A Summer Training Project

ON CAPITAL STRUCTURE

TELECOMMUNICATION CONSULTANT INDIA LTD.

AT

TCIL IT CHANDIGARH

In the Partial Fulfillment of the requirement of

BACHLOR OF BUSINESS ADMINISTRATION

(2012-2013)

Submitted

To: Submitted By

Ms.Nancy Jindal Neetu

Assist professor (BIMT) BBA 5th SEM

University Roll no1297006

DECLARATION

This is to certify that I, Neetu the student of Bharat group of Institute of Technology

and Management studying in B.B.A 5th Semester. Roll no. 1297006 has undergone

summer training in TCIL-IT in Chandigarh for six weeks and have submit a project

report on the title of ‘‘capital structure ’’ at TCIL as assigned by the company, for

partial fulfillment of degree of Bachelor of Business Administration B.B.A. to PTU

University Jalandhar.

I solemnly declared that the work done by me is original and no copy of it has been

submitted to any other for award of any other degree / diploma / fellowship or on

similar title or topic.

NEETU

ACKNOWLEDGEMENT

A person always requires guidance & help of other to achieve success in his mission;

similarly it was not possible for me to complete my project individually. I am very

much thankful to all the people who have helped me to complete the project.

B I am gratefully in debt to Mr. Shekhar Gharu – Chief Campus Evangelist, my

project guide for providing me necessary help, editing my project and required

guideline for the completion of my project and for the valuable time that he gave me

from his busy schedule.

Last but not the least I am thankful to all my friend of inspiration and information for

us. I thank to God and my parents for showing their blessings.

I am thankful to our faculty guide Miss.Nancy Jindal (Department of Management

Studies) of BHARAT GROUP OF INSTITUTE OF TECHNOLOGY &

MANAGEMENT to help me to complete my project report.

NEETU

PREFACE

In an institute, a student learns about theoretical concepts. But in the present day

scenario, environment surrounding the business is complex, dynamic and the

industries are so much diversified and specialized that it requires the managers to be

wholesomely nourished with knowledge and skills in the respective field of

specialization. Exposure is the key in building good future managers.

This research project is the result of my hard work. Research project is an integral part

of bachelor of Business Administration and it aims at providing the real life

experience of the industry to the students. The practical experience helps the student

to view the real business world closely, which in turn widely influences their

conception and perception.

It provides the basic skill required to perform the survey and statistics tool needed to

analysis the data. Research project is an integral part curriculum and its purpose is

providing the students with the practical exposure of today changes scenario. It helps

in the development of the practical skill and the analytical skill and analytical thinking

process.

EXECUTIVE SUMMARY

TCIL (Telecommunication Consultants India Ltd), a prime engineering consultancy company, is a

wholly owned Government of India Public Sector Enterprise under the administrative control of the

Department of Telecommunications (DOT), Ministry of Communications and Information

Technology, Government of India. TCIL was set up in back 1978 for providing Indian telecom

expertise in all fields of telecom, Civil and IT to developing countries around the world. In

Information Technology, TCIL has established its IT Training division TCIL- IT which is running

various training programmes duly approved by Department of Electronics, Govt. of India for career

advancement.

The project Title Financial statement analysis of TCIL IT basically deals with finding the liquidity,

profitability, long term solvency position of the company. The tool which is used for this purpose is

Ratio Analysis. By applying this tool we had found out that company’s liquidity, profitability,

solvency position is satisfactory but not good. So company should have to improve its liquidity

profitability, solvency position.

CONTENTS

Sr. no. Title

Chapter1. Industry Introduction &Company profile

Chapter2. Topic Introduction

Chapter3. Review Literature

Chapter4. Research Methodology

Chapter5. Data Analysis and Result

Chapter6. Conclusion

CHAPTER - 1

Industry Introduction

IT Industry, Information Technology Industry

Information technology, and the hardware and software associated with the IT

industry, are an integral part of nearly every major global industry.

The information technology (IT) industry has become of the most robust industries in

the world. IT, more than any other industry or economic facet, has an increased

productivity, particularly in the developed world, and therefore is a key driver of

global economic growth. Economies of scale and insatiable demand from both

consumers and enterprises characterize this rapidly growing sector.

The Information Technology Association of America (ITAA) explains 'information

technology' as encompassing all possible aspects of information systems based on

computers.

Both software development and the hardware involved in the IT industry include

everything from computer systems, to the design, implementation, study and

development of IT and management systems.

Owing to its easy accessibility and the wide range of IT products available, the

demand for IT services has increased substantially over the years. The IT sector has

emerged as a major global source of both growth and employment

Features of the IT Industry at a Glance

Economies of scale for the information technology industry are high. The marginal

cost of each unit of additional software or hardware is insignificant compared to the

value addition that results from it.Unlike other common industries, the IT industry is

knowledge-based. Efficient utilization of skilled labor forces in the IT sector can help

an economy achieve a rapid pace of economic growth.

The IT industry helps many other sectors in the growth process of the economy

including the services and manufacturing sectors.

The role of the IT industry

The IT industry can serve as a medium of e-governance, as it assures easy

accessibility to information. The use of information technology in the service sector

improves operational efficiency and adds to transparency. It also serves as a medium

of skill formation.

MAJOR STEPS TAKEN FOR PROMTION OF IT INDUSTRY

Domain of the IT Industry

A wide variety of services come under the domain of the information technology

industry. Some of these services are as follows:

* Systems architecture

* Database design and development

* Networking

* Application development

* Testing

* Documentation

* Maintenance and hosting

* Operational support

Most Popular in IT Industry

Information Technology Industry: Information technology, and the hardware and

software.

Information Economy: Information and Communication Technology has

Internet Economy: The meaning of Internet Economy is developing

Mobile Phones And Business Development: It’s the case of Mobile Phones, where

E-commerce And Economies: Most of the enterprises worldwide have conducted

Broadband Spread: Use of Internet through broadband connection

Company Introduction

Telecommunications Consultants India Limited

(A Government of India Enterprise)

TCIL (Telecommunication Consultants India Ltd), a prime engineering consultancy

company, is a wholly owned Government of India Public Sector Enterprise under the

administrative control of the Department of Telecommunications (DOT), Ministry

of Communications and Information Technology, Government of India. TCIL

was set up in back 1978 for providing Indian telecom expertise in all fields of

telecom, Civil and IT to developing countries around the world. Company's core

competence is in the fields of Switching, Transmission Systems, Cellular services,

Rural Telecommunication, Optical fiber based backbone transmission systems, IT &

Networking Solutions, Application Software, e-Governance, 3G Network, WIMAX

Technology and also Civil construction projects. TCIL-IT has tie-up with many

government agencies to impart training for career advancement.

