Capital Structure of Cement Industries

Topics: Finance, Corporate finance, Debt Pages: 21 (6960 words) Published: October 31, 2013
CHAPTER 1
INTRODUCTION
1.1 Background
The main theme of capital structure is the reasoning that it is the blend of two main financial variables which are liabilities that includes debt and the second one is also a kind of liability retained earnings or equity. These are the main variables that are involved in the asset financing of an organization. The major decision that is made in finance is about the capital structure. There are many theories about capital structure. Except of those theories there is the major part in corporate finance is the judgment about it. The determinants of capital structure include policies that are related to dividend, securities and the financing of projects etc. One of the purposes of the finance executive is to make sure the maximization of the wealth of shareholders by lowering the cost of capital. That is why it is said to be the operational gears for the finance department i.e. the financial management system to control the total cost of capital. We can get the best of capital structure when there is a decrease in total cost of the capital. If the company is supporting finance to the company’s asset and its growth in the capital structure then it is being done by giving earning equity, liabilities like debt and securities. On the other side of the picture the major theme of financing is basically the route by which the company’s gather money by the help of its sources that are involved in getting and maintaining the company’s total amount of assets and the company growth and present operations in the field. Moreover, Equity in the company comes by dispensing all the company’s stocks and equity or retained earnings. Beside these sources of finance, company’s issue securities that own the distinctiveness of both equity and debt such as income bond also called as hybrid securities. A company can choose its financing mix decision so that it can use in the company’s assets and it will lead to value maximization. The researchers and scholars did researches which leads us to the point to make us realize that the earning power of a company can find out its. There are three major methods of financing for a company which are if the shares are issued and if the profits are either spend or borrowed. In this corporate world the determinants of capital structure is as old as the economic revolution of the world. The decision of the capital structure is based upon elements which are tangible and intangible both in nature. Development of many theories took place to elucidate the right debt and equity combination for a company in order to adapt the best possible level of capital mix (Modigliani and Miller, 1958). The decision of the company’s capital structure in Pakistan is done by the funds accessible in the financial sector of the country. There is not a huge amount of national savings that are there to be used to execute the requirements of the financial management of the diverse types of businesses in the country’s economy. That is why the economy of any developing country helplessly relying on the overseas liabilities. There were many issues raised for the financial configuration and related choices. These determinants are less percentage on liability and the risk is high which eventually maximize te equity’s amount as there is an increase in liability and tax benefits in debt (Modigliani and Miller, 1958 and 1963). Many researchers said that the capital amount i.e. the cost of capital remained same. After research the researcher agreed to the point that using as much debt as a liability is agreeable, keeping in mind the taxes (Myers, 1984).

The study of this paper focuses on cement industries of Pakistan. There were many elements that were providing a conclusion of how to decide about the kind of capital structure of companies in the Pakistani cement sector. Moreover each industry show signs of some different and unique qualities but the main problem is that these talents are overshadowed...

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