Factors That Influence the Capital Structure Decision of...

ABSTRACT The capital structure decisions are influenced by various factors. Different researchers obtained different conclusions on what the important determinants of capital structure are. The main objective of this study is to ascertain the factors that significantly influence capital structure decisions. The factors tested are: The firm’s age, size, growth, tangibility, profitability, business risk and non-debt tax shield. From my analysis all these factors were found to be significant but at varying levels, with profitability and company growth as the most significant. TABLE OF CONTENTS Declaration ii Acknowledgement iii Abstract iv Table of Contents v CHAPTER 1. 1.0†¦show more content†¦The debt-equity capital structure also affects creditors because their security is enhanced when the company obtains financing from investor whose position is junior to them and vice-versa. Finally, this decision affects managers who may lose their jobs if they choose a capital structure that provides too little return or too much risk. The choice between equity and debt has no effect on the company and market value of its common stock in a perfect financial market with symmetric information; however, it may have an effect under other conditions. If use of debt affects cost of capital then an optimal capital structure exists. This is the mix of debt and equity that simultaneously maximizes a firm’s value and minimizes the overall cost of capital. From various studies carried out, there is still no clarity whether firm’s have target debt rations, Weston and Copeland (1988). Based on findings by Kamere (1987): stability of future cash flows, the level of interest rates, the firm’s asset structure, the firm’s tax advantage of debt and the maturity of debt are all important factors in deciding a firm’s capital structure. Other factors tested by Kamere were Age, which proved to have a very low correlation co-efficient of 0.1748 and Size of the firm, which also had a low co-efficient of 0.2727. The study is done with the factors that influence the capital structure decision of the management of public company. Omondi (1996)Show MoreRelatedCapital Structure Of A Firm1670 Words   |  7 PagesThe capital structure of a firm describes the way in which a firm raised capital needed to establish and expand its business activities. It is a mixture of various types of equity and debt capital a firm maintained resulting from the firms financing decisions. In one way or another, business activity must be financed. Without finance to support their fixed assets and working capital requirements, business could not exist. In all aspects of capital investment decision, the capital structure decisionRead MoreWhy Do Firms Choose Their Capital Structure?1623 Words   |  7 Pagesfinance those investments: with equity, debt or a combination of both (Myers, 2001). The study of capital structure tries to clarify this variety of securities and financing opportunities. In accounting terms, this decision is situated on the right-hand side of the balance sheet (Myers, 2001). In his Capital Structure Puzzle article, Myers (1984) poses the question â€Å"How do firms choose their capital structure?†. But even today, there is no right solution to this question. In the literature, there areRead MoreCapital Structure of a Firm Essay1257 Words   |  6 PagesDoes the capital structure of a firm really matter? If so, how and why does it matter? Practitioners and scholars of corporate finance have debated these questions for several years and have found it difficult to come up with definitive answers. The classical work of Modigliani and Miller (1958) provided the impetus for what is now, orthodox corporate finance theory on the optimal capital structure of firms. They postulated that, in a perfect or frictionless capital market, the choice betwe en debtRead MoreCapital Structure Policies1538 Words   |  7 PagesThere are many important factors for our company to consider in making decisions relative to capital structure. Some of these factors relate to debt choices and reviewing performance results where volatility plays a role in making the decisions. Deciding what the proper capital structure policies are is vitally important, and directly affects our stockholders. Other considerations relate to the applicability of capital structure theories in making these key decisions, including evidence regardingRead MoreThe Effect Of Geography On Firm s Characteristics And Financial Decisions1626 Words   |  7 Pagesthe capital structure, the location effect, and the peer effects literature. In the classical capital structure context, Fischer, Heinkel, and Zech-ner (1989) and Leland (1994), (1998), Hovakimian, Opler, and Titman (2001) show that firms periodically readjusts their capital structures toward a target ratio. Lemmon, Roberts, Zender (2008) show that the majority of changes in leverage ratio is caused â€Å"by an unobserved time-invariant effect that generates surprisingly stable capital structures.† LemmonRead MoreCorporate Finance1421 Words   |  6 Pagesis nothing like optimum capital structure for a firm. The Optimal Capital structure is that Capital Structure at which the weighted Average cost of capital (Ko) is Minimum. It is that combination of Equity and Debt at which the total cost of capital is mini-mum. Trade-off theory argues that there s an optimal amount of debt of each firm. At this level of debt, firms can take the most advantage of debts. Debts can be tax shield so that they can save money for firms to reinvest in other projectsRead MoreDifferent Variables and Situations That Influence Capital Financing Structure Decisions726 Words   |  3 Pagesthe corporation prefers to use debt and in which cases they prefer to use all equity in financial leverage and capital structure? What is better for the corporation Should they use all equity with zero debt? Or all debt? Or both? Which is better for investors to maximize their wealth? The number of different variables and situations that influence capital financing structure decisions are far too numerous and complex to list here, but essentially a company should continually assess the cost of debtRead MoreOptimal Capital Structure and Stock Price835 Words   |  3 Pageshave to understand optimal capital structure is maximizes a firm’s stock price, and the target capital structure is mix of the debt, preferred stock, and common equity the firm wants to have (Eugene and Joel 2009). The capital structure is also showing how a firm use different sources of funds to finances its overall operations and growth the stock price. Capital structure shows that how a firm’s assets have been established debt and equity, it is very important in a firm, because it is related toRead MoreCost of Capital1479 Words   |  6 PagesCost of Capital Definition: cost of capital is the rate of return that a company must earn on its project investments to maintain its market value and attract funds. The cost of capital to a company is the minimum rate of return that is must earn on its investments in order to satisfy the various categories of investors, who have made investments in the form of shares , debentures and loans. The cost of capital in operational terms refers to the discount rate that would be used in determining theRead MoreCapital Strength Of A Business Organization1114 Words   |  5 Pages5021 0.3983 1 MV 0.2691 0.3949 0.5627 -0.082 0.1105 0.4074 0.2416 -0.402 -0.04 1 CAR -0.189 0.0092 -0.135 0.0886 -0.219 0.0579 -0.249 -0.008 -0.449 -0.086 1 1. Capital strength: The usage of fixed assets is usually similar to the idea of functioning leverage, also known as assets intensity; this indicates that increase in the capital strength of the business organisation increases the risk of inconsistent future earnings. The main aims of the top level management in this scenario are to gain maximum