Question

Capital structure is a combination of capital from different sources used by companies to finance the operations and activities. Learners are required to refer at least to at FOUR articles journal for each assignment and answer the following questions:

1. Discuss the determinants of companies’ capital structure choices.
2. Discuss the relationship between companies ’corporate governance and capital structure.
3. Discuss the impacts of financial crisis on the companies’ capital structures.

Answer 1

The optimal capital structure choice can be influenced by factors such as growth, cash flow, size, and product and industry characteristics. The results also confirm the existence of restructuring costs in attaining an optimal capital structure.

Corporate Governance (CG) and Capital Structure (CS) plays a big role in the maximization of shareholders' wealth and good CG is important in increasing the market value of a firm while higher financial leverage decreases a firm value by increasing bankruptcy risk.

impact of the recent financial crisis on the capital structure decision of UK, French and German firms. The results show that overall leverage ratios increase from pre-crisis (2006
and 2007) to crisis (2008 and 2009) years and then decrease in the post-crisis (2010 and 2011) years.
Both equity and debt levels change during the crisis and post-crisis years. The findings further reveal that firms with lower than industry average capital structure ratios in the pre-crisis period experience a gradual increase in their leverage during crisis and post-crisis periods. However, firms with higher than industry average capital structure ratios in the pre-crisis periods experience a significant decrease in the leverage ratios particularly in the post-crisis period mainly due to changes in their equity levels.

News cuttings of some crisis situations are as follows