Optimum Levels of Capital Structure

By

ACKNOWLEDGEMENT

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

Signed __________________ Date _________________

ABSTRACT

The dissertation surveys the literature on the capital structure. The main theoretical findings of the dissertation are the capital structure of the corporations is not affected due to the leverage ratios of the industry it is operating in. The main empirical findings of the research study are firms can enhance or reduce their market value by adopting the changes in the debt level in order to move towards or away from the industrial average. The data has been collected through the DATASTREAM that is based on the 17 companies of the United Kingdom. In the research study, there has been analyzed the impact of firm's characteristics on the capital structure of the firm. There were also used two other databases for the collection of the data that were Value Line and the Compustat. The important unanswered question in the research study is there any significant difference between the High Debt firms and the Low Debt firms. The research study has taken into account different aspects of the capital structure. There have been discussed various changes that has occurred in the capital structure of the corporations. The optimum level of the capital structure has also been discussed that is affected by the performance of the capital structure. There have been analyzed various factors with respect to the capital structure that includes debt to equity ratio, effect of changes on the value of the corporation, long term and short term levels of debt. The research study has also discussed the debt, equity and other components of the capital structure. The capital structure explains the way of how the corporations finance its business activities. The value of the firm is not affected by the changes in the capital structure. There have been set various targets of the debt and equity by the corporations. However, the optimum levels of the capital structure cannot be set as it changes with the passage of time.

Table of Contents

ACKNOWLEDGEMENTii

DECLARATIONiii

ABSTRACTIV

CHAPTER 1: INTRODUCTION1

Aims and objectives of the study1

Background of the study1

Problem Statement2

Significance of the study3

Research questions5

CHAPTER 2: LITERATURE REVIEW7

Theoretical Framework7

Capital Structure and Industrial Averages7

Corporate Debt10

Corporate Equity11

Debt to Equity Ratio12

Theories by Economist13

Propositions by Modigliani and Miller15

Effect of Taxes and Bankruptcy Costs17

The tax favours debt17

Influence of Asymmetric Information among Agents18

The Agency Conflicts between Shareholders and Creditors19

CHAPTER 3: METHODOLOGY21

Introduction21

Rationale for a Quantitative Study22

Rationale for a Phenomenological Study22

Mixed Research23

Classification of research methods24

Multi-method studies24

Mixed method studies24

Steps in mixed methodology24

Strength and weakness of the mixed research:25

Strengths25

Weaknesses25

Research Design26

Literature Search26

Instrument for data collection27

Data analysis27

Data Security: Participant Anonymity and Document Retention27

Reliability/Dependability28

Validity30

Ethical Considerations31

CHAPTER 4: DISCUSSION AND FINDINGS32

Capital Structure ...