The Relationship between Capital Structure and Firm Performance Evaluation Measures Evidence From the Food Sector"

Abstract

Capital structure of the organization is of much importance. Decisions pertaining to capital structure are considered as important as for the growth of any firm. They believe that the capital structure mix i.e. equity and Debt, as a source of fund has an impact on firm performance, by performance means the overall value of the firm. The present research is conducted to check whether the capital structure has an impact on firm value, as firm value could not be determined by single indicator, so to verify the impact different determinants were used like Gearing ratio, return on Equity, Return on Assets, Size, Age, and Growth. Different hypothesis has made to check whether capital structure has impact on these determinants. Different analysis techniques have used to determine the relationship. Following tests are applied on Eviews to check the relationship and test the hypothesis, like Descriptive analysis, Covariance analysis and Crosssectional time series regression model. The present study reveals that capital structure has an impact on firm value. This study also assessed the optimal financing mix for National Foods Limited Company and evaluated the cost to the firm from deviating from that position. In doing this, we derived a firm-specific optimal capital structure using the cost of capital approach and discount rates based on different combinations of debt and equity. The base result shows that as the debt intensity increases, the equity Beta has a multiplier effect such that the cost of equity increases more than proportionately to the increase in leverage