About

In Information Technology, TCIL has established its IT Training division TCIL- IT

which is running various training programmes duly approved by Department of

Electronics, Govt. of India for career advancement. Keeping in view the rising need

for quality IT & Telecom professionals, TCIL-IT has introduced a gamut of

comprehensive training program in Software, Hardware & Networking, Telecom,

Multimedia, Interior Designing and Fashion Technology through its countrywide

network. Over the years TCIL-IT has built up a solid reputation for offering world

class training in software, hardware, and telecom and embedded system. From Indian

Army, Banks to Multinational majors- TCIL-IT is being sought after by the biggest

and the best for imparting IT Training. The curriculum development team of TCIL-IT

is in regular touch with today’s industry and updates the training curriculum regularly

to meet its demands. As the training curriculum is designed giving importance to live

project based knowledge and practical skills, the trainees will get ample time to work

in Labs. To enhance the knowledge base of our aspirants there are various interactive

sessions with our industry partners from time-to-time and visits of industry

professionals / Engineers.

ICSIL has entered in the MOU with Ministry of Small & Medium Enterprises, to

conduct Computer training in their Development institute at New Delhi. Also has

made MOU with NORTEL for the communication Network job for the

Commonwealth Games in New Delhi.

TCIL-IT has got recently the orders from Ministry of Minority affairs, Govt. of India

for conducting Computer courses to 70 Minority students in New Delhi. Also got the

order to conduct various training for 287 students from The Commissioner of Most

Backward Classes DE notified Communities, Govt. of Tamil Nadu, and Chennai.

In addition to the above, TCIL has established Training centers in 5 provinces of

Afghanistan to meet the specific needs. In the process, more than 2000 Afghan

official, students and teachers have been trained in last three years. TCIL has recently

been empanelled by Ministry of External Affairs, Govt. of India for providing training

facilities to 156 Indian Technical and Economic Cooperation (ITEC) Program partner

countries under ITEC/ SCAAP (SPECIAL COMMONWEALTH AFRICAN

ASSISTANCE PLAN) training program funded by Government of India.

Telecommunications Consultants India Ltd (TCIL) is a leading ISO - 9001:2000

certified public sector undertaking. TCIL, a premier telecommunication consultancy

and engineering company with a strong base in Telecommunication & Information

Technology (IT), Today TCIL offers total telecom solutions for projects. TCIL has

working/ is works in almost 45 Countries mainly in Middle East Africa, South-East

Africa, South-East Asia and Europe. The Organisational Structure is formed with the

objectives of providing globally world-class Technology and Indian expertise in all

fields of Telecommunications and to provide total Quality management & excellence

in project execution.

MISSION

"To excel and maintain leadership, in providing Communication Solutions on turnkey

basis in telecommunication and information technology service sector globally.’’

Registered Office

Telecommunications Consultants India LimitedTCIL BhawanGreater Kailash - INew Delhi - 110 048. India.Ph : +91-11-26202020Fax : +91-11-26242266

Head Office

TCIL-IT (ICSIL) DSIIDC Adminstrative BuildingOkhla Industrial Area, Phase-IIINew Delhi -- 110 020Tel. No. 011-26929051 email : tcil.itc@rediffmail.com web : www.icsil.in

Chandigarh

TCIL-IT (ICS) S.C.O. 3017-18, Second Floor Sec. 22D, Chandigarh - 160 022Phone : 0172 - 4634529 Mobile : 098767 95015e-mail : tcil_chd@rediffmail.com

TRAINING

The business of TCIL is characterized by advanced technologies both in the field of Telecom

and IT. Technology is advancing very fast and with a view to keep updated with the latest

technology TCIL undertakes training activities either through its own resources or through

external agencies. TCIL is having strategic tie-up to provide telecom and IT training with the

following prestigious institutes of Govt. of India:

* Advanced Level Telecom Centre (ALTTC), Ghaziabad

* Centre for Excellence in Telecom Technology and Management, Mumbai

* Intelligent Communication Systems India Ltd.(ICSIL)

CHAPTER-2

2.1 Capital structure

The term of business” relates to the state of being busy either as an individual or

society as a whole, doing commercIially viable and profitable work. This term has at

least three usages, depending on the scope; one is to mean a particular company or

corporation, the generalized usage to refer to a particular market sector or the broadest

meaning to include all activity by the community of suppliers of goods and services.

Business is an economic activity as it is concerned with earning money and acquiring

wealth through the production and distribution of goods and services. Businesses are

predominant in capitalist economies, most being privately owned and formed to earn

profit that will increase the wealth of its owners and grow the business itself. The

main objective of any business owner or operator is to generate a financial return in

exchange for work and acceptance of risk.

There are several common forms of business ownership like sole proprietorship,

partnership, corporation and cooperative. In order to generate a financial output, a

financial input is most important. This financial input is termed as capital in business.

In economics, capital or capital goods or real capital refers to factors of production

used to create goods or services that are not themselves significantly consumed in the

production process. Capital goods may be acquired with money or financial capital. In

finance and accounting, capital generally refers to financial wealth especially that

used to start or maintain a business.

Financial capital represents obligation, and is liquidated as money for trade, and

owned by legal entities. It is in the form of capital assets, traded in financial markets.

Its market value is not based on the historical accumulation of money invested but on

the perception by the market of its expected revenues and of the risk entailed.

Financial capital can refer to money used by entrepreneurs and businesses to buy what

they need to make their products or provide their services to that sector of the

economy based on its operation, i.e. retail, corporate, investment banking, etc.

Financial capital refers to the funds provided by lenders (and investors) to business to

purchase real capital equipment for producing goods/services. Real capital comprises

physical goods that assist in the production of other goods and services.

The financial capital which is required by entrepreneurs can be obtained through

various sources. There are long term sources like share capital, debenture capital,

venture capital, mortgage, retained profit, etc. Financial capital can also be obtained

through medium term sources like term loans, leasing, etc. and through short term

sources like bank overdraft, trade credit, factoring, etc.

