Important factors in determining the capital structure of a. Abstract capital structure has been one of the most controversial issues in. Shala, ahmeti, berisha and perjuci 2014 investigated the factors that determine the capital structure among insurance companies in kosovo, based on data retrieved from 11 insurance companies. Analyzing a companys capital structure investopedia.
Trading on equitythe word equity denotes the ownership of the company. Capital structure theories of capital structure finance essay. This study seeks to identify the determinants of indian central psus capital structure. A new approach to testing agency theory and an application to the banking industry allen n. Use of financial leverage in corporate capital structure. Feb 27, 2017 factors affecting capital structure 1.
Under the capital structure, decision the proportion of longterm sources of capital is determined. Pdf corporate capital structure remains a controversial issue in modern corporate finance. The impact of adjustment in capital structure in mergers. Capital structure is the specific mix of debt and equity that a firm uses to finance its operations abor, 2005.
Factors determining financial structure of a company. Dec 20, 2015 the overall result of this study proved that merger and acquisition in malaysian anchor banks do not significant increment the capital structure of bank. In section 1 the most prominent theoretical and empirical findings are surveyed. Pdf determining the factors affecting capital structure decisions. Determining optimal tax deferral strategies in the absence of capital gains tax rates and tax. A firm mobilizes funds which, depending upon their maturity period, can be classified as longterm and shortterm sources. Theoretical considerations a firm could use three methods to determine its capital structure. The development of debt to equity ratio in capital. To identify the relationship between the factors determining capital structure and capital structure to identify the impact of those factors on capital structure of the companies.
Chapter iii concepts and theories of capital structure and profitability. Determining an optimum capital structure of an organization is obviously a crucial at all the time. Capital structure, dividend policy and valuation b40. This study investigates capital structures used in different countries and industries and explores the different theories on capital structure that have been put forward to date. In addition to the requirement to pay interest, debt may also carry. The capital structure involves two decisionstype of securities to be issued are equity shares, preference shares and long term borrowings debentures. Capital structure definition of capital structure by. Capital structure theories the debate on optimal capital structure that leads to maximum market valuation and minimum cost of capital is perennial. The traditional school, at one extreme, argues that there is an optimum capital structure at. The optimal capital structure should ensure companies retain sufficient capital levels. A company may choose to look to its owners who have equity to raise the funds, by asking them to forgo their dividend payout and instead reinvest their earnings to drive. Factors that determine the capital structure among micro.
The capital structure should be such which increases the value of equity share or maximizes the wealth of equity shareholders. Some of the chief factors affecting the choice of the capital structure are the. Willy muturi jomo kenyatta university of agriculture and technology. The former consists of capital, reserves and term loans raised from public. Determinants of capital structure univerzita karlova. Munich personal repec archive capital structure, pro. Thus, according to the fact that capital structure is the mixture of equity capital and debt capital, how large a firms debt capital takes part of its total capital is the proxy of capital structure. Empirical evidence from kuwait ahmad mohammad obeid gharaibeh assistant professor, dept. The effects of firm size and risk on capital structure. Capital structure definition is the makeup of the capitalization of a business in terms of the amounts and kinds of equity and debt securities. Capital structure of the business affects the profitability and financial risk.
The capital structure is how a firm finances its operations and growth by using. While determining capital structure, the following factors should be taken into account. In another word, capital structure can be represented by financial leverage. The rationale here is that the debtequity ratios appropriate for other firms in a similar line of business should be appropriate for the company under consideration. In other words, it represents the mix of different sources. Capital structure meaning and factors determining capital.
The choices and the trade off neither a borrower nor a lender be. The case of thailand abstract we explore the impact of liquidity on capital structure decisions. An analysis of listed companies in the colombo stock exchange in sri lanka sithysafeena m. In a world with taxes and financial distress, when a firm is operating with the optimal capital structure the. Bahadur institute of management sciences, university of mysore, india available online at. Modigliani and miller proposed that capital structure is irrelevant when there are no taxes and that 100% debt is the optimal capital structure when there are taxes.
An overview kennedy prince modugu department of accounting faculty of management sciences university of benin nigeria abstract capital structure decision poses a lot of challenges to firms. The objectives of the study were to identify the factors affecting capital structure of microenterprises, to establish the extent to which the factors affect capital structure of microenterprises and to analyze the extent. Improper composition of capital structure could even lead the organization towards bankruptcy. Important factors determining working capital requirements.
Determining an appropriate mix of equity and debt is one of the most strategic decisions public interest entities are confronted. The main problem in this study is the type of the relationship between capital structure and value of equities in firms listed in tehran stock exchange and factors affecting capital structure and the impact of capital structure on value of equities and shareholders interests. So, no need to further increase in debt in capital structure. Key factors influencing capital structure decision and its speed of. The quantum of working capital is depending upon a large number of factors. The results show that profitability and liquidity ratios are negatively affecting the total debt ratio of romanian companies. Important factors in determining the capital structure of. How and when do firms adjust their capital structures toward targets. Pdf this note explores the interaction between the use of debt and firm value and provides a brief perspective on the use of debt. Managing ventures capital structure 1 minimize cost of capital achieving the optimal mix of debt, equity and internal capital accessing low cost capital maximizes ventures value 2 raising capital is key to growth new ventures have large working capital and capex needs 3 maintain financial flexibility. Also a conclusion can be given about the importance of the theories. Capital structure refers to the amount of debt andor equity employed by a firm to fund its.
