CAPITAL STRUCTURE

Capital Structure

Name of the writer]

Capital Structure

Introduction

The most critical area for managers is financing decision. This decision directly influences capital structure and companies financial performance. Researchers have continued their research for optima l capital structures. This is a structure that defines the minimize cost of capital on one hand and maximizing shareholder's wealth. The importance of this study is connected with the work of Modigliani and Miller - 1958 and other studies that has devoted to the questions regarding the leverage that company should consider and the reason for taking such leverage.

Objective of the paper

The Objective of this paper is discuss the relationship between leverage and the determinants; and the reasons for why there is a negative relationship between profitability and leverage and why Market to Book Ratio and leverage is controversial. Hence, the entire paper will focus on the Capital Structure of the company.

Hypothesis

In order to understand the relationship between profitability and leverage, the hypotheses developed are:

No significant association between Degree of Financial Leverage and Earning per Share.

No significant association between Degree of Operating Leverage and Earning per Share.

No significant association between Degree of Combined Leverage and Earning per Share.

No significant association Debt Equity Ratio and Earning Per Share

Literature Review

The literature will cover the capital structure i.e. the debt and equity of the company. This further shows, how company is financing its overall business transaction and operational through utilization of different sources of fund. Capital structure offers investors an insight view regarding risk exposed to the company. Higher debt companies are termed with greater risk i.e. higher levered company.

Furthermore, in order to test the hypotheses, previous research regarding the relationship between leverage and the determinants (Taxes, Costs of Financial Distress -bankruptcy costs, and agency conflicts) will be discussed. As we ...