Capital contributed by the owner or entrepreneur of a business, and obtained by

means of saving or inheritance, is known as own capital or equity. This capital that

owners of business provide can be in the form of

• Preference shares/hybrid source of finance

Ordinary preference shares

Cumulative preference shares

Participating preference shares

• Ordinary shares

• Bonus shares

• Founder’s shares

That capital which is granted by another person or institution is called borrowed

capital, and this must usually be paid back with interest. This capital which the

business borrows from institutions or people includes debentures:

• Redeemable debentures

• Irredeemable debentures

• Debentures to bearer

• Ordinary debentures

Thus, the sources of financing will, generically, comprise some combination of debt

and equity. Financing a project through debt, results in a liability that must be serviced

and hence there are cash flow implications regardless of the project’s success. Equity

financing is less risky in the sense of cash flow commitments, but results in a dilution

of ownership and earnings.

2.2 MEANING OF CAPITAL STRUCTURE

The term “Financial Management” connotes that fund flows are directed according to

some plan. It connotes responsibility for obtaining and effectively utilizing funds

necessary for the efficient operation of an enterprise.1

A formal definition of financial management would be the determination, acquisition,

allocation and utilization of financial resources, usually with the aim of achieving

some specific goals. To be more specific financial management is about analyzing

financial situations, making financial decisions, setting financial objectives,

formulating financial plans to attain those objectives, and providing effective systems

of financial control to ensure plans progress towards the set objectives.

Financial decision-making includes strategic investment decisions, such as investing

in new production facilities or the acquisition of another company, and strategic

financing decisions, like the decision to raise additional long-term loans.

Thus, a financial manager is primarily concerned with two main types of interrelated

decisions, i.e. investment decisions and financing decisions.

Investment decision includes:

• Strategic investment decision

• Tactical/operational investment decisions

Similarly financing decision also includes:

• Strategic financing decision

• Tactical/operational financing decisions.

The strategic financing decision typically involves deciding the most appropriate mix

of equity and long-term debt finance in the firm’s capital structure, also called as the

capital structure decision. The tactical financing decision is related with ways to

finance the firm’s investment in its medium and short-term assets respectively. 2

37

Capital structure refers to the combination of debt and equity capital which a firm uses

to finance its long-term operations. Capital in this context refers to the permanent or

long-term financing arrangements of the firm. Capital is the aggregation of the items

appearing on the left hand side of the balance sheet minus current liabilities.3

Corporate finance is an area of finance dealing with the financial decisions

corporations make and the tools and analysis used to make these decisions. The

primary goal of corporate finance is to maximize corporate value while managing the

firm’s financial risks.

The main concepts in the study of corporate finance are applicable to the financial

problems of all kinds of firms. The discipline can be divided into long-term and short-

term decisions and techniques. Capital investment decisions are long-term choices

about which projects receive investments, whether to finance that investment with

equity or debt, and when or whether to pay dividends to shareholders. On the other

hand, the short term decisions can be grouped under the heading “Working capital

management”.

Capital investment decisions are long-term corporate finance decisions relating to

fixed assets and capital structure. Decisions are based on several inter-related criteria.

Corporate management seeks to maximize the value of the firm by investing in

projects which yield a positive net present value when valued using an appropriate

discount rate. These projects must also be financed appropriately. If no such

opportunities exist, maximizing shareholder value dictates that management returns

excess cash to shareholders. Capital investment decisions thus comprise an investment

decision, a financing decision, and a dividend decision.

Achieving the goals of corporate finance requires that any corporate investment be

financed appropriately.

The ratio between debt and equity is named leverage. It has to be optimized as high

leverage can bring a higher profit but create solvency risk. As above, since both

hurdle rate and cash flows (and hence the riskiness of the firm) will be affected, the

financing mix can impact the valuation. Management must therefore identify the

“optimal mix” of financing – the capital structure that results in maximum value.

38

The optimum capital structure has been expressed by Ezra Solomon in the following

words:

“Optimum leverage can be defined as that mix of debt and equity

which will maximize the value of a company, i.e., the aggregate value

of the claims and ownership interests represented on the credit side of

the balance sheet.”4

Capital structure policy involves a choice between risk and expected return. The

optimal capital structure strikes a balance between these risks and returns and thus

examines the price of the stock.

The pattern of capital structure of a firm has to be planned in such a way that the

owner’s interest is maximized. There may be three fundamental patterns of capital

structure in a firm:

1. Financing exclusively by equity stock.

2. Financing by equity and preferred stock.

3. Financing by equity, preferred stock and bonds.

GUIDING PRINCIPLES OF CAPITAL STRUCTURE

Which of the above patterns would be most suited to the company can be decided in

the light of the fundamental principles. The guiding principles of capital structure

decision are:

1. Cost principle: According to this principle ideal pattern of capital structure is

one that tends to minimize cost of financing and maximize the earnings per

share. Cost of capital is subject to interest rate at which payments have to be

made to suppliers of funds and tax status of such payments.

2. Risk principle: This principle suggests that such a pattern should be devised so

that the company does not run the risk of brining on a receivership with all its

difficulties and losses. Risk principle places relatively greater reliance on

common stock for financing capital requirements of the corporation and forbids

as far as possible the use of fixed income bearing securities.

3. Control principle: While deciding appropriate capital structure the financial

remains undisturbed. The use of preferred stock and also bonds offers a means

of raising capital without jeopardizing control.

4. Flexibility principle: According to this principle, the management should strive

towards achieving such combinations of securities that the management finds it

easier to maneuver sources of funds in response to major changes in needs for

funds. Not only several alternatives are open for assembling required funds but

also bargaining position of the corporation is strengthened while dealing with

the supplier of funds.

5. Timing principle: Timing is always important in financing and more

particularly in a growing concern. Maneuverability principle is sought to be

adhered to in choosing the types of funds so as to enable the company to seize

market opportunities and minimize cost of raising capital and obtain substantial

savings. Depending on business cycles, demand of different types of securities

oscillates. In times of boom when there is all-round business expansion and

economic prosperity and investors have strong desire to invest, it is easier to sell

equity shares. But in periods of depression bonds should be issued to attract

money because investors are afraid to risk their money in stocks. moreless re

FACTORS INFLUENCING CAPITAL STRUCTURE DECISION

A number of factors influence the capital structure decision of a firm. These factors

can be categorized in to three categories, i.e., as per characteristics of the economy,

characteristics of the industry and characteristics of the company.6

Characteristic of the Economy

1. Tempo of the business activity: If the economy is to recover from current

depression and the level of business activity is expected to expand, the

management should assign greater weightage to maneuverability so that the

company may several alternative sources available to procure additional funds

to meet its growth needs and accordingly equity stock should be given more

emphasis in financing programmes and avoid issuing bonds with restrictive

covenants.

