Question

1. With greater financial integration in the last two decades, what are the main factors that affect their choices of capital? Are legal considerations, economic potentials and challenges, demographic and cultural transformations act as factors that determine their decisions-making process on capital structure? Explain your answer. (Dimention2)

2. From the previous question, what impact do the previous factors have on the choice of capital structure for corporations in Qatar and UK and how will they affect corporate financing decisions in the future. (Dimention3)

Answer 1

A Capital Structure is a combination of debt and equity issued by any company to finance it's operations and growth.

Due to financial integration since the past two decades, companies have enjoyed a better reach in terms of it's business and finance.

A company has mainly two choices in it's capital, one being equity and the other being Debentures (debt). Since in debt instruments, regular payment of interest is mandatory alongwith the refund of the principal on redemption, only companies having stable income choose this source of capital.

1) The Main Factors Affecting the Capital Choices due to greater Financial Integration are as follows:

• Conditions of Global Markets:

Capital markets are very dynamic. The company would always want to issue instruments during bear market and not a bull market.

• Fiscal Policies:

Government might come up with policies that are very rigid for foreign investments in a company. Therefore, this is one of a macro-economic concept that affects majorly the choice of capital.

• Tax Rates:

Interest income earned on debts shall be taxable on accrual and residency rule. Therefore, DTAAs signed with different countries shall be an utmost important factor to be considered.

2)

• Legal Considerations:

Laws and statutory requirements affect the capital structure. The authorised capital of a company and the ratio of debt and equity in the capital structure is determined as per the laws of the particular country.

• Economic Potential:

The factors like inflation, GDP, interest rates affect the borrowing capacity of a company thereby affecting the capital choice.

• Demographic and Cultural Transformations:

Improved standard of living of the people and the increased income or purchasing power shall directly impact upon the capital borrowing capacity of an entity.

Conclusion: Therefore, all the above factors shall affect the decision making of the capital structure greatly.

3) Choice of Capital Structure for Qatar:

Qatar is a developing country. Therefore it is not economically advanced as compared to the developed countries. The size of company, the nature of its business, profitability have a dominant role in determining capital structure. Growth in the GDP, purchasing power shall attract more investments in future.

Choice of Capital Structure for UK:

UK has a highly developed social market and economy. The purchasing power of the people is very high thus the borrowing alternatives for the entities shall be high. Also, since the economy is fast growing, the interest rates shall also be high thus attracting more investments.