If the companys management policies are such that they want to retain their voting rights in their hands, the capital structure consists of debenture holders and loans rather than equity shares. This study adopted an explanatory approach by using panel data research design to fulfill the above objectives. The report distinguishes twelve major standards, which have an impact on effective debt management, and then groups these standards into three areas. Empirical evidence from selected indian firms international journal of marketing, financial services and management research, vol. The study used homogeneous panel of 39 thai companies in real estate industry listed in the stock exchange of thailand set during the period 2002 to 2009. Factors affecting capital structure decision semantic scholar. Factors affecting capital structure decision of a firm are therefore critical. An optimal capital structure is the best debttoequity ratio for a firm that maximizes its value.
Factors affecting capital structure decisions mba lectures. There is a tendency for organizations is some industries such as air transport, auto and trucks to use more debt than those in other industries. Most favourable proportion determines the optimum capital structure. Feb 27, 2017 factors affecting capital structure 1. Bonds pay interest to investors until the maturity date. The business is affected by its internal and external environment.
Specifically, it analyzed the influence of budget management and financial controls on financial management. That happens to be the need of the company because eps happens to be the maximum on it. Private companies considers control factor as important whereas public company finds cost factor more important. The factors affecting capital budgeting 7350 words bartleby. Some of the major factors influencing capital structure are as follows.
Effective capital structure decisions decrease the cost of capital and hence the value of a firm increases. Factors affecting capital structure decision of a firm. However, determining what factors to use in the process can be difficult this research presents the most common procedures used in the capital budgeting process. Whatever decision heshe makes, whether it is investment decision, financing decision or dividend decision, heshe has to maximise value of the firm. Introduction there have been published numerous research papers about the importance and the effect of financial structure on financial performance.
This article throws light upon the seven major factors influencing capital structure. Pdf the factors affecting capital structure for each group of. Capital structure is the mix of the longterm sources of funds used by a firm. What are the key influential factors that resolve capital structure decisions. It is the employment of an asset source of finance for which. Key factors influencing capital structure decision and. The large expenditures include the purchase of fixed assets like land and. Depending on your company and the industry you operate in a financial manager has to determine what level of debt is good for your capital structure.
It is important not only from a return maximization point of view, but also this decision has a great impact on a firms ability to. The form of market structure, the company, is operating into, determines its capital structure. Effectiveness of debt management in local governments. Factors influencing islamic banks capital structure in developing. Factors affecting dividend policy various factors that have a bearing on the dividend policy maximisation of owners wealth is the objective of the financial managers job. This suggested that much more research needed to be undertaken on dividend policy in developing economies. Key factors influencing capital structure decision and its. First, it determines which part of companys assets is funded by shareholders and which is attributable to lenders. Importance of capital structure planning mba knowledge base. Factors affecting cost of capital fundamental, economic.
Jun 26, 2015 factors affecting capital structure decisions. The second objective was to determine and evaluate the effects of market structure factors. 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. Moreover, the extant literature on islamic finance has been theoretically explored, and the empirical research regarding capital structure is still. This article throws light upon the top seventeen factors determining the capital structure. Capital structure capital structure means the proportion of dept and equity used for financing the operations of business. Capital structure is the mix of ownersupplied capital equity, reserves, surplus and borrowed capital bonds, loans that a firm uses to finance business operations. Financial leverage it refers to proportion of debt in the overall capital. Companies use a variety of methods to raise capital needed to finance operations and expansion. The proportions of debt and equity used to finance the. Macroeconomic factors and corporate capital structure.
The factors affecting the capital structure finance essay. An appropriate capital structure or target capital structure can be developed only when all those factors, which are relevant to the companys capital structure decision, are properly analyzed and balanced. Capital structure of the business affects the profitability and financial risk. Capital structure decision is one of the core decisions that financial managers. Capital structure definition the capital structure is how a firm finances its overall operations and growth by using different sources of funds. Factors affecting capital structure decisions wiley online library. Under the capital structure, decision the proportion of longterm sources of capital is determined. Some firms operate in volatile financial environments affecting their ability to meet financial obligations. The optimal capital structure for a company is one that offers a. Cbse notes class 12 business studies financial management. The internal factors which are affecting capital structure are as follows. What is the best capital structure depends on several factors. A firms ability to pay expenses and loans determines debt capacity.