Second, capital structure affects companys solvency key financial ratios like debt ebitda and debt equity are dependent on capital structure. Analysis of capital structure is relevant to understanding the level of risk which a business has. The traditionalist theories believe that capital structure is relevant in determining a. Determinants of capital structure a study of manufacturing. However, the result of roa and roe indicate performance of banks will improve after merger and acquisition. Which factors of capital structure decisions are important. Capital structure theory exercises question 1 levered inc. Pdf determinant factors of the capital structure of a firm an. Important factors in determining the capital structure of a company. In this article we will discuss about the capital structure and value of firm. Irr 20% transaction, a firm will take on significant leverage to finance the acquisition. Berger board of governors of the federal reserve system washington, dc 20551 u. Aug 12, 2010 determining an optimal capital structure for a company is a multifacetted problem that has challenged and fascinated academics and practitioners for a long time.
The companys choice of capital structure is important, since it has an effect on the companys present and future. This paper uses descriptive statistic to compare the capital ratios and profitability ratios of 5 years before and after merger and acquisition to identify the impact. Factors affecting capital structure of a firm capital. Determining an optimal capital structure for a company is a multifacetted problem that has challenged and fascinated academics and practitioners for a long time. As a matter of fact, capital structure planning is one of the major tasks which involve determination of the right proportion of different securities. The traditionalist theories believe that capital structure is relevant in determining a firms value.
Determinants of capital structure mba knowledge base. Firms that enjoy more liquid equity experience a lower cost of equity and may be more motivated to adopt more equity and less debt in their capital structure. Factors determining capital structure a case study of listed. In other words, capital structure represents the proportion of debt capital and equity capital in the capital structure. The purpose of this research was to determine the factors which influence the capital structure among microenterprises. The mix of debt and equity used to finance the companys future profitable investment opportunities is referred to as capital structure. Capital structure is a permanent type of funding that supports a companys growth and related assets. The effects of firm size and risk on capital structure decisions of insurance industry in kenya michael njogu wahome, dr.
It refers to additional profits that equity shareholders earn because of issuance of debentures and preference shares. The traditional school, at one extreme, argues that there is an optimum capital structure at which the value of the firm is highest. The study of capital structure attempts to explain how listed firms utilise the mix of various forms of securities in order to finance investment. Jun 17, 20 objective of studythe main objective of the study is to find out the factors which determine the capital structure of sri lankan listedcompanies and sub objectives are. Pdf the factors that determine the capital structure. A reason for this can be that the corporate governance structures in dutch companies are different in comparison with other countries. Corporate finance lecture note packet 2 capital structure. The paper contributes to the capital structure literature by investigating the determinants of capital structure of firms operating in the asia pacific region, in four countries with different legal, financial and institutional environments, namely thailand, malaysia, singapore and australia. The theory and practice of corporate capital structure january 2006 2 liability strategies group executive summary this paper discusses the theory and practice of corporate capital structure, drawing on results from a recent survey. The degree of influence of each factor varies from time to time. Key factors influencing capital structure decision and. Taxes affect a companys optimal capital structure, value.
There are studies implying that factors such as leverage, risk, and financial distress are central when determining capital structure, and when analysing the. This article throws light upon the top seventeen factors determining the capital structure. Capital structure definition the capital structure is how a firm finances its overall operations and growth by using different sources of funds. It is made up of debt and equity securities and refers to permanent financing of a firm. Generally companies use the concept of financial leverage to set up capital structure. Capital structure is the mix of the longterm sources of funds used by a firm. Capital structures can vary significantly by industry. Here the data is described, measures of institute of economic studies, charles university, prague and idet, department of eco. This paper focuses on seven pairs of anchor banks which merged and acquired other minor banks in malaysia from year 1999 until 2006. Aug 30, 2014 factors determining financial structure of a company capital structure refers to the mixture of long term funds represented by equity share capital, preference share capital and long term debts. Capital structure financial leverage describe the combination of debt and equity capital. Empirical evidence from nigeria ogbulu, onyemachi maxwell. It is the employment of an asset source of finance for which.
Factors considered in the capital structure decisionmaking process. That happens to be the need of the company because eps happens to be the maximum on it. Capital structure is how a firm finances its overall operations and growth by using different sources of funds. Trading on equity means taking advantage of equity share capital to borrowed funds on reasonable basis. Capital structure and value of firm financial management.
May 21, 2019 capital structure is a statement of the way in which a companys assets are financed. Abstract capital structure has been one of the most controversial issues in the field of finance during past years. Expressed as a formula, capital structure equals debt obligations plus total shareholders equity. Capital structure before and after merger and acquisition. Factors affecting the capital structure of a company. Meaning and definition of capital structure and value of firm. Obligation to pay interest and principal lien against the assets of the company right to force bankruptcy preferred stock hybrid equitydebt. The capital structure claims on a companys assets and income bonds and loans debt. In section 2 the potential determinants of capital structure are summarized and theoretical and empirical evidence concerning these determinants is provided. Most favourable proportion determines the optimum capital structure.
Financial leverage is an important consideration in planning the capital structure of a company because of its effects on the earning per share. Therefore, accordingly, the main research question is summarized below. First, it determines which part of companys assets is funded by shareholders and which is attributable to lenders. Factors determining financial structure of a company mba. Capital structure is referred to as the ratio of different kinds of securities raised by a firm as longterm finance. What kind of capital structure is best for a firm is very difficult to define.
It is very difficult to pin point the factor which is highly responsible. Capital structure is a statement of the way in which a companys assets are financed. A best capital structure is the one which results in maximizing the value of equity shareholder or which brings rise in the price of equity shares. Another factor determining a companys optimal capital structure is the debtequity ratios of other companies belonging to the same industry and facing a similar business risk. Mar 27, 2012 the factors influencing the capital structure or determinants of capital structurea are discussed as follows financial leverage or trading on equity. Most of the results are in line with what was expected, except for the variables tangibility, free cash flow and priority shares. What factors are important for capital structure decisions of dutch firms.
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