Dissertation Proposal: Capital Structure and Company Sustainability

This dissertation proposal explores the relationship between a company's capital structure and its financial sustainability. It investigates issues such as debt-to-equity ratio, optimal capital structure, and the management of long-term debt. The aim of the study is to demonstrate how businesses can ensure financial sustainability through proper capital structure adoption, focusing on reducing insolvency risk and determining the best debt-to-equity ratio. Research questions address how companies can reduce insolvency risk by adopting a proper capital structure and how management can ensure borrowed debts are long-term for maximum returns. The proposal outlines the need to gather information on basing capital structure decisions on cash flow, perfecting cash flow timing, and adapting capital structure to interest rate changes, utilizing interviews and literature review as access methods. It identifies sustainability issues in finance as the primary subject area.

DISSERTATION PROPOSAL FORM
Business School
BUSINESS MASTERS DISSERTATION PROPOSAL
The procedure for submission of this proposal is given in the Dissertation Guidelines
Please Type in the appropriate spaces. Boxes will expand as you type.
Name Student Number
Course
Provisional Title of Your Dissertation.
Relationship Between Proper Capital Structure and Financial Sustainability of A
company
Describe the topic(s) or issue(s) you wish to investigate for your Dissertation.
These must relate to the subjects that comprise your programme of study, and
must clearly indicate what your aims /objectives / research questions will be.

Issues/Topics:
#1Issue:
The first issue to be investigated include the capital structure which shows how a
company funds its overall operations and growth with funds from different sources in a
manner that still makes it sustainable. A good capital structure is the one that is highly
responsive to emergencies. The ability of a financial plan to respond to emergency issues
determines the success of the company. Emergency situations may include revenue
fluctuations, finance availability among others. A capital structure should be able to
contain these emergencies and still service the debts in time. A responsive capital
structure helps the company avoid solvency as a result of an emergency situation.
(DeAngelo and Masulis 1980).
#2Issue:
Another issue is debt to equity ratio which is a financial ratio indicating the relative
proportion of shareholders’ equity and debt used to finance a company’s assets. The
investigation intends to determine the best debt: equity ratio a company needs to stay in
business based on the type of mix up of debt and equity it uses. The focus here is to help
recommend to the management and stakeholders the need to make sound decisions on
what mix to use to avoid insolvency.
#3Issue.
Another issue to be investigated relates to how the management should ensure that the
debts borrowed to finance the company’s operations are long-term debts to ensure
maximum returns from the debts (Scott 1977). The management and stakeholders should
also consider the advantages of raising the capital using either of the ways of raising the
capital, that is equity or debts. The focus here is to give the company the best framework
on how to attain the optimal capital structure.
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Aim:
 The aim of this study is to demonstrate how businesses can ensure financial
sustainability through the adoption of proper capital structure
Objectives:
 To determine how a company can decrease risk of insolvency through adoption of
proper capital structure with optimal debt to equity ratio
 To determine the best debt: equity ratio a company needs to stay in business based
on the type of mix up of debt and equity it uses.
Research Questions:
 How a company can reduce the risk of insolvency by adopting a proper capital
structure with optimal ratio of debt equity.
 How the management can ensure that the debts borrowed to finance the
company’s operations are long-term debts for maximum returns?
What facts or information will you need to gather? How will you access these?
a. Basis of Company Capital Structure
The first information that will be gathered relates to how decisions on the capital
structure should be based on cash flow and not on the income. The cash flow to debt
analysis determines the company’s borrowing capacity. Making decisions on borrowing
capacity of a company by the income of the company involves a lot of risks since the
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future of the company is hard to predict. It may experience depression at the very period
it is supposed to finance its debts which is a direct ticket to insolvency (Leland and Toft
1996). Cash flow analysis helps the company determine financial environments. This
allows the company to evaluate the level of debts it should not exceed. This is
information will be gathered though interviews of various company management.
b. Perfect Cash flow timing:
This is the second information that will be gathered both through literature review and
interviews of company management. Cash flow timing should be perfect. For the
company to operate on the optimal capital structure, it should clearly understand its cash
flow trends. This helps the company know the perfect time to borrow and when not to
borrow depending on the trends of the company. The time at which the project will start
generating income for the company should also be properly estimated. This will allow the
company to know exactly what loan to take, that is, short-term loan or long-term loan.
(Rajang and Zingales 1995).
c. How to Make Capital Structure Adaptive to Interest Rate Changes:
The third facts to be gathered through interviews of company management is current
strategies used by firm to ensure that capital structure is adaptive to the changes in
interest rates. Interest rate affects the benefits derived from loans and debts a company
gets. A capital structure should be very adaptive to these changes to avoid situations
where the costs are out of control. An optimal structure is one with minimal cost of
financing debts borrowed, that is, a company makes borrowing only when the interests
rates are low so. This will ensure that the amount payable to the lenders is as low as
possible hence maximum benefits from the debt (DeAngelo and Masulis 1980).
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To which subject area(s) is this proposal - in your view -most strongly related?
Sustainability issues affecting the various sectors of finance and financial approaches
Name any tutor(s) you think might be appropriate to supervise your dissertation.
Student to fill:
References
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DeAngelo, H. and Masulis, R.W., 1980. Optimal capital structure under corporate and
personal taxation. Journal of financial economics, 8(1), pp.3-29.
Leland, H.E. and Toft, K.B., 1996. Optimal capital structure, endogenous bankruptcy,
and the term structure of credit spreads. The Journal of Finance, 51(3), pp.987-1019.
Rajan, R.G. and Zingales, L., 1995. What do we know about capital structure? Some
evidence from international data. The journal of Finance, 50(5), pp.1421-1460.
Scott, J.H., 1977. Bankruptcy, secured debt, and optimal capital structure. The journal
of finance, 32(1), pp.1-19.
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