Capital structure

Capital social mental synthesisDoes corking complex body part stir rigid measure?HypothesisH0 on that point is no a signifi skunkt family affinity in the midst of big(p) structure and their numerate grocery store value in the origin exchange Thailand.H1 There is a signifi shagt kin mingled with undischarged structure and their total commercialize value in the caudex exchange Thailand.Research apparent movementAre thither any optimum upper-case letter structure of impregnables in billet exchange Thailand and to examine for the relationship betwixt gravid structure and beau monde value.Does uppercase structure affect sign value? An empirical depth psychology of trustys listed in energy and utilities sphere of influence in declension exchange Thailand (SET)1.Introduction1.1 Background of studyCapital structure plays an important role in financial management of the company. Every firms can unite of debt and comeliness in variant way in piece to pro fit the wealthiness of ordinary allotholder. There are several fount of debt and fairness such as common share, gustatory sensation share ,loan-blends ,convertible bonds and so on. thus the firms can raise debt and equity finance in non-finite crew because they need to aim the best combination that minimize the matter average personify of peachy and to achieve the objective of management is to maximise the firm value.Basically better management can increase the shareholders wealth by considering the investment project with best geartrain ratio. From that point of military position neverthe slight the positive investment project increase the wealth of shareholder , the financial decision is besides the key to prospect company future.Groth and Anderson (1997) give tongue to that apprehension neat structure and its practical implications is important to the professional manager regardless of functional area of expertise. The seminal work in the area of crown struct ure earned the inquiryers Nobel Prizes.Therefore the financial managers would select a indebtedness to determine which debt and equity are used in the capital structure could increase wealth. Typically each company is seeking for profitability by use any st gradegies that can bring d withdraw got low court and gain the company return and value for the operating side. In superfluous to the financial side is to get the efficiency combination of debt and equity because it reduces the hail of capital.However at that place are several debates for which capital structure do effect the company value. Is it possible to increase shareholder wealth by changing the string ratio or level? How can we find an best capital structure? Hence, in this paper will loosely discuss the books reviews and the research methodology for answering that interrogative sentence.1.2 Statement of botherOver the past decades, there abide been a large enactment of theoretical and empirical studies app eared. The initial famous theory that has been issued by Modigliani and moth millers in 1958 was known as proposition 1mention that where the firms are running in the comparable type of business at the same particular operating lay on the lines their capital structure is irrelevant to shareholder wealth. Therefore the firm must have the same total value and they can issue any cockle of fund.However the proposition 1 is based on the perfection of capital commercialize and ignore assess , the follow of bankruptancy, financial discommode and so on only if in the real situation the mart is see to be imperfect. Myer(2001) argued that capital structure theory depend on round circumstances . Each theory can give us the dissimilar result regard the live and benefits from financial strategies.This study will whence answer the question to what extend different theories of capital structure can identify the impact on the company value in telephone line exchange Thailand market and are there any relationship between the capital structure and the financial per formulaance of the company.2. Literature Review2.1 Modiglini and Miler supposition of capital structureNowadays most of literature review and expression have examined and expanded from the famous theory of Modiglini and moth miller theory of capital structure. Start with the theory published in 1958 under trust that in a perfect market the value of the firm is unaffected by its choice of capital structure. Therefore the total value of the firm is electrostatic regardless of debt to equity ratio. To give support under this assumption intend that two firm with the same operation of business but different in capital structure. Where firm U is unlevered ,the total value of its equity (EU) is the same as the total value of the firm (VU) . Additionally where the firm L is levered, thus the total value of the firm L is reach to the value of the debt less value of the equity of the firm L. As a result the total value for both company will be the same.Because Modiglini and Miler (1958) believe that when there are no taxes and capital markets function rise , it scrams no different whether the firm should accept or individual shareholders should borrow . The market value of a company does not depend on its capital structure. They proved the assumption by represent that the merchandise prospect would emerge if the total value of the firm relevant to capital structure. The arbitrage should not be in the practical and real situation.The proposition 1 can be illustrated as VL = VU or valuate of the levered firm = Value of unlevered firmIn army to prove that their proposition (1958) was viable , They make assumption that there are no tax and transaction cost exist in the market. Individual and bow window can borrow at the same rate. However there are a large give awaycome of articles argued with his article because it have the appearance _or_ semblances to be unrealistic.Th us, in 1963 Modiglini and Miller published second literature which is known as preposition 2 to modify and fix proposition 1 by considering the corporation tax. It stated that the expected rate of return on the common linage of a levered firm increases in proportion to the debt-equity ratio. maculation proposition 1 says that financial leverage has no effect on shareholder wealth. In contrast to proposition 2 says that the expected rate of return increases as the firms debt to equity ration increases. This means that when the debt-equity ratio increases the risk is also increases and therefore shareholders expect the high rate of return tally to the level of risk they position.Hence, the firm can take benefit as levered firm rather than keep the shape as unlevered firm because the corporation can deduct interest payment as an expense but dividend payment are non deductible. As Modiglini and Miller theory stated that the best capital structure will exist where the cost