2. State of capital market: Study of the trends of capital market should be

undertaken in depth since cost and availability of different types of funds is

essentially governed by them. If stock market is going to be plunged in bearish

state and interest rates are expected to decline, the management may provide

greater weightage to maneuverability factor in order to take advantage of

cheaper debt later on.

3. Taxation: The existing tax provision makes debt more advantageous in

relation to stock. Although it is too difficult to forecast future changes in tax

rates, there is no doubt that the tax rates will not be adjusted downwards.

4. State regulation: Decision as to the make-up of capitalization is subject to

state control. For e.g. Control of Capital Issues Act in India has preferred 4:1

ratio between debt and equity and 3:1 between equity and preferred stock.

5. Policy of Term-Financing Institutions: If financial institutions adopt harsh

lending policy and prescribe highly restrictive terms, the management must

give more significance to maneuverability principle and abstain from

borrowing from those institutions so as to preserve the company’s flexibility in

capital funds.

Characteristics of the Industry

1. Cyclical variations: There are industries whose products are subject to wider

variations in sales in response to national income, whereas some products have

low income elasticity and their sales do not change in proportion in variation in

national income. The management should attach more significance to flexibility

and risk principle in choosing suitable sources of funds in an industry dealing in

products whose sales fluctuate very markedly over a business cycle so that the

company may have freedom to expand or contract the resources used in

accordance with business requirements.

2. Degree of competition: Public utility concerns are generally free from intra-

industry competition. In such concerns the management may wish to provide

greater weightage to cost principle. But in industry which faces neck to neck

competition, risk principle should be given more consideration.

3. Stage in life cycle: In infant industry risk principle should be the sub-guide line

in selecting sources of funds since in such industry the rate of failure is very

high. During the period of growth flexibility factor should be given special

consideration so as to leave room open for easy and rapid expansion of funds

used.

Characteristics of the Company

1. Size of the business: Smaller companies confront tremendous problem in

assembling funds because of poor credit worthiness. In this case, special

attention should be paid to flexibility principle so as to assure that as the

company grows in size it is able to obtain funds when needed and under

acceptable terms. This is why common stock represents major portion of the

capital in smaller concerns. However, the management should also give special

consideration to the factor of control. Larger concerns have to employ different

types of securities to procure desired amount of funds at reasonable cost. To

ensure availability of large funds for financing future expansion larger concerns

may insist on flexibility principle. On the contrary, in medium sized companies

who are in a position to obtain the entire capital from a single source, leverage

principle should be given greater consideration so as to minimize cost of capital.

2. Form of Business Organization: Control principle should be given higher

weightage in private limited companies where ownership is closely held in a few

hands. In case of public limited companies maneuverability looms large because

in view of its characteristics it finds easier to acquire equity as well as debt

capital. In proprietorship or partnership form control is an important

consideration because it is concentrated in a few hands.

3. Stability of earnings: With greater stability in sales and earnings a company can

insist on leverage principle and accordingly it can undertake the fixed obligation

debt with low risk. But a company with irregular earnings will not choose to

burden itself with fixed charges. Such company should pay greater attention to

risk principle.

4. Age of company: Younger companies find themselves in difficult situation

to raise capital in the initial years. It is therefore worthwhile to give more

weightage to flexibility principle so as to have as many alternatives open as

possible in future to meet the growth requirement. Established companies

should insist on cost principle.

5. Asset structure of company: A company which have invested major portion of

funds in long lived fixed assets and demand of whose products is assured should

pay greater attention to leverage principle to take advantage of cheaper source of

fund. But risk principle is more important in company whose assets are mostly

receivables and inventory.

6. Credit standing: A company with high credit standing has greater ability to

adjust sources of funds. In such a case, the management should pay greater

attention too flexibility principle.

7. Attitude of management: Attitude of persons who are at the helm of affairs of

the company should also be analyzed in depth while assigning weights to

different factors affecting the pattern of capitalization. Where the management

has strong desire for exclusive control, preference will have to be given to

borrowing for raising capital in order to be assured of continued control. If the

principal objective of the management is to stay in office, they would insist more

on risk principle. But members of the Board of Directors who have been in

office for pretty long time feel relatively assured and they would prefer to insist

on cost principle.

CAPITAL STRUCTURE THEORIES

There are different viewpoints on the impact of the debt-equity mix on the

shareholder’s wealth. There is a viewpoint that strongly supports the argument that the

financing decision has major impact on the shareholder’s wealth, while according to

others, the decision about the financial decision is irrelevant as regards maximization

of shareholder’s wealth.

A great deal of controversy has developed over whether the capital structure of a firm

as determined by its financing decision affects its cost of capital. Traditionalists argue

that the firm can lower its cost of capital and increase the market value per share by

the judicious use of leverage. Modigliani & Miller, on the other hand, argue that in the

absence of taxes and other market imperfections, the total value of the firm and its

cost of capital are independent of capital structure.

There are four major theories explaining the relationship between capital structure,

cost of capital and value of the firm:

1. Net Income Approach

2. Net Operating Income Approach

3. Traditional Approach

4. Modigliani-Miller Approach There are certain underlying assumptions made in order to present the theories in a

simple manner. The assumptions are as follows:

1. The firm employs only two types of capital- debt and equity.

2. There are no corporate taxes. This assumption is removed later.

3. The firm pays 100% of its earnings as dividend.

4. The firm’s total assets are given and they do not change, i.e. the investment

decisions are assumed to be constant.

5. The firm’s total financing remains constant.

6. The operating earnings are not expected to grow.

7. The business risk remains constant and is independent of capital structure and

financial risk.

8. All investors have the same subjective probability distribution of the future

expected operating earnings for a given firm.

9. The firm has a perpetual life.

1. Net Income Approach

The approach has been suggested by David Durand. According to this approach, the

capital structure decision is relevant to the valuation of the firm, i.e., a change in the

capital structure will lead to a corresponding change in the overall cost of capital as

well as the total value of the firm. If the ratio of debt to equity is increased the

weighted average cost of capital will decline, while the value of the firm as well as the

market price of ordinary shares will increase. Conversely, a decrease in the leverage

will cause an increase in cost of capital and a decline in the value of the firm as well

as the market price of equity shares.

