CHAPTER 01 INTRODUCTION DETERMINANTS OF THE CAPITAL STRUCTURE :
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CHAPTER 01
INTRODUCTION
DETERMINANTS OF THE CAPITAL STRUCTURE : SPECIAL
REFERENCE TO LISTED HOTELS AND RESTAURANTS OF
COLOMBO STOCK EXCHANGE (CSE), SRI LANKA
S. MADHUSHIKA SENEVIRATHNE
2015/BAD/202
INTRODUCTION
DETERMINANTS OF THE CAPITAL STRUCTURE : SPECIAL
REFERENCE TO LISTED HOTELS AND RESTAURANTS OF
COLOMBO STOCK EXCHANGE (CSE), SRI LANKA
S. MADHUSHIKA SENEVIRATHNE
2015/BAD/202
1
CHAPTER 01
INTRODUCTION
1.1 Background of the study
This is the first chapter targeted to point out the background of the research, the main problem
that are being investigated any why there is a need for such research. This chapter will justify
how researcher reaches to pre-defined study’s objectives. Further, it will state the significance
of the study. Finally, this chapter will high light the limitations of the research and chapter
organization second chapter onwards.
The capital structure in the financial term means the way of firm finance their assets through
the combination of equity, debt or hybrid securities. Capital structure is referred to as the ratio
of different kinds of securities raised by a long term finance the capital structure involves two
decisions.
Types of securities to be issued is equity shares, performance shares and long term
borrowings.
Relative ratio of securities can be determined by process of capital gearing.
Capital structure refers to the mix of company’s long-term debt, specific short-term debt,
common equity and preferred equity. The capital structure is how a firm finances its overall
operations and growth by using different sources of funds. Capital structure remains as a
controversial issue in modern corporate finance. A firm can raise either through debt or equity
or mixture of both. The capital structure decisions is one of the most important decisions made
by financial management. The capital structure decision is at the center of many other decisions
in the area of corporate finance. These include dividend policy, project financing, issue of long
term securities, financing of mergers, buyouts and so on. Capital structure is one of the effective
tools of management to manage the cost of capital.
Capital structure decisions have the underlying aim towards maximizing the value of a firm.
According to Subramaniyam and Wild (2009), capital structure refers to a company’s source
of financing. There are two schools of thought in capital structure. One school pleads for
optimal capital structure and other does against.
CHAPTER 01
INTRODUCTION
1.1 Background of the study
This is the first chapter targeted to point out the background of the research, the main problem
that are being investigated any why there is a need for such research. This chapter will justify
how researcher reaches to pre-defined study’s objectives. Further, it will state the significance
of the study. Finally, this chapter will high light the limitations of the research and chapter
organization second chapter onwards.
The capital structure in the financial term means the way of firm finance their assets through
the combination of equity, debt or hybrid securities. Capital structure is referred to as the ratio
of different kinds of securities raised by a long term finance the capital structure involves two
decisions.
Types of securities to be issued is equity shares, performance shares and long term
borrowings.
Relative ratio of securities can be determined by process of capital gearing.
Capital structure refers to the mix of company’s long-term debt, specific short-term debt,
common equity and preferred equity. The capital structure is how a firm finances its overall
operations and growth by using different sources of funds. Capital structure remains as a
controversial issue in modern corporate finance. A firm can raise either through debt or equity
or mixture of both. The capital structure decisions is one of the most important decisions made
by financial management. The capital structure decision is at the center of many other decisions
in the area of corporate finance. These include dividend policy, project financing, issue of long
term securities, financing of mergers, buyouts and so on. Capital structure is one of the effective
tools of management to manage the cost of capital.
Capital structure decisions have the underlying aim towards maximizing the value of a firm.
According to Subramaniyam and Wild (2009), capital structure refers to a company’s source
of financing. There are two schools of thought in capital structure. One school pleads for
optimal capital structure and other does against.
2
There are several factors determining the capital structure. Therefore trading on equity, degree
of control, flexibility of financial of financial plan, choice of investors, capital market
conditions, period of financing, stability of sales and size of the company. The above factors
are included on financial performance.
The financial performance is the key element to determine the capital structure. The firms may
have their retained earnings to increase their capital structure. Capital structure is an important
topic in corporate finance for practitioners and academic researchers. A number of theories
have been proposed in the recent years to explain the variation in debt ratios across firms.
Capital structure theory suggests that firms determine what is often referred to as a target debt
ratio. This is based on various trade-off between costs and benefits of debt versus equity.
Former school argues that judicious mixture of debt and equity capital can minimize the overall
cost of capital and maximize the value of the firm. Hence this school considers capital structure
decisions as relevant. Latter school of thought led by Modigliani and Miller (1958). From this
point a number of theories have emerged relating to capital structure (Rajang and Zing ales,
1995,Harris and Raviv, 1991). However broadly speaking four theoretical approaches can be
distinguished namely the irrelevant theory of Modigliani and Miller, the trade off theory,
agency cost theory and pecking order theory. The publications of Modigliani and Miller’s
irrelevant proposition so many articles on this regard have been carried out from different
perspectives however still it remains a controversial issue in modern corporate finance.
The capital structure is how a firm finances its overall operations and growth by using different
sources of funds. The capital structure decision is one of the most important decisions made by
the financial management. It is center of many other decisions in the area of corporate finance.
Capital structure is one of the effective tools of management to manage the cost of capital. In
this study, we examine the factors that determine the capital structure of the listed hotels and
restaurants in Sri Lanka during the period of 2014-2018. This study attempts to investigate the
determinants of capital structure for the hotels and restaurants in Sri Lanka, listed by the
Colombo Stock Exchange over the period of 2014-2018.
There are several factors determining the capital structure. Therefore trading on equity, degree
of control, flexibility of financial of financial plan, choice of investors, capital market
conditions, period of financing, stability of sales and size of the company. The above factors
are included on financial performance.
The financial performance is the key element to determine the capital structure. The firms may
have their retained earnings to increase their capital structure. Capital structure is an important
topic in corporate finance for practitioners and academic researchers. A number of theories
have been proposed in the recent years to explain the variation in debt ratios across firms.
Capital structure theory suggests that firms determine what is often referred to as a target debt
ratio. This is based on various trade-off between costs and benefits of debt versus equity.
Former school argues that judicious mixture of debt and equity capital can minimize the overall
cost of capital and maximize the value of the firm. Hence this school considers capital structure
decisions as relevant. Latter school of thought led by Modigliani and Miller (1958). From this
point a number of theories have emerged relating to capital structure (Rajang and Zing ales,
1995,Harris and Raviv, 1991). However broadly speaking four theoretical approaches can be
distinguished namely the irrelevant theory of Modigliani and Miller, the trade off theory,
agency cost theory and pecking order theory. The publications of Modigliani and Miller’s
irrelevant proposition so many articles on this regard have been carried out from different
perspectives however still it remains a controversial issue in modern corporate finance.
The capital structure is how a firm finances its overall operations and growth by using different
sources of funds. The capital structure decision is one of the most important decisions made by
the financial management. It is center of many other decisions in the area of corporate finance.
Capital structure is one of the effective tools of management to manage the cost of capital. In
this study, we examine the factors that determine the capital structure of the listed hotels and
restaurants in Sri Lanka during the period of 2014-2018. This study attempts to investigate the
determinants of capital structure for the hotels and restaurants in Sri Lanka, listed by the
Colombo Stock Exchange over the period of 2014-2018.
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