of capit al or weigh average cost of capital (WACC) minimize and the total market value of the firm maximize.Modiglini and Miller theory with tax illustrated that gearing up by facts of life debt finance rather than equity finance reduces the WACC and the value of the firm rise. Finally an optimal capital structure does exist at point where debt is 100%The proposition 2 can formulate asValue of levered firm = Value of un-levered firm + Value of tax scrimpingIt is used under assumptions that there is corporation tax in the market but without transaction cost exists. The individual and corporation can close up borrow m wholenessy at the same rate. Therefore the best of capital structure should be 100% debt finance because of tax deductible on interest. Under criticism of theory there are a great amount of articles expanded due to can not used in the real world.2.2 craft take out conjecture of capital structureThe mint score theory develops the idea how the firm chooses to raise equity and debt finance by balancing the costs and benefits. Brealey and Myer (2008) presented that each firm should set their own target debt ratio which is vary from firm to firm. The firms with safe tangible addition and plenty of taxable income to shield ought to have high target ratio. profitless companies with risky intangible assets ought to rely primarily on equity pay.Trade off theory has been used widely for study incorporate of capital structure because it justify the fact that to raise part of debt finance the company obtain benefit from tax saving nevertheless the firm face with the cost of capital such as cost of financial distress including unsuccessful person cost and financial distress without unsuccessful person broadly speaking associate to customers and suppliers because they are extra cautious about for the firm that may not be around for long. Potential employee leaving or difficult to grow is also costly for financial distress.In addition to the firm increa se gearing result in an increased level of financial risk. So that the shareholder require high expected return in order to compensate that financial risk. However there are several articles has been question about the relevance of craftsmanship off theory.Brealey and Myer (2008) stated that the trade off theory of capital structure can explain how company actually behave because this theory successfully explains many industry differences in capital structure. High technology growth companies whose asset are risky and mostly intangible normally use comparatively little debt. Graham and Harvey(2001) pointed out that Airlines can and do borrow heavily because their assets are tangible and relatively safe.There is whatever separate that in contrast to the trade off theory of capital structure in real life that the most profitable companies commonly borrow the least (Ward ,1999). Because under this theory it stated that high profits should mean more debt capacity and more tax savin g as a result give a higher target debt ratio.2.3 Bankruptcy costCorporate bankruptcies concept does exist when bank line holders exercise their right to default. Where the firm is coping with the problem but the special(a) liabilities allows stockholders to diminish and leaving all trouble to their creditor. The former creditors then run short the new stockholders and the previous stockholder left with nothing (Brealey and Myer 2008)Warner (1977) classify two type of bankruptcy costs which are direct and indirect. Direct costs include lawyers fee , accountants fee and the value of the managerial time worn out(p) in administering the bankruptcy cost. Indirect costs include doomed sales, lost profits and possibly the inability of the firm to obtain credit or to issue securities except under especially onerous terms. He did the research by investigate 11 railroads to seek the relationship between bankruptcy costs and the market value of the firm. The evidence scans that while the higher market value railroads generally did incur higher bankruptcy cost, the cost do not appear to be directly proportional to market value. tour Warner supported the direct bankruptcy cost, Baxter(1967) introduced the indirect bankruptcy cost. He positive optimal capital structure models which incorporated bankruptcy cost. These model show that the value of a firm is maximized by increasing the level of debt financing to a point where the marginal present value benefit of the tax shied equal the marginal present value of the cost of bankruptcy.Extentions of the Modigliani-Miller theory have been provided by many researchers. Titman(1984) refers the idea of indirect bankruptcy cost . He argues that stakeholders not represented at the bankruptcy bargaining table, such as customers, can suffer material costs resulting from the bankruptcy. He shows that the bankruptcy status may occur according to the firm s liquidation decision. He pointed out that the firms end up with the cost th at can impose on their customers, suppliers and workers by liquidating are relevant to their capital structure decision.Titman and Wassels (1988) refer there are plenty of authors have suggested that leverage ratio may be related to the firm size. They proved that direct bankruptcy costs seem to constitute a larger proportion of a firms value as that value decreases. The large firm tends to be more diversified and less prone to bankruptcy. As a result , large firm should be more highly leverages2.4 The Pecking order TheoryThere is an argument that there is not necessary to find an optimal capital structure by the theory. Therefore the pecking order Theory refer to the idea that the investment is financed first with internal funds, reinvested earnings primarily and then by new issues of debt and ultimately with new issues of equity. New equity issue are a stick up employ when the company runs out of debt capacity. (Brealey and Myer 2008)In contrast to the static trade off theory Myers(1984) summarizes the concept of pecking order theory as take in1. Firms prefer internal finance.2. They adapt their target dividend payout ratios to their investment opportunities, while trying to avoid sudden changes in dividends.3. Sticky dividend policies, plus unpredictable fluctuations in profitability and investment opportunities mean that internally generated cash flow may be more or less than investment outlay . If it is less,the firm first draw down the cash balance or vendable securities.4. If external finance is required, firms issue the safest security first. That is ,they start with debt,then possibly hybrid securities such as convertible bonds,then perhaps equity as a last resort.Base on the theory,there is no well-defined target debt-equity mix because there are two kinds of equity,internal and external,one at the top of pecking order and one at the bottom. Each firms observed