Capital Structure Case Study

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Recommended: Factors that affect capital structure decision

Introduction

1.1 Conceptual framework

The most debatable topic in finance is capital structure. The main issue is what should be the optimal capital structure?
Capital structure is basically the combination of equity and debt. It is very important for every organization to choose optimal capital structure because the decision ultimately affects the management, investors and lenders. So it becomes very crucial for all organizations.
An ideal composition of capital structure which consists of debt and equity will minimize the cost of capital and maximize the firm’s value. Therefore it becomes important for the managers to understand the theories of capital structure.

The main reason why capital structure decisions are significantly vital is that it helps minimize the firm’s weight average cost of capital (WACC) through adjusting the return rate of debt. As a result, it maximizes the wealth of shareholders. Glen and Pinto supported this theory by stating that the ratios of debt and equity play an essential part in firm’s financial decisions (Glen & Pinto 1994). Furthermore, capital structure affects the firm’s profitability as well as its risk (Froot et al. 1993). A false vision about the capital structure may cause financial …show more content…

One way that can be chosen is to undertake a capital restructuring, especially debt restructuring. The decision taken on debt restructuring, of course, requires expertise and analystic capabilities so managers can make the right decisions of financial restructuring for the company. An ideal composition of capital structure which consists of debt and equity, will minimise the cost of capital and maximise the firm‟s value. Therefore, it is important for the firm‟s manager to understand the theory of capital

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