Planning and Determinants of Corporate Capital Structure: an Emprical Study of Telecommunication Industry |
The two principal sources of finance for a businessunit are equity and debt. On debt interest is to be paid at fixed rate but incase of equity there is no such fixed burden. By using debt the firm canincrease the value of shares if the money collected through debts is investedin a project which fetches return higher than interest on debt. The businessunit has to decide as to how much financial leverage it should employ so as tomaximize the value of shares and minimize the cost of capital. Capitalstructure is the composition of debt and equity securities that are used tofinance a company’s assets. Both debt and equity securities are used in most ofthe companies. Having determined its investment policy, a company should planthe sources of finance and their mix. Decisions on capital structureformulation are influenced by multiple factors. Companies that do not formallyplan their capital structure are likely to have uneconomical and imbalancedcapital structures and could face immense difficulties in raising capital onfavourable terms in the long run. Also, inappropriate mix of sources of financecan render the operations of companies inflexible.