OPTIMAL CAPITAL STRUCTURE

Optimal Capital Structure in Telecom Industry



Optimal Capital Structure in Telecom Industry

Introduction

According to the European classification of activities, the sector of telecommunications includes not only telephony services. Apart from the transmission information, this segment also includes activities that allow access to certain networks like the Internet. In the definition of the sector includes the distribution of sound, images, data or other information through cable networks, broadcasting, retransmission, or satellite. The sector includes communication by telephone, telegraph; and telex transmission of radio and television, Internet access provision and maintenance of networks.

Telecommunications services are included in the same classification of postal activities, as until recently was head of state service e in all European countries and is also responsible for telecommunications system monopoly. The telecommunications sector experienced significant growth in the second half of the nineties, before deregulation and privatization of the former sector operators modify the picture. The intense competition has led to a reduction in prices in recent years including telephone services of dominant operators, reflecting the approach taken by the European regulatory framework that promotes the interests of consumers. However, new operators have reaped only partially successful, as the demand for services has fallen short of expectations. Focusing on the data, the production of telecommunications companies from 15 countries EU amounted in 2003 to 277,000 million USD, generating a value of 138,000 million EUR telecommunications services.

Research Methodology

The methodology of this research is the descriptive research methodology. This is a secondary research where data used for process pertains to the research journals, books and websites. There are different sources used in order to collect data for this paper. This study aims to explore the optimal capital structure and its concepts. This study utilizes the market data of five British telecom companies in order to compare and contrast their optimal capital structure and to enlighten the ideology of the concept. This study utilizes different sources i.e. journals, publications, book reviews in order to accumulate the data.

Literature Review

This paper aims to critically analyze and enlighten the optimal capital structure and value of debt incurred in the course of investment in a telecommunication industry. Formulas generally used to value companies can not be applied to obtain an optimal capital structure because they are based on the principles of Modigliani and Miller concerning the independence of business value from the level debt in a context of perfect capital markets implies absence of bankruptcy costs. The combination of the formulas derived by Modigliani and Miller to invite those from the CAPM in the presence of taxes, maximize borrowing against what happens in practice more widespread. The analysis of the investor's own resources as an option purchase made on the property in which the investment, giving the level optimum debt, the equilibrium price of the mortgage loan and the value combination of the options available to the debtor (default and prepayment) in the presence of taxes on profits and costs bankruptcy.

Optimal capital structure

The optimal capital structure can be defined as that maximizing business ...