The Impact of Capital Structure
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Added on 2020-04-07
The Impact of Capital Structure
Added on 2020-04-07
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Running head: THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIALPERFORMANCE OF AIRLINESThe impact of capital structure on the Financial Performance of AirlinesName of the Student: Name of the University: Author’s Note:
1THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OFAIRLINESAbstractThis paper has been constructed in order to have an idea about the capital structure thatis existent in the airline industry. The assessment of the capital structure is helpful forunderstanding the financial performance of the airline industry. This research highlights theprocess with the help of which the objectives of the research is constructed and the problemthat has to be assessed in this paper. This paper gathers data from the annual reports of theairline companies and thereby understanding the financial performance of the companies. Thefinancial performance of the airline companies indicates the profitability of the firms andthereby the processes they use in order to maintain competitive edge in the market. Theresearch indicates that financial performance has an impact on the capital structure of airlineindustries and in that manner the companies constructs their plans and policies that aids in theenhancement of the companies. Table of Contents
2THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OFAIRLINESChapter 1: Introduction..................................................................................................51.1 Aims and Objectives of the Research...................................................................6Chapter 2: Literature review...........................................................................................72.0 Introduction...............................................................................................................72.1 Literature of Agency Theory:..............................................................................102.2 Leverage Literature:............................................................................................132.3 Dividends pay-out ratio literature:......................................................................142.4 Summary.............................................................................................................16Chapter 3: Research Methodology................................................................................18Introduction...............................................................................................................18Research Onion.........................................................................................................18Incorporation of the Research Methods....................................................................20Research Philosophy.................................................................................................20Research Approach...................................................................................................21Research Design........................................................................................................23Data Collection process and sample.........................................................................24Data Analysis Plan and Reliability...........................................................................25Limitations of the data sample..................................................................................25Ethical Consideration................................................................................................26Chapter 4: Data Analysis and Discussion.....................................................................274.1 Descriptive Statistics...........................................................................................27
3THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OFAIRLINES4.2 Correlation...........................................................................................................284.3 Hypothesis Testing..............................................................................................414.3.1 Hypothesis 1 Trade-off theory.....................................................................414.3.2 Hypothesis 2 Pecking order theory..............................................................434.3.3 Hypothesis 3 Agency cost theory.................................................................454.3.4 Summary of the testing hypothesis..............................................................46Chapter 5: Conclusion and Future Work......................................................................475.1 Conclusion...........................................................................................................475.2 Future Research...................................................................................................485.3 Limitations of the Research................................................................................48Reference List and Bibliography..................................................................................50
THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OFAIRLINESChapter 1: IntroductionOver time, it was acknowledged that there is a link between the firm’s capital structureand its value. However, there is no certainty about the overall effect of debt on firm value.TheMyers’ question: “How do firms choose their capital structure?” has no answer yet.The Modern theory of capital structure began with Modigliani and Miller (1958),showing under what conditions capital structure is irrelevant. Over the last 10 years, asignificant effort of researchers has been dedicated to structures in which capital structure isdetermined by agency costs. This are of research was covered by Jensen and Meckling(1976), however, this research it was built on earlier work of Fama and Miller (1972).(TheJournal of Finance; The theory of capital structure).This paper is based on the analysis of the impact of capital structure on airlinesfinancial performance.Nowadays, modern society cannot be conceived without air transport and an efficienttransport system. “The International Air Transport Association (IATA) announced that itexpects the global airline industry to make a net profit in 2017 of $29.8 billion. On forecasttotal revenues of $736 billion that represents a 4.1% net profit margin. This will be the thirdconsecutive year (and the third year in the industry’s history) in which airlines will make areturn on invested capital (7.9%) which is above the weighted average cost of capital (6.9%)”.(iata.org, December 8,2016) Thereby, this could lead to industry manufacturers to improvemore the quality of the aircrafts airlines ’management. This study will be a source ofinformation for the airlines, when deciding on investments and choosing optimal capitalstructure. Moreover, it will give an overview of the current state of the companies, to themanagers.
THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OFAIRLINESIt was not found any previous studies about capital structure in the airline industry,and thought it would be interesting to test if the airline industry has the same influencingfactors as previous studies in general.. The volatility in fuel prices, adds to the normaloperational risk and it is desired to see if it influenced the capital structure choices. The airlineindustry is also capital intensive because of the need for large investments in planes and otherfixed assets. The management have to choose from different financial sources when raisingcapital for large investments. 1.1 Aims and Objectives of the Research The aims and objectives of the research has been the focus with respect to which theresearcher would undergo with the paper. The researcher would look to highlight the aspectsthat have been figured in the objectives and thereby creating a clear mind set for theresearcher in order to conclude the research. The objectives of the research has been given asfollows: Understand the impact of capital structure with respect to the financial performance ofthe airline companies Discover the financial dependent and independent variables that has extensive impacton the financial performance of the airline companies.
THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OFAIRLINESChapter 2: Literature review2.0 IntroductionThe current paper looks to illuminate in a detailed manner the effect of capitalstructure on the financial performance of the airline industry. Furthermore, it the directimpact of the leverage on the industry will be examined by taking help of the agency costtheory and the free cash flow theory. The fundamental objective of the research is to find a conclusion with respect to thecapital structure of the airline organizations that are listed. In specific, this paper will explorethe questions that have been given below: Q1. Is the Free-cash theory effective on the airline industry?Q2. Is a higher level of debt proportional with better firm performance?Q3. Which are the dominant strategies for funding in the airline industry?Q4. Are these strategies connected to a good financial performance?There has been an examination on the performance, effectiveness and financialstrategies of the civil aviation in which are highlighted the key features of the aviationindustry, which are required to invest an extensive and large regulations. The aim of theresearch was to compute the degree of indebtedness, which provides the business with theoptimum performance. The sample was undertaken by taking assistance of 35 organizationsfrom 22 countries that were functioning from 1993 to 1996 and the outcome indicated thatequity represented 40% of the overall funds that was employed in the aviation industry. The value of a firm is explained as the present value of the inflow and outflow of thecash flows with respect to which the asset that has been considered is entitled to the overallperiod of ownership. Rhou, Singal and Koh (2016) have stressed there are plenty more to
THE IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OFAIRLINESdescribe with respect to the value of the organization that are inclusive of the market value,nominal value, liquidation value and the intrinsic value.Liu et al.(2014) like other researchers look at the fact that the key aim of a firm is tomaximise their value. Lunardi et al.(2014) explains that the management of the companiesmust concentrate on the determinant strategies in order to obtain an excess market value incomparison to the accounting value. The capital structure tries to explain the kind of the long-term financing and how theorganization finance themselves by looking to discover the optimal contribution of the debtand the equity. The existence of an effective capital structure contributes in making vitaldecisions to optimise the value of the firm by their managers. The initial study regarding optimal capital structure was introduced by Modigliani andMiller in the year 1958. In looking to recognise an optimal value of the financial leverage inorder to raise the value of the organization, it was discovered that there is a relationship ofindependence among the two variables. As the overall asset value of the financial leverage isthe counterpart of the equity and debt, it is not precise to the value of the firm if the financialresources are internal or external in nature. The way there are combined in the capitalstructure does not manipulate the value of the organization. The idea behind the classicaltheory is that in a perfect market and the absenteeism of taxation, the value of a firm is notmanipulated by how the firm id financed and conversely, in a world where tax deductibility ofthe payment of interests predominates the value of the organization and the capital structureof the firm have been correlated positively (Vomberg, Homburg and Bornemann 2015). However, opposing to this theory, numerous financial professionals have argued thatthe effect of leverage of a firm would lead to the rise in debt in the capital structure and in thatmanner would increase the value of the business up to a certain level, but over that threshold
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