Capital Structure for Industries

This article explains the concept of capital structure and its representation in the Saudi stock exchange. It discusses the two commonly used types of funds, debt and equity financing, and the associated risks and advantages of capital financing. The article also highlights the risks involved in different capital structures and the need to balance non-employment of debt capital risk and financial risk to enhance the market value of the firm.

Running head: CAPITAL STRUCTURE FOR INDUSTRIES
Capital Structure for Industries
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1CAPITAL STRUCTURE FOR INDUSTRIES
Table of Contents
The concept of capital structure.................................................................................................2
Explanation of the two commonly types of fund, the interest paid and the associated cost for
each............................................................................................................................................2
The various risks involved in the different capital structure and its aversion............................3
The advantages and disadvantages of capital financing............................................................3
References..................................................................................................................................6

2CAPITAL STRUCTURE FOR INDUSTRIES
The concept of capital structure in for every industry in Saudi stock exchange market
Capital structure deals with the amount of the equity or debts that is used by the
organization to fund for its activities and to finance its assets. In the Saudi stock exchange the
capital structure is generally represented as the debt capital or debt to equity ratio. The capital
structure of debt and equity are utilized in the business for acquisitions, expenditures and to
make other investments. The objective of the manager of the firm in the Saudi stock
exchange is to balance between the two capital structure by deciding whether to raise equity
or debt and obtain the optimum structure of capital. It can be said that the profitability and
risk are the chief factors in the determination the structure of capital decision for listed
entities in Saudi Arabia.
Explanation of the two commonly types of fund, the interest paid and the associated cost
for each
Market of equity and bond
The Bond market development in the country of Saudi Arabia can find its origin back
to the mid-1988, when the securities of the government have been issued in the domestic
market to finance the fiscal deficits of the government. However, the market was still
stagnant until the time 2009 when the Capital Market Authority (CMA) approved the trade of
Sukuk (Islamic bond) and traditional bonds for the first time in Saudi Arabia. The Bond and
eequity financing helps to raise of funds by the issue the shares of equity, or stocks, on
securities exchanges1. A shareholder is also known as the stockholder who receives the
payments of dividend that are regular and earns revenue when there is a rise in the share.
Debt Financing
1 Parlińska, Agnieszka, and Hasan Bilgehan Yavuz. "Finances of Municipalities Governments in Poland and
Turkey." Acta Scientiarum Polonorum. Oeconomia 16.4 (2017).

3CAPITAL STRUCTURE FOR INDUSTRIES
In the case of program of debt financing, the firm by issuing a convertible bonds or
regular bonds in the financial markets. The bonds buyer, who is known as a bondholder, gets
an interest payments on a periodic during the bond term. The principal amount is refunded at
maturity2.The Government of Saudi formed the five chief institutions for lending namely;,
Public Investment Fund, Saudi Credit Bank, Saudi Agricultural Bank Saudi Industrial
Development Fund and the Real Estate Fund.
The various risks involved in the different capital structure and its aversion
The potential financial risk: The degree of risk of finance be determined by on the control
of capital structure of the corporate organization. An organization at the time of using the
debt in its capital needs for the payment of the fixed charges of interest and the deficit of
capability to pay fixed interest increases the liquidation risk. The various risk related to
finance also suggests that the variability of earnings available to their stakeholder’s3.In Saudi
companies the firms with high volatility of earning might find some issue of honoring the
payment of obligation of debt, which will result in high probability of bankruptcy. Thus, as
per the Saudi stock exchange rules firms with high volatility of cash flow can lower their risk
by reducing the level of debt
Non employment of debt capital ratio: In the Saudi corporate entities if the firm does not
use structure of capital debt, it has to face the risk of non-employment capital debt. The risk
of NEDC has an adverse relationship with the ratio of debt in its total capital4. If there is high
leverage or debt-equity ratio, lower is the NEDC risk and vice-versa.
2 Zhang, Yanlong. "The contingent value of social resources: Entrepreneurs' use of debt-financing sources in
Western China." Journal of Business Venturing 30.3 (2015): 390-406
3 Ackrill, Rob. "Reflections on the Reflection Paper on the Future of EU Finances." The Political Quarterly 88.4
(2017): 716-720.
4 Bricker, Jesse, et al. "Changes in US Family Finances from 2013 to 2016: Evidence from the Survey of
Consumer Finances." Fed. Res. Bull. 103 (2017): 1.

4CAPITAL STRUCTURE FOR INDUSTRIES
Therefore, the business has a reach a point of balance between the non-employment of
debt capital risk and financial risk to enhance its value in market. In order to achieve the
capital structure that is optimal there has to be determination of the overall total risk and
minimum along with maximize the possible return to achieve the objective of higher market
value of the firm.
The advantages and disadvantages of capital financing
The advantages are as follows:
 There is less burden: In the end of 2010 there are 146 listed companies in Saudi
Arabia with a market capitalization of about 80 percent of GDP. Market
Capitalization is dominated by petrochemical companies (36.6 percent), financial
companies (27.6 percent) and telecoms (10 percent). With the help of a sound capital
financing there is no loan that are to be repaid. The business does not have to make a
loan payment on monthly basis. This also allows to get relief from the burden of
channelling more money for developing the organisations.
 There is no Credit issues: In case the organisation lacks solvency by having a poor
credit history and a lacking financial track record, the equity and the debt can be
preferred for financing5.
 To obtain knowledge and gain from partners: With the help of capital financing,
the organisation may form partnerships with enhanced experienced or knowledgeable
individuals. The business may benefit from the knowledge and the network of the
business.
5 Yellen, Janet L. "Perspectives on inequality and opportunity from the Survey of Consumer
Finances." RSF (2016).

5CAPITAL STRUCTURE FOR INDUSTRIES
The disadvantages of capital are as follows
 The Share of profit: The investors will have to be given their share of profits.
However, this is a trade-off which is worthwhile if the company is benefiting from the
value they bring as financial backers but in case the company does not earn it would
be a drawback6.
 Loss of control: The price which has to be paid for the capital financing all of its
prospective benefits is that there has be share the control of the business with the
stakeholders.
 Existence of Potential conflict: The distribution of the ownership along with
working with others can result in conflict along with tension if there exists
differences, management style in vision and techniques of business process. It can be
an issue that has to be considered.
6 Dettling, Lisa J., et al. "Comparing micro and macro sources for household accounts in the United States:
evidence from the Survey of Consumer Finances." (2015).

6CAPITAL STRUCTURE FOR INDUSTRIES
References
Ackrill, Rob. "Reflections on the Reflection Paper on the Future of EU Finances." The
Political Quarterly 88.4 (2017): 716-720.
Bricker, Jesse, et al. "Changes in US Family Finances from 2013 to 2016: Evidence from the
Survey of Consumer Finances." Fed. Res. Bull. 103 (2017): 1.
Dettling, Lisa J., et al. "Comparing micro and macro sources for household accounts in the
United States: evidence from the Survey of Consumer Finances." (2015).
Parlińska, Agnieszka, and Hasan Bilgehan Yavuz. "Finances of Municipalities Governments
in Poland and Turkey." Acta Scientiarum Polonorum. Oeconomia 16.4 (2017).
Yellen, Janet L. "Perspectives on inequality and opportunity from the Survey of Consumer
Finances." RSF (2016).
Zhang, Yanlong. "The contingent value of social resources: Entrepreneurs' use of debt-
financing sources in Western China." Journal of Business Venturing 30.3 (2015): 390-406.