The Net Income Approach is based on three assumptions:

1. There are no taxes.

2. The cost of debt is less than the equity-capitalization rate or cost of equity.

3. The use of debt does not change the risk perception of the investors.

The implication of the above assumptions is that as the degree of leverage increases,

the proportion of an inexpensive source of funds, i.e., debt in the capital structure

increases. As a result the weighted average cost of capital tends to decline, leading to

an increase in the total value of the firm. Thus, the cost of debt and cost being

constant, the increased use of debt will magnify the shareholder’s earnings and

thereby the market value of the ordinary shares.

With a judicious mixture of debt and equity, a firm can evolve an optimum capital

structure will be the one at which value of the firm is the highest and the overall cost

of capital is the lowest. At that structure the market price per share would be

maximum. If the firm uses no debt the overall cost of capital will be equal to the

equity-capitalization rate. The weighted average cost of capital will decline and will

approach the cost of debt as the degree of leverage reaches one.

2. Net Operating Income Approach

This approach is also suggested by David Durand. It is diametrically opposite to the

Net Income Approach. The essence of this approach is that the capital structure

decision of the firm is irrelevant. Any change in leverage will not lead to any change

in the total value of the firm and the market price of shares, as the overall cost of

capital is independent of the degree of the leverage.

The Net Operating Income Approach is based on the following propositions:

1. Overall cost of capital is constant: The overall cost of capital remains constant

for all degrees of leverage. The value of the firm, given the level of EBIT is

determined by V = EBIT/ko.

2. Residual value of equity: The value of equity is residual which is determined by

deducting the total value of debt from the total value of the firm.

3. Changes in cost of equity capital: The cost of equity increases with the degree of

leverage. With the increase in the proportion of debt the financial risk of the

shareholders will increase. To compensate for the increased risk, the shareholders

would expect a higher rate or return.

4. Cost of debt: The cost of debt has two parts: explicit and implicit cost. The explicit

cost is represented by the rate of interest. Irrespective of the degree of leverage the

firm is assumed to be able to borrow at a given rate of interest. This implies that

the increasing proportion of debt in the financial structure does not affect the

financial risk of the lenders and they do not penalize the firm by charging higher

interest. Increase in the degree of leverage causes an increase in the cost of equity.

This increase in cost of equity being attributable to the increase in debt is implicit

part of cost of debt. Thus the advantage associated with the use of debt supposed

to be a cheaper source of funds in terms of the explicit cost is exactly neutralized

by the implicit cost represented by the increase in cost of equity. As a result the

real cost of debt and the real cost of equity according to Net Operating Income are

the same and equal to overall cost.

3. Traditional Approach

The Traditional Approach or the Intermediate Approach is a mid-way approach

between the Net Income and Net Operating Income approach. It partly contains

features of both the approaches.

The traditional approach accepts that the capital structure of the firm affects the cost

of capital and its valuation. However, it does not subscribe to the Net Income

approach that the value of the firm will necessarily increase with all degrees of

leverages.

It subscribes to the Net Operating Income approach that beyond a certain degree of

leverage, the overall cost of capital increases resulting in decrease in the total value of

the firm. However, it differs from Net Operating Income approach in the sense that

the overall cost of capital will not remain constant for all the degree of leverages.

The essence of the traditional approach lies in the fact that a firm through judicious

use of debt-equity mix can increase its total value and thereby reduce its overall cost

of capital. According to this approach, up to a point, the content of debt in the capital

structure will favorably affect the value of the firm. However, beyond that point, the

use of debt will adversely affect the value of the firm. At this level of debt-equity mix

the capital structure will be optimum.

.If capital structure is irrelevant in a prefect market, then imperfections which exist in

the real world must be the cause of its relevance. The theories below try to address

some of the imperfections, by relaxing assumptions made in the M&M model.

This theory maintains that businesses adhere to a hierarchy of financing sources and

prefer internal financing when available, and debt is preferred over equity if external

financing is required. Thus, the form of debt a firm chooses can act as a signal of its

need for external finance. The pecking order theory is popularized by Myers(1984)

when he argues that equity is a less preferred means to raise capital because when

managers (who are assumed to know better about true condition of the firm than

investors) issue new equity, investors believe that managers think that the firm is

overvalued and managers are taking advantage of this over-valuation. As a result,

investors will place a lower value to the new equity issuance.

The determination of capital structure in practice involves considerations in addition

to the concerns about earning per share, value and cash flow. A firm may have

enough debt servicing ability but it may not have assets to offer as collateral.

Attitudes of firms with regard to financing decisions may also be quite often

influenced by their desire of not losing control, maintaining operating flexibility and

have convenient timing and cheaper means of raising of funds.

According to Ezra Solomon and John Pringle, financial leverage affects both the

magnitude and the variability of earnings per share and return on equity. For any

given level of EBIT, the effect of increase in leverage is favourable if the percentage

rate of operating return on assets is greater than the interest on debt and it is

unfavourable if it is less. When EBIT varies over time, financial leverage magnifies

the variation in earnings per share and return on equity.

A great deal of controversy has developed over whether the capital of a firm as

determined by its financing decision, affects its cost of capital. Traditionalists argue

that the firm can lower its cost of capital and increase market value per share by the

judicious use of leverage. Modigliani and Miller, on the other hand, argue that in the

absence of taxes and other market imperfections, the total value of the firm and its

cost of capital are independent of capital structure. This position is based on the

notion that there is a conservation of investment value. No matter how you divide the

pie between debt and equity claims, the total investment value of the firm stays the

same. Therefore, leverage is said to be irrelevant.

Hence, the proposed study makes a critical study of the capital structure of various

companies over a period of a time. There are various industries like cement,

pharmaceuticals, sugar, steel, petroleum, fertilizer, automobile etc. From among these,

the proposed research shall study few companies in the pharmaceutical and

engineering industry.

4. M-M APPROACH:

Franco Modigliani and Merton Miller (hereafter called M-M) were the first to present

a formal model on valuation of capital structure. In their seminal papers (1958, 1963),

they showed that under the assumptions of perfect capital markets, equivalent risk

class, no taxes, 100 % dividend-payout ratio and constant cost of debt, the value of a

firm is independent of its capital structure. When corporate taxes are taken into

account, the value of a firm increases linearly with debt-equity ratio because of

interest payments being tax exempted. M-M’s work has been at the centre stage of the

financial research till date. Their models have been criticized, supported, and extended

over the last 35 years.

