Capital structure research project
Introduction
The task for this assessment is to research and examine capital structure theory, issues, and debates, while showing how capital structure choices affect a firm’s return on investment (ROI) and its risk profile. As a pair you will select a publicly-held company and analyse its capital structure, applying the theories and principles found in Chapter 15 of the text. You and your partner should submit your work as per the guidelines below.
- A preview of capital structure issues
- Business and financial risks related to capital structure
- Modigliani and Miller’s (MM) capital structure theory
- Criticisms of the MM model and assumptions
- Capital structure evidence and implications
- Estimating the firm’s optimal capital structure
A firm’s optimal capital structure is that mix of debt and equity that maximises the stock price. At any point in time management has a specific target capital structure in mind, presumably the optimal one, though this target may change over time. For example, financial management may choose a 50% equity financing (stock) and 50% debt (bond) financing.
Several factors influence a firms’ capital structure, including:
- business risk
- tax position
- the need for financial flexibility
- managerial conservativeness
- growth opportunities.
Business risk is the riskiness inherent in the firm’s operations if it uses no debt.
This assessment is intended to be a capital structure analysis of your selected public company. Your paper is intended to be an executive summary of your analysis, and is limited to a maximum of 3000 words, excluding the title page, table of contents, graphs, charts, tables, and reference list etc.
You should ensure that your report has an abstract. An abstract generally emphasises the main findings and conclusions of the research study. It should briefly: establish the topic of the research; articulate the research problem/question, and/or convey the purpose/objective of the research; indicate the methodology used; present the expected findings; and present the anticipated conclusions.
Your project should include a minimum of four references, excluding the textbook. Sources should be from academic, scholarly reviewed journals (Wikipedia is not considered a scholarly reviewed journal). Use of internet-retrieved and cited sources should be minimised. The summary report of your selected company’s capital structure should convey the quality, depth, and completeness of your capital structure analysis, without going into excessive detail.