An optimal capital structure is the best debttoequity ratio for a firm that maximizes its value. Factors affecting capital structure 1 cash flow position. Factors affecting capital structure decisions mba lectures. This article throws light upon the top seventeen factors determining the capital structure. 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. It involves the decision to invest the current funds for addition, disposition, modification or replacement of fixed assets. Determining the factors affecting capital structure decisions of. The effect of capital structure on the financial performance. The form of market structure, the company, is operating into, determines its capital structure.
Some of the major factors influencing capital structure are as follows. Capital budgeting is a companys formal process used for evaluating potential expenditures or investments that are significant in amount. Specifically, it analyzed the influence of budget management and financial controls on financial management. First, it determines which part of companys assets is funded by shareholders and which is attributable to lenders. 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. 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. In companies capital structure is very important as many companies treat it as a different entity. Factors affecting capital structure decisions your business. Pdf the factors affecting capital structure for each group of.
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. Capital structure of the business affects the profitability and financial risk. Factors affecting capital structure of a firm capital. 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. Capital structure is defined as the specific mix of debt and equity a firm uses to finance its operations. 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. Capital structure choice is an important decision for a firm.
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. Most favourable proportion determines the optimum capital structure. Effective capital structure decisions decrease the cost of capital and hence the value of a firm increases. It is the employment of an asset source of finance for which. There are multiple related factors which affect capital structure decisions. 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. Second, capital structure affects companys solvency key financial ratios like debt ebitda and debt equity are dependent on capital structure. Moreover, the extant literature on islamic finance has been theoretically explored, and the empirical research regarding capital structure is still. It is made up of debt and equity securities and refers to permanent financing of a firm. 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.
There are a number of rules which are to be considered while deciding the financing pattern. Private companies considers control factor as important whereas public company finds cost factor more important. Factors affecting capital structure of go public manufacturing. Financial leverage it refers to proportion of debt in the overall capital. Research on the factors that affecting capital structure in manufacturing. This suggested that much more research needed to be undertaken on dividend policy in developing economies. The study was guided by budget, financial control, and agency theories. Factors influencing islamic banks capital structure in developing. Capital structure a reading prepared by pamela peterson drake outline 1. This article throws light upon the seven major factors influencing capital structure. 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. Key factors influencing capital structure decision and its. It provides examples and discusses quantitative as well.
The general factors which are affecting the capital structure are as follows. 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. 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. Introduction there have been published numerous research papers about the importance and the effect of financial structure on financial performance. A the objective of this empirical study is to analyze the factors affecting capital. Factors affecting capital structure decision semantic scholar. The business is affected by its internal and external environment. The factors affecting capital budgeting 7350 words bartleby. Macroeconomic factors and corporate capital structure. Jun 26, 2015 factors affecting capital structure decisions. Factors affecting capital structure decision of a firm.
On the maturity date, the company must pay the full redemption value back to the investor. Capital structure is the mix of the longterm sources of funds used by a firm. The objective of this study was to determine the effect of capital structure on the financial performance of smes in thika subcounty, kenya. Chapter iii concepts and theories of capital structure and profitability. Importance of capital structure planning mba knowledge base. Capital structure capital structure means the proportion of dept and equity used for financing the operations of business. Key factors influencing capital structure decision and. Feb 27, 2017 factors affecting capital structure 1. The internal factors which are affecting capital structure are as follows. The factors affecting the capital structure finance essay. This study adopted an explanatory approach by using panel data research design to fulfill the above objectives. Capital structure is the mix of ownersupplied capital equity, reserves, surplus and borrowed capital bonds, loans that a firm uses to finance business operations. Factors affecting capital structure decision of a firm are therefore critical.
A firms ability to pay expenses and loans determines debt capacity. 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. 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. The optimal capital structure for a company is one that offers a. Factors affecting capital structure decisions wiley online library. The capital structure should be planed generally keeping in view the interest of the equity shareholders and financial requirements of the company. Whatever decision heshe makes, whether it is investment decision, financing decision or dividend decision, heshe has to maximise value of the firm. The company implemented a twoforone stock split for shareholders on. Key factors influencing capital structure decision and capital. 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.
Bonds pay interest to investors until the maturity date. The most reliable factors for explaining market leverage are. What are the key influential factors that resolve capital structure decisions. Some firms operate in volatile financial environments affecting their ability to meet financial obligations.
Cbse notes class 12 business studies financial management. Corporate capital structure remains a controversial issue in modern corporate finance. The nature of business can have strong effect on the pattern of capital structure. Flexibility of financial plan in an enterprise, the capital structure should be such that there is both contractions as well as relaxation in plans. Factors affecting the capital structure of a company. The factors affecting capital budgeting 7350 words. Factors affecting capital structure of a firm capital structure corporate finance management notes. The report distinguishes twelve major standards, which have an impact on effective debt management, and then groups these standards into three areas. The influence of capital structure on financial performance. What is the best capital structure depends on several factors. That happens to be the need of the company because eps happens to be the maximum on it.
The proportions of debt and equity used to finance the. 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. Empirical evidence from selected indian firms international journal of marketing, financial services and management research, vol. Some of the chief factors affecting the choice of the capital structure are the. What are the internal factors affecting capital structure. Factors affecting capital structure linkedin slideshare. 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. 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. Jul 01, 2015 capital budgeting is a companys formal process used for evaluating potential expenditures or investments that are significant in amount. Effectiveness of debt management in local governments. The second objective was to determine and evaluate the effects of market structure factors. The aim of this study is to indicate the influence of macroeconomic factors on corporate capital structure in different european countries.
Generally companies use the concept of financial leverage to set up capital structure. Abstract capital budgeting is necessary for large, long term investment projects. What are the general factors affecting capital structure. Factors affecting the capital structure the dependent variable are. If a firm finances its activities with debt, the creditors expect the. This paper examines the relative importance of many factors in the capital structure decisions of publicly traded american firms from 1950 to 2003. Research entitled factors affecting the capital structure a requirement for the course readings in financial. Cost of raising finance by tapping various sources of finance should be estimated.
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