Determinants of Capital Structure Determinants of Capital Structure Capital structure refers to the way a firm chooses to finance its assets and investments through some combination of equity, debt, or internal funds. It is in the best interests of a company to find the optimal ratio of debt to equity to reduce their risk of insolvency, continue to be successful and ultimately remain or to become profitable. The capital structure of a concern depends upon a large number of factors such as leverage or trading on equitygrowth of the company, nature and size of business, the idea of retaining control, flexibility of capital structurerequirements of investors, cost of floatation of new securities, timing of issue, corporate tax rate and the legal requirements.
A perfectly competitive market is one in which the number of buyers and sellers is very large, all engaged in buying and selling a homogeneous product without any artificial restrictions and possessing perfect knowledge of market at a time. In the words of A.
The following are the conditions for the existence of perfect competition: The first condition is that the number of buyers and sellers must be so large that none of them individually is in a position to influence the price and output of the industry as a whole.
The demand of individual buyer relative to the total demand is so small that he cannot influence the price of the product by his individual action. Similarly, the supply of an individual seller is so small a fraction of the total output that he cannot influence the price of the product by his action alone.
In other words, the individual seller is unable to influence the price of the product by increasing or decreasing its supply. Rather, he adjusts his supply to the price of the product. Thus no buyer or seller can alter the price by his individual action. He has to accept the price for the product as fixed for the whole industry.
The next condition is that the firms should be free to enter or leave the industry. It implies that whenever the industry is earning excess profits, attracted by these profits some new firms enter the industry.
In case of loss being sustained by the industry, some firms leave it. Each firm produces and sells a homogeneous product so that no buyer has any preference for the product of any individual seller over others.
This is only possible if units of the same product produced by different sellers are perfect substitutes. In other words, the cross elasticity of the products of sellers is infinite. No seller has an independent price policy. He cannot raise the price of his product.
If he does so, his customers would leave him and buy the product from other sellers at the ruling lower price. The above two conditions between themselves make the average revenue curve of the individual seller or firm perfectly elastic, horizontal to the X-axis.
It means that a firm can sell more or less at the ruling market price but cannot influence the price as the product is homogeneous and the number of sellers very large.
The next condition is that there is complete openness in buying and selling of goods. Sellers are free to sell their goods to any buyers and the buyers are free to buy from any sellers. In other words, there is no discrimination on the part of buyers or sellers.
There are no efforts on the part of the producers, the government and other agencies to control the supply, demand or price of the products. The movement of prices is unfettered. Every firm has only one goal of maximising its profits. Another requirement of perfect competition is the perfect mobility of goods and factors between industries.
Goods are free to move to those places where they can fetch the highest price. Factors can also move from a low-paid to a high-paid industry.
This condition implies a close contact between buyers and sellers. Buyers and sellers possess complete knowledge about the prices at which goods are being bought and sold, and of the prices at which others are prepared to buy and sell. They have also perfect knowledge of the place where the transactions are being carried on.
Such perfect knowledge of market conditions forces the sellers to sell their product at the prevailing market price and the buyers to buy at that price. If transport costs are added to the price of the product, even a homogeneous commodity will have different prices depending upon transport costs from the place of supply.
Under perfect competition, the costs of advertising, sales-promotion, etc. Perfect Competition vs Pure Competition: Perfect competition is often distinguished from pure competition, but they differ only in degree.
The first five conditions relate to pure competition while the remaining four conditions are also required for the existence of perfect competition.(1) Cash Flow Position: While making a choice of the capital structure the future cash flow position should be kept in mind.
Debt capital should be used only if the cash flow position is really good because a lot of cash is needed in order to make payment of interest and refund of capital. The present study goes beyond traditional finance paradigms by incorporating elements from divergent perspectives, including family business, finance, economics, and management, to explore capital structure decision-making processes.
Using a comprehensive sample of nearly 7, firms from to , we examine the corporate board structure, trends, and determinants. Guided by recent theoretical work, we find that board structure across firms is consistent with the costs and benefits of the board's monitoring and advising roles.
Capital structure can be a mixture of a firm's long-term debt, short-term debt, common equity and preferred equity. A company's proportion of short- and long-term debt is considered when analyzing. THE DETERMINANTS OF CAPITAL STRUCTURE: EMPIRICAL EVIDENCE FROM KUWAIT Ahmad Mohammad Obeid Gharaibeh revealed to be non-determinants of capital structure.
Keywords: capital structure, multiple regression, endeavor to explain the determinants of capital structure. The trade-off theory (also referred.
Background: This article seeks to complement the previous literature and clarify the particularities of the capital structure policy of firms with foreign direct investment in Angola.