3.7.2 Dependent variables (Measuring the leverage)
Financial Leverage
There are some issues regarding the definition of Leverage of the firms. In other words there is no clear-cut definition of leverage in academic literatures. For the definition of leverage its Depends on the objective of researcher by which is the study is being conducted. Previous studies suggest that the level of leverage depends upon the definitions of the leverage, several research studies have used both market and book value based measured of leverage (Rajan, R. and Zingales, L, 1995). Through capital structure theories consider long term debt as a substitute for financial leverage, we take the total debt to total equity ratio as a proxy for the financial leverage because in Pakistan firms have mostly short-term financing as the average firm size is small, which makes access to the capital market difficult in terms of cost of capital (Shah & Hijazi, 2004). The main sources of debt in Pakistan have been commercial banks, which do not persuade long term loans.
3.7.3 Independent Variables
Size
Size (SZ) of the firm is measured by the taking natural log of the sales to smoothen the variation over the periods considered. With respect to the pecking order theory, (Rajan, R. and Zingales, L, 1995) argued that this relationship could be negative. For the static order approach, the large firms, the greater the possibility it has of issuing debt, resulting in positive relationship between debt and size. In another research (Shah & Hijazi, 2004) found that there is a positive relationship between and size of the firm. In this study we expect the same relationship between size and leverage.
Profitability
Given the pecking order theory that the firm...
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Balance sheet lists assets, liabilities and owner’s equity. The assets listed on the balance sheet are acquired either by debt (liabilities) or equity. “Companies that use more debt than equity to finance assets have a high leverage ratio and an aggressive capital structure. A company that pays for assets with more equity than debt has a low leverage ratio and a conservative capital structure. That said, a high leverage ratio and/or an aggressive capital structure can also lead
Higher leverage is very likely to create value for a firm considering capital structure change by exerting financial discipline and more efficient corporate strategy changes.
Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.
MCI current capital structure is x% debt and y% equity. Their key ratios are a, b, and c. Comparing to other firms in the utilities industry they appear to be underutilizing (debt/equity). (See exhibit D). Referencing the forecast there is expected to b...
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Modigliani & Miller applied their theories with two modules, one which doesn’t include the taxes and this is their first finding, and another one with taxes to make it more realistic. The First Proposition without taxes: In this part Modigliani & Miller stated that the firm’s value is not affected by the structure of the capital between Equity and Debt, They proved this by having an example of two firms that have got the same conditions in everything, same cash flow, same operational risks and same opportunity costs. One of the firm’s capital structure is all equity and the other firm’s capital structure is a mixture between equity and debt, since the form of financing (debt or equity) can neither change the firm’s net operating income nor its operating risk, the values of levered and unlevered firms will be the same. They have concluded that the value of the levered firm = the value of the unlevered firm, only if they have the same conditions, same risk levels, cash and opportunity cost.
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... It was the conclusion of the author that financial ratios, when combined with statistical analysis, still remain a valuable tool. The theoretical conclusion was that ratios used within a multivariate framework take on a more influential role than when used in isolation. The discrimination model was very accurate in the initial sample of 66 firms, correctly predicting 94 percent of the original bankrupt firms. The potential suggested uses of the model include: business credit evaluation, investment guidelines and internal control procedures.
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The financial cost and cash flows are significantly changing by quarter after quarter. The rise in cash flows, reduce the risk of financial management as the company can easily pay the financial costs. It is observed that on the other side when there is a downfall of cash flows Company have high financial management risks. According to the correlation analysis, the value of the correlation is 0.012 which is highly insignificant as the limit of the correlation value is 0.953. So there is no relation between profit and leverage. It is also found that financial cost has a positive of correlation with profit as this correlation is verified by Pearson correlation value 0.378. By these findings, it is clear that financial risk is not an important
A Company’s policy generally is to have different types of investors for their securities. Therefore, a capital structure should give enough choice to all kind of investors to invest. Usually bold and adventurous investors go for equity shares and loans & debentures are often raised keeping into mind conscious
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.
Thus, capital structure would vary from one company to another company depend upon the company’s availability of fund, operational size, from different sources and management efficiency etc.