David Durand (1963) criticized the model on the ground that the assumptions used by

M-M are unrealistic. Solomon (1963) argued that the cost of debt does not always

remain constant. When the leverage level exceeds the accepted level, the probability

of default in interest payments increases thus raising the cost of debt.

This trade-off theory was challenged by Miller (1977). He argued that bankruptcy and

agency costs are too small to offset the tax advantage of debt. But when personal taxes

are taken into account, this advantage is completely offset by the disadvantage of

personal tax. Thus, in equilibrium, the value of a firm is independent of its capital

structure, even when the market is imperfect.

But Miller’s model was rejected by De Angelo and Masulis (1980). They argued that

even if bankruptcy, agency and related costs are ignored, introduction of non-tax debt

shields is enough for a firm to have an optimal capital structure. And even if these

costs are taken into account, an optimal capital structure exists, irrespective of

availability of non-debt tax shields.The Modigliani-Miller theorem, proposed by

Franco Modigliani and Merton Miller, forms the basis for modern thinking on capital

structure, though it is generally viewed as a purely theoretical result since it assumes

away many important factors in the capital structure decision. The theorem states that,

in a perfect market, the value of a firm is irrelevant to how that firm is financed. This

result provides the base with which to examine real world reasons why capital

structure is relevant, that is, a company’s value is affected by the capital structure it

employs

CHAPTER-3LITERATURE REVIEW

Brander and Lewis (1986) and Maksimovic (1988) provide the theoretical framework

that links capital structure and market structure. Contrary to the profit maximisation

objective postulated in industrial organisation literature, these theories, like the

corporate finance theory, assume that the firm’s objective is to maximise the wealth of

shareholders, and show that market structure affects capital structure by influencing

the competitive behaviour and strategies of firms. Firms in the oligopolistic market

will follow the strategy of maximising their output for improving profitability in

favourable economic conditions (Brander and Lewis, 1986). In unfavourable

economic conditions, they would take a cut in production and reduce their

profitability. Shareholders enjoy increased wealth in good periods, but they tend to

ignore decline in profitability in bad times as unfavourable consequences are passed

on to lenders because of shareholders’ limited liability status. Thus, the oligopoly

firms, in contrast to firms in the competitive markets, would employ higher levels of

debt to produce more when opportunities to earn higher profits arise. The implied

prediction of the output maximisation hypothesis is that capital structure and market

structure have positive relationship.

In corporate finance, the agency costs theory supports the use of high debt, and it is

consistent with the prediction of the output maximisation hypothesis. Jensen and

Meckling (1977) argue that the shareholders-lenders conflict results into risk shifting

and wealth appropriation in favour of shareholders as they take on risky investment

projects (asset substitution). Hence, shareholders and managers, as their agents, are

prompted to take on more borrowing to finance risky projects. Lenders would receive

interest and principal if projects succeed, and shareholders would appropriate the

residual income. However, lenders would lose if project fails. It is difficult and costly

for debt holders to be able to assess and monitor risky projects. Even debt covenants

may not be able to protect them. In terms of the product-market decisions, the

implication of the agency theory is that firms would borrow more to pursue an

aggressive production policy that would benefit shareholders. Yet another corporate

finance theory that justifies the use of high debt is the tax-shield theory (Modigliani

and Miller, 1963). Profitable firms borrow more to save taxes since interest costs are

tax deductible. The output maximisation by oligopoly firms is supposed to increase

their profitability. Hence, both the agency cost theory and the tax-shield theory would

predict a positive relationship between capital structure and market structure.

Capital structure increases the chances of financial distress and bankruptcy. Firms

face costs of financial distress when they are unable to service debt. They will have

high debt ratios if these costs are zero or trivial (Scott, 1976; Kim, 1978). Since costs

of financial distress are non-trivial and high levered firm can actually go bankrupt,

firms with high probability of bankruptcy will have low debt ratio. The chances of

bankruptcy for firms with large reserve funds will be relatively less, but unlevered

firms with high profitability and large reserve funds would have great competitive

advantage. These firms with “deep purse” may not only survive but they would also

gain by driving their rival firms into bankruptcy (Brander and Lewis, 1986; Bolton

and Scharfstein, 1990). These firms follow a policy of aggressive production and

predatory price cut to eliminate their rivals by forcing them into financial distress.

Their strategy pays them off particularly when external funding is not available to

firms of the target predatory price behaviour. The implication of this model is that the

unlevered firm with deep purses (high profitability and reserve funds) would have

incentive to increase output to drive the competitors into bankruptcy. Empirically, we

can predict a negative relationship between capital structure and market structure.

Myers (1977) provides a model under which debt causes under-investment (asset

substitution). Firms reject those profitable, low risk investment projects that have the

possibility of passing on benefits from shareholders to lenders. Further, internal

financing is cheaper than external debt or equity financing due to asymmetric

information. Higher debt makes higher output costly for a levered firm. In a

competitive market, unlevered or low-levered rival firms will intensify competition by

increasing their output and/or lowering prices. If the levered firms continue borrowing

to meet the competition, they may face financial distress and bankruptcy. Hence, the

pecking order/asymmetric information theory predicts a negative relation between

capital structure and market power.

There are a few empirical studies that have investigated the issue of capital structure

and market structure using data of the US firms. In these studies, market structure has

been measured either in terms of price or quantity data or the Lerner index or the

Herfindahl-Hirschman index or Tobin’s Q. Krishnaswamy, Mangla and Rathinasamy

(1992) find a positive relation between debt and market structure, measured by the

Lerner index. Chevalier (1993) provides evidence in support of a negative relation

between capital structure and market structure. This result is consistent with

bankruptcy costs or the asymmetric information/pecking order hypotheses. Phillips

(1995), using price and quantity data for market structure, finds a positive link

between capital structure and market structure, consistent with the output and limited

liability effect model. In a study of international firms from forty-nine countries,

Rathnasamy, Krishnaswamy and Mantripragada (2000) also report a positive relation

between capital structure, measured by total debt ratio and long-term ratio and market

structure measured by Tobin’s Q. Their finding supports the output and limited

liability effect and agency theoretic risk-shifting model of capital structure and

product market interaction. The results also provide support for the free cash flow

model of Jensen (1986), in the form of positive relation between capital structure and

profitability.