Key factors influencing capital structure decision and capital. It is made up of debt and equity securities and refers to permanent financing of a firm. Apr 28, 2009 this paper examines the relative importance of many factors in the capital structure decisions of publicly traded american firms from 1950 to 2003. Factors affecting capital structure 1 cash flow position. Some of the chief factors affecting the choice of the capital structure are the. Abstract capital budgeting is necessary for large, long term investment projects. Capital structure meaning and factors determining capital. Second, capital structure affects companys solvency key financial ratios like debt ebitda and debt equity are dependent on capital structure. Factors affecting the capital structure of a company. On the maturity date, the company must pay the full redemption value back to the investor. The company implemented a twoforone stock split for shareholders on. Seeking all above thoughts in mind it can be said that the companies should maintain the financial flexibility or adequate reserve borrowing capacity because it depends on the factors which are necessary in making capital structure decisions. The general factors which are affecting the capital structure are as follows.
Factors affecting capital structure of a firm capital. If a firm finances its activities with debt, the creditors expect the. The most reliable factors for explaining market leverage are. Factors affecting capital structure decisions your business. In companies capital structure is very important as many companies treat it as a different entity. Factors affecting capital structure of a firm capital structure corporate finance management notes. The aim of this study is to indicate the influence of macroeconomic factors on corporate capital structure in different european countries. It involves the decision to invest the current funds for addition, disposition, modification or replacement of fixed assets. What are the internal factors affecting capital structure. There are a number of rules which are to be considered while deciding the financing pattern. The another factor which should be considered is the objective or purpose for which the funds are required. Whether the capital structure of a firm should have some effect on the financial performance of small and medium enterprises is a matter for empirical determination. Chapter iii concepts and theories of capital structure and profitability.
The nature of business can have strong effect on the pattern of capital structure. Capital structure a reading prepared by pamela peterson drake outline 1. Corporate capital structure remains a controversial issue in modern corporate finance. The effect of capital structure on the financial performance. The recent global financial crisis and the following european debt crisis show the significance of the country financial stability, consequently the efficiency of fiscal and monetary policies, and their impact on the private sector. This paper investigates the significant factors influencing capital structure decision of the listed real estate companies and the speed of adjustment towards their target level.
Capital structure is defined as the specific mix of debt and equity a firm uses to finance its operations. Flexibility of financial plan in an enterprise, the capital structure should be such that there is both contractions as well as relaxation in plans. Research entitled factors affecting the capital structure a requirement for the course readings in financial. Capital budgeting is a companys formal process used for evaluating potential expenditures or investments that are significant in amount. It implies that the company uses a mix of debt capital, preference capital and equity capital, wherein the longterm debt adds to the equity shareholders earnings per share. Factors affecting capital structure linkedin slideshare. Cost of raising finance by tapping various sources of finance should be estimated. Capital structure choice is an important decision for a firm.
Research on the factors that affecting capital structure in manufacturing. The influence of capital structure on financial performance. The objective of this study was to determine the effect of capital structure on the financial performance of smes in thika subcounty, kenya. Factors affecting capital structure of go public manufacturing. The study was guided by budget, financial control, and agency theories. What are the general factors affecting capital structure. The results have shown that capital structure has an impact on companys performance, but the sign of that relation depends on the type of measure that is used to quantify the performance. Determining the factors affecting capital structure decisions of. Important factors in determining the capital structure of a company.
There are multiple related factors which affect capital structure decisions. Jul 01, 2015 capital budgeting is a companys formal process used for evaluating potential expenditures or investments that are significant in amount. It provides examples and discusses quantitative as well. This paper examines the relative importance of many factors in the capital structure decisions of publicly traded american firms from 1950 to 2003. The management must plan a capital structure which retains its elasticity, raising funds as and when required and reducing the cost of capital at its discretion. The factors affecting capital budgeting 7350 words. Generally companies use the concept of financial leverage to set up capital structure. Factors affecting the capital structure the dependent variable are.
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