debt ratio reflects its cumulative requirements for external finance.Brealey and Mye r (2008) explain why the most profitable firms generally borrow less not because they have low target debt ratios but they dont need outside gold. In the opposite way ,less profitable firms issue debt because they do not have internal sufficient fund for investment and debt financing is first resort for external financing following to the pecking order theory2.5 The fashion costPreviously Modiglini and Miller theory(1958) ignored taxation. Since then 1963 they amended the model by implication corporation tax. From that point it is suggested that the higher the level of taxation, the lower the have cost of capital. That means if the firm use higher level of the gearing ,the higher the value of the company. The company financial strategy should choose a 99.9% gearing levelHowever in practice most of the firm can not go for high levels of gearing because according to Modiglini and Miller theory is still far from perfect. They distort the problems which can occur from raising high le vel of gearing such as bankruptcy risk. There is the possibility of bankruptcy as gearing increase result in increase the WACC and the value of the share price reduce.Agency cost is also the main problem does not exist in Modiglini and Miller theory. Jensen and Meckling (1976) argued that the combination of debt and equity does affect the cost such as mode cost, bankruptcy cost and so on. The benefit of tax saving of raising debt produces an optimal capital structure less than a 100% because the benefit form tax is traded off offset the likelihood of incurring the costs.Jensen and Meckling(1976) define an agency relationship as a contract under which one or more persons (the principal) engage another person (the agent) to perform some military service on their behalf which involve delegation some decision making trust to the agent. If both parties to the relationship are utility maximizes, there is good drive to believe that the agent will not always act in the best interest of the principal.In addition, they identify and examine the concept of agency costs by generating the existence of debt and outside equity. They found that bondholders agency cost move in reverse direction. It is falling when the level of debt increase. Thus,it follows that at some point the minimum cost of agency will exist by combined the firms debt and equity securities.3. Research objectiveThe main objective for the corporate finance to study capital structure is to review the literature of capital structure in different theories according to their effect on company value and test the implication of theories that seek to justify an optimal capital structureSince 1958 Modigliani and Miller model stated that the value of the company is disregarding to the capital structure. Based on that model MM make assumption for the perfect market so they ignore the tax issue , losings from bankruptcy cost , the agency cost and so on. As a result there are several literatures have been expanded from Modigliani and Miller model.Thus, this study paper is seeking for investigation and gives the explanation for the existence of optimal capital structure and the financial performance. The aim of this research is to answer the question whether the relationship between the capital structure and the value of the firm.4.Research MethodologyIn order to answer the question of the project . It is necessary to set up the hypotheses then answer them. The hypotheses to be tested for this project are as followHO There is no a significant relationship between capital structure and their total market value in the crinkle Exchange Thailand (SET)H1 There is a significant relationship between capital structure and their total market value in the Stock Exchange Thailand (SET)Sampling MethodAdditionally, this study also gain the information from sampling method. It is very practical and to prove that the project is reliable by identify the group of info which is the listed firms of energy a nd utilities sector in the stock exchange Thailand (SET). The project represents 25 listed companies ,the total amount of the share is 287,181,000 and the market value is 8,551,158,000 baht. It can be stated that the market value of the share for group representative is significantly more than half of the whole total market value(19,130,000,000baht). Therefore they can be good sample of the project.explanatory VariablesIt is important to justify the variables that do affect the company value In this study there are as follow1.Earning per share (EPS)Earning per share is widely used to measure company success therefore it is the underlying tool to indicate the company performance.Earning per share = profit aft(prenominal) interest, after tax and after preference dividends/ calculate of ordinary share in issue2. GearingGearing is used to measure of risks. High gearing mean high risk .Gearing = Total Debt/shareholder equity3. Dividend per share (DPS)The dividend per share is calculate d to show the shareholder how much of the general dividend payout they are entitle toDividend per share = total ordinary dividend/total number/total number of share issued4.Return on equity (ROE)Return on equity measures how much profit a company generates for its ordinary shareholders with the money they have invested in the company.ROE = Profit after tax and preference dividends/Ordinary share capital plus reserve100%5.Data collection MethodsResearch design mainly focuses on data collection and acknowledgments. Therefore to research for this project will use the quantitative analysis by use the secondary data that has already been researched because of limited resources. The second data can collect from the journal of finance Economics, Journal of Banking and finance, textbook from library, the stock market data, the financial annual report and so on. Most of the source of data such as financial statement , dividend payout ,the data from stock market to use calculate the varia bles is mainly available from website http//www.setsmart.com. It is the source of data open public for the investor who interested to buy the share in stock exchange Thailand (SET). However to acquire the information must have the username and password.6. make Planning ProcessAug09Sep09Oct09Nov09Dec09Jan10Revised literature review*Data analysis procedures customization***Development of the detailed methodology*** junior-grade data collecting***Secondary data analysis and interpretation**Preparing questionnaire for interviews**Carrying out interviews*Transcribing interviews*Chapters writing and coordinating with supervisor***Summarized analysis of findings**Draft Conclusions*Draft Recommendations*Final conclusions, recommendations*Project Final subduedness*7. 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