4.00 as compared to Rs. 1.50 under Proposal A because of the use of debentures and preference capital for raising funds.

EFFECT OF TRADING ON EQUITY

Particulars                                                                     Proposal A

Proposal A

Earning before Interest and Taxes (EBIT)                  Rs. 2,50,000

Less Interest on Debentures (10%)                                            Nil

Earning after interest and before Taxes                            2,50,000

Less Taxes (40%)                                                             1,00,000

Earning after Interest and Taxes                                       1,50,000

Less Preference Dividend (8%)                                                 Nil

Earning available to Equity Shareholders                         1,50,000

No. of Equity shares outstanding                                       1,00,000  

Earning per share (EPS)                                                Rs. 1.50

Rs. 2,50,000

         50,000

      2,00,000

         80,000

      1,20,000

         20,000

      1,00,000

         25,000

        Rs. 4.00