CHAPTER-4RESEARCH METHODOLOGY

We use data of companies listed on the Kuala Lumper Stock Exchange for the period

from 1993 to 2000. Our analysis covers data from 1994 to 2000 as data for year 1993

are used to calculate some variables for 1994. Companies with missing data are

excluded from the study. We also exclude the financial and securities sector

companies as their financial characteristics and use of leverage is substantially

different from other companies. We also drop companies with zero sales and negative

equity. After eliminating outliers, sample size is 208 companies for each period. We

adjust data of those companies, which change their financial year. Such changes result

in one year with missing data and the subsequent year data of more than 12 months.

We first annualise the subsequent year data, and then substitute missing data by the

mean value

Our estimation model uses panel data. Panel data, unlike cross-section data, allows

controlling for unobservable heterogeneity through individual (firm) effect (ηi). We

also include dummies for time variable to measure temporal effect (γt). This helps in

controlling the effect of macro-economic variables on capital structure.

Total debt-to-asset ratio (TD/A) at book value is our dependent variable. Independent

variables include Q ratio, profitability, growth, unsystematic risk, size, ownership

(number of shares) and tangibility. Q is calculated as the sum of market value of

equity and book value of long-term debt and net current assets (current assets minus

current liabilities). Growth (GA) is measured as one plus annual change in assets.

Profitability is defined as earnings before interest and taxes divided by assets or

capital (EBIT/A). Risk is defined as systematic risk, and it is measured by unlevered

beta. Beta for each firm is calculated using the weekly share price data. The calculated

beta for each company is unlevered for its level of leverage. Size is measured as

natural log of assets. Ownership is measured by natural log of number of outstanding

shares. It is assumed that larger number of shares imply diffused ownership.

Tangibility is defined as fixed assets divided by assets.

CHAPTER-5

DATA ANLYSIS AND RESULTS As per the Redundant Fixed Effect Test the probability of having identical cross

sectional data is close to zero and probability of having identical time period is 0.873

(refer Table , Appendix). So we decide to go for fixed effect in cross sectional data

and consider no time effect (refer Table 4, Appendix). Then we conduct Hausman’s

test to check an Misspecification in case of random effect. Here we get chi square

value as 34.49 (refer Table Appendix) which gives a p value close to zero. So we

reject the null hypothesis that there is no misspecification in case of random effect and

conclude that the random effect model is inappropriate. Hence we take panel

regression analysis with fixed effect on cross sectional data and no effect on time

(period) variable. As we conduct the SUR (PCSE) Test (refer Table Appendix) we

find the results are similar although the “Intercept term” and “Tan” appear to be

statistically significant now. Other coefficients show improvement in significance,

reinforcing our earlier results. The results of our empirical findings regarding effects

on leverage for each of the variables are discussed as below:

PRO & PRO (-1)

Profitability of the current year (PRO) is having a negative coefficient with

statistically significant t-value (-7.325). This implies that current profit plays a

significant role in determining capital structure and higher is the profit lower is the

leverage. This finding supports the pecking-order theory. Not only current profit, last

year’s profit also plays a statistically significant (t-value: -2.857) role in determination

of capital structure. The relation of the profitability is negative, which means more

profitability leads to less leverage. Thus internal fund has remained an important

source of capital financing in Indian corporate sector during the bullish phase of 2003-

07.

SZS (-1)

Size, determined by the last year’s sales volume is also found to be a statistically

significant (t value: 4.056) determinant of capital structure. As we get positive

relation between size and leverage, we conclude that bigger firms have opted for

greater debt financing of capital investments.

NDT (-1), TAX & GRO

The t-value of the coefficients of previous year’s NDT [NDT (-1)] is not found to be

statistically significant (t value: -1.343). This shows that firms have not borrowed to

save taxes. On the other hand, growth opportunity is observed to significantly (t

value: -6.722) affect the capital financing behaviour. Negative coefficient of GRO

suggests that during boom firms want to enjoy the benefits of growth and therefore

they prefer to invest from the internal fund more, creating lower leverage. Perhaps

because of this behavioural pattern, coefficient of NDT registers statistically

insignificant value, implying that firms are less

concerned about tax shield when the going is good. Our studies also find a statistically

insignificant (t value: -0.931) role of the independent variable TAX in capital

financing, most probably for the same reason. The overall behavioural pattern thus

supports trade-off theory.

RESULTS

Table 1 provides means and standard deviations of the dependent and independent

variables for each year from 1994 to 2000 and for the period 1994-00. The average

total debt ratio (TDR) for the period of 1994-00 is 30%. However, TDR has been

steadily increasing over years, ranging from 24% to 35% in 2000. Q ratio has shown

fluctuations during 1994-00. It was lower in 1997 and 1998, corresponding with the

financial and stock market crisis in Malaysia. Assets growth was quite high for the

years from 1994 to 1996; but it showed a sharp decline in the last three years.

Table 2 provides correlation matrix for the pooled sample of 1456firms/years

observations1. We find that size (ln A) and Q ratio have a significant positive

relationship with total debt ratio while risk (unlevered beta) and profitability

(EBIT/A) have a significant negative relationship. Other significant relationships exit

between risk and size and size and ownership (ln NSH). The negative relationship

between risk and size implies that the large firms, being more diversified have lower

systematic risk. The positive relationship between size and ownership indicates that

the large-sized Malaysian firms have more diffused ownership.

Table 3, column two, presents results of two-way fixed firm and time effects model.

Our main concern is to test the specification about the relationship between capital

structure (total debt ratio) and market power (Q ratio). As predicted, we find that the

coefficients of variables Q and Q3 are positive and the coefficient of Q2 is negative.

All these coefficients are significant at 1% level of significance, which supports a

cubic specification for the capital structure-market power relationship for Malaysian

firms. We interpret this evidence as consistent with the economic theory of output

maximisation and finance theories of agency costs and bankruptcy costs. For a given

initial range of Q ratio, any increase in this ratio leads firms to increase output and

take more risk to maximise shareholders wealth. This causes rivalry in the market and

competition intensifies, particularly from unlevered firms. The fear of bankruptcy and

loss of investment and profitability obliges levered firms to reduce debt. Hence, for

some intermediate range of Q, the competition forces levered firms to lessen debt.

Finally, for well-established, profitable firms with very high Q ratio and low

probability of financial distress and bankruptcy, the output maximisation seems to

dominate the relation between capital structure and Q ratio.

