case study financial management

Topics: Finance, Corporate finance, Capital structure Pages: 22 (4163 words) Published: December 1, 2014
The Determinants Of Capital Structure

THE DETERMINANTS OF CAPITAL STRUCTURE

The Determinants of Capital Structure: A Case from Pakistan Textile Sector (Spinning Units) Pervaiz Akhtar
National University Of Modern Languages, Islamabad
Muhammad Husnain
University Of Agriculture Faisalabad
Muhammad Ahsan Mukhtar
Muhammad Ali Jinnah University, Islamabad

Proceedings of 2nd International Conference on Business Management (ISBN: 978-969-9368-06-6)

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The Determinants Of Capital Structure

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Abstract

Capital structure decisions are among the most important and crucial decisions for any business because of their effect on value and cost of the company. In this paper we have discussed the determinants of capital structure of Pakistani firms. The sample comprised 30 Pakistani textile sector companies. Size, growth, financial cost, profitability, and tangibility are used as independent variables, while leverage is the dependent variable. For analysis purpose descriptive statistics, correlation and regression analysis are used. The results imply that the spinning sector companies are small in size and capitalization so these companies prefer internal financing as compare to external financing.

Keywords: Capital Structure, Leverage, Pakistan Textile Sector, Spinning Sector.

Proceedings of 2nd International Conference on Business Management (ISBN: 978-969-9368-06-6)

The Determinants Of Capital Structure

3

Introduction

The Capital Structure Of A Company Is A Particular Combination Of Debt, Equity And Other Sources Of Finance That It Uses To Fund Its Long-Term Asset. The Key Division In Capital Structure Is Between Debt And Equity. The Proportion Of Debt Funding Is Measured By Gearing Or Leverages. There Are Different Factors That Affect A Firm's Capital Structure, And A Firm Should Attempt To Determine What Its Optimal, Or Best, Mix Of Financing.

In Corporate World Discussion Of The Determinants Of Capital Structure Is As Old As The Economic Revolution Of The World. The Capital Structure Is Decided On The Basis Of Some Forces Which Are Tangible As Well As Intangible In Nature.

In Recent Years, At International Level, Several Authors On Capital Structure Have Proposed To Identify And Explain Many Great Potential Attributes That Influence The Financial Decision In Selecting The Right Debt To Equity Variations Across A Firm‟s Capital Structure. The Link Between A Firm‟s Capital Structure And The Factors That Influence A Firm‟s Debt Equity Mix Took On Added Importance As A Result Of The Path Breaking Debate Pioneered By Modigliani And Miller (1958).

Capital Structure Remains To Be A Conventional Issue In Modern Finance. The Path Breaking Work Of Modigliani And Miller (1958) On The Irrelevance Theorem Served As A Great Foundation For Many Work To Be Carried Out On The Subject And Pointed Direction That Such Theories Would Show Under Different Conditions From The Duo Is Capital Structure Irrelevant.

Proceedings of 2nd International Conference on Business Management (ISBN: 978-969-9368-06-6)

The Determinants Of Capital Structure

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These Changes Adapted From The Original Assumptions Took Precedence After Modigliani And Miller (1963) Theory Demonstrates The Benefits Of Debt By Introducing Taxes. Miller‟s (1977) Discovery Of The Effect Of The Inclusion Of Personal And Corporate Tax On Firm Value And Two Theories On Pecking Order Which Consist Of Bankruptcy Costs (Titman, 1984), Agency Cost Theory, Jensen And Meckling, (1976); Myers, (1977) And The Trade Off Theory Dominate The Literature Of Capital Structure.

Theories Have Been Developed To Explain The Right Debt And Equity Combination For A Firm To Adapt In Order To Achieve The Optimum Level Of Capital Mix. Traditional Theory Is In Favour Of Borrowing More For Financing. This Is Mainly Because Of The Tax Advantage That Is Enjoyed By Debt Whilst Equity Is Not. This Makes Equity More Expensive To Consider. According To Myers And...

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