Financial Structure of Bsrm Steels Limited

Topics: Finance, Corporate finance, Capital structure Pages: 47 (14304 words) Published: May 9, 2013
Chapter 1

1.1 Prelude
Financial structure refers to the make-up of the right hand side of a company`s balance sheet, which includes all the ways it`s assets are financed, such as trade accounts payable and short-term borrowings as well as long-term debt and ownership equity. Each business will have a different mixture depending on its needs and expenses. This specific mixture of debt and equity that a company uses to finance all it`s operations directly affects the risk and value of the business. Capital structure, as distinguished from this structure, doesn`t include current liabilities. Financial structure is the combination of Capital Structure and Current Liabilities. Theoretically speaking, capital structure determination is achieving an appropriate and desirable combination of equity and debts in a way that could maximize the firm value and in contrast, reduced the cost of financing .There are several factors that may have effect on this relationship. On the other hand, several factors (economic and accounting) may influence the composition and structure of the capital 1.2 Review of literature

Capital structure consists of debt and equity of . This includes long-term debt, preferred stock and common stock (Dastgir, 2003). While determining capital structure, the firm has to focus on deciding about an appropriate and desirable portion of liabilities and equity because of their direct effect on value of stock market. After determining the amount of capital needed by company, management decides which source of funding and what mode should be used. Typically, companies and finance managers consider financial policies to reach the highest market value for their stocks. Maximizing shareholder wealth requires using financial resources and obtaining optimal maximum efficiency and selecting appropriate risk for the company (Kohher, 2007). According to traditional theory, achieving an optimal capital structure is depending on the cost of financing. The company can increase their market shares price through reducing financing costs and it may lead to enhance the total value of the company (Harris and Raviv, 2002). Modigliani and Miller (1958)’ theory showed that if the Company's investment policy is constant, regardless of the taxes and engagement expenses, the company's financing policy has no influence on the current market value. Their hypothesis about capital structure shows that financing policy choices could not change the value of the company. According to Static Trade-off Approach, optimal capital structure is achieved through a combination of different sources of financing that matched the debt financing costs and benefits. Cash flow hypothesis is based on this fact that Payment of dividends has reduced the free cash flows available to managers and so prevents managers from doing opportunistic activities (Jensen, 1986).

Brander and Lewis (1986) and Maksimovic (1988) provide the theoretical framework that links capital structure and market structure. Contrary to the profit maximization objective postulated in industrial organization literature, these theories are similar to the corporate finance theory in that they assume that the firm's objective is to maximize the wealth of shareholders. Furthermore, market structure is shown to affect capital structure by influencing the competitive behavior and strategies of firms. Fanelli and Keifman (2002) examine the relationship between capital structure and some economic variables in Argentina. Their results show that in country's financial markets, unstable economic environment and external events have effects on investment decisions of companies. They also express that issuance of bonds by companies for financing is suitable only when the country is in good economic situation.

Miguel and Peinado (2004) investigate the relationship between capital structure and liquidity, short-term debt and long-term debt ratios for the 10 years period....

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13. Jensen, M.C., and W.H. Meckling, 1976, “Theory of the firm: managerial behavior, agency costs and ownership structure”, Journal of Financial Economics 3, 305-360.
14. Modigliani, F., and M.H. Miller, 1958,” The cost of capital, corporate finance and the theory of investment”, American Economic Review 48, 261-297.
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