We also find expected signs of the coefficients of profitability variables, EBIT/A,

(EBIT/A)2 and (EBIT/A)3.The coefficients of EBIT/A and (EBIT/A)3 are,

respectively, negative and positive and statistically significant at 1% level of

significance. The coefficient of (EBIT/A)2 is not statistically different from zero.

Thus, our results confirm a saucer-shaped relationship between debt ratio and

profitability. We interpret this evidence as a trade-off between the effects of

asymmetric information, agency costs and tax benefits. For a given initial range of

profitability, any increase in this ratio leads firms to internally finance its output

growth and minimise cost of financing. It is also likely that at relatively lower levels

of profitability, firms may not have much incentive to issue debt, as other non-debt tax

shields may be available to them. There may also exit an intermediate range of

profitability where firms do not have sufficient incentive either to increase or decrease

any further. Finally, at higher levels of profitability and given their market power and

intensifying competition, firms will increase borrowing to expand their output. Also,

they have more profits to shield from taxes. Further, agency costs will be higher once

firms reach high levels of profitability.

The coefficients of other control variables are also statistically significant. Consistent

with option model of Myers (1977) and the pecking order hypothesis of Myers and

Majluf (1984), our results show a significant negative relation between growth and

debt ratio. We also find a negative relationship between (systematic) risk and debt

ratio. This finding is consistent with the trade-off theory. The positive relation

between size and debt ratio is evidence in favour of the hypotheses that larger firms

tend to be more diversified and less prone to bankruptcy and the transaction costs of

issuing debt is smaller. The negative relation between debt ratio and the size of

shareholding means that more diffused ownership results in lower leverage. The result

supports the agency hypothesis. Our results indicate a significant positive relation of

tangibility (FA/A ratio) with debt ratio. These results vindicate the trade-off theory

that postulates a positive correlation between debt ratio and tangibility since fixed

assets act as collateral in debt issues.

In Table 3 we also present the results of fixed firm effects models (without the time

effect). Column three gives results of fixed effect model with standard and White’s

heteroscedasticity-consistent t-values. The results of this model are similar to the two-

way fixed (firm and time) model and for all variables White’s heteroscedasticity-

Consistent t-values are

Table 1

Theoretical relationship withLeverage

Trade-off Pecking OrderFindingsName of Variables Theory Theory

PRO Positive Negative NegativePRO (-1) NA* NA* NegativeGRO Negative Positive NegativeSZS (-1) NA* NA* PositiveTAN Positive NA* PositiveNDT (-1) NA* NA* No statistically significant relationTAX Positive NA* No statistically significant relation

Cross-Section and Period Fixed Effects Test Equation

Table 2

Dependent Variable: LV1Method: Panel Least SquaresSample (adjusted): 2011 - 2012Cross-sections included: 76Total panel (balanced) observations: 304Variable Coefficient Std. Error t-Statistic Prob.C 0.386 0.056 6.881 0.000PRO(-1) -0.222 0.156 -1.421 0.157PRO -0.637 0.145 -4.378 0.000SZS(-1) -0.014 0.007 -1.937 0.054GRO -0.023 0.007 -3.286 0.001NDT(-1) -0.049 0.504 -0.097 0.923TAX 0.000 0.000 -2.780 0.006TAN 0.363 0.036 10.059 0.000

Effect SpecificationsR-squared 0.517 Mean dependent var 0.285Adjusted R-squared 0.506 S.D. dependent var 0.222S.E. of regression 0.156 Akaike info criterion -0.853Sum squared resid 7.194 Schwarz criterion -0.755Log likelihood 137.695 Hannan-Quinn criter. -0.814F-statistic 45.348 Durbin-Watson stat 0.432

CHAPTER-6

ConclusionAs per our empirical study we have three variables supporting pecking-order theory and two

supporting trade-off theory (refer Table 1, Appendix). So we conclude that behavior of the

Indian corporate sector regarding capital structure is eclectic. This is what is expected. Real life

situation does not totally match with only one theory. But we get some interesting observations

from our results. It is observed that firms on an average prefer to use internal funds compared to

debt to fund their projects during the bullish phase. This gives a redeeming signal about the

Indian corporate behavior which is found out to show more dependence on their internally

generated funds than on external sources of finance. Two positive effects can come out of it.

Firstly, from macroeconomic point of view this can signify more investments with the household

savings getting supplemented by corporate savings. Actually, latest macroeconomic figures on

corporate savings corroborate this observation. Secondly, this implies that the firms are not

exposed to the vagaries of interest rates and thus volatility in interest rates and liquidity in the

market may not have lethal impact on the corporate investment. This gives another clue that the

bottom line of the firms may be less exposed to credit uncertainty. Low leverage can help the

firms to avoid second agency conflict between shareholders and debtholders as well. But at the

same time it can increase the conflict between managers and shareholders.

As a concluding note, we point out some limitations of this study. Our study suffers from the

limitation of a short time series. Because of that we cannot check panel unit root. Our analysis is

restricted to the bull phase of the economy i.e. from 2003 to 2007 and we consider

Only stock market listed companies. This gives a partial picture about overall investment

behavior. However, in our opinion similar econometric study for the bearish phase during 1998-

2003 and comparison with present results of bullish phase of 2003-07 can be very illuminating to

identify whether there has been any impact of changes in conditions of stock market on the

corporate behaviour and determinants of the capital structure. This should be a future research

agenda.

References

• Brealey, R., and Myers S. (2000) Principles of Corporate Finance, 6th ed., McGraw-

Hill.

• Bradley, M., G. Jarrell, and Kim E. (1984): On the Existence of an Optimal Capital

Structure: Theory and Evidence, Journal of Finance, 39, 857-878.

• Foam, E., and French K. (2000): Testing Tradeoff and Pecking Order Predictions about

Dividends and Debt, working paper, University of Chicago and Sloan School of

Management (MIT)

• Galai, D., and Masulis R.(1976), The Option Pricing Model and the Risk Factor of Stock,

Journal of Financial Economics, 3, 631-644.

• Grossman, S., and Hart O. (1982): Corporate Financial Structure and Managerial

Incentives, in: McCall, J. (ed.), The Economics of Information and Uncertainty,

University of Chicago Press.

• Gujrati D. N. & Sangeetha (2007): Basic Econometrics: India: Tata Mc Graw-Hill.

• Harris, M., and Raviv A. (1991): The Theory of the Capital Structure, Journal of Finance

46, 297-355.