IMPACT OF CAPITAL STRUCTURE ON FIRM’S PROFITABILITY/ MARKET VALUE OF FIRM

Abstract

The purpose of this study is to determine the impact of capital structure on corporate performance and preference of using financing option in Cement industry of Pakistan. The study involved use of secondary data through published financial reports for the period of 2006-2013. To analyze the data, Regression, ANOVA and Correlation tests were applied. Data is collected from 12 cement companies listed in KSE from cement sector. Decisions relating to capital structure are regarded as the most critical for an organization. A correct mix of debt and equity had a great impact on the company’s future. The decision is critical therefore a number of factors are involved while formulating the capital structure. These factors include size, nature of business, industry and financial outlook of the industry. Every business has its own nature and priorities therefore, the capital structure is different from one another even it can differ in the same industry. In Pakistan large size companies mostly prefer Debt option over equity. The following research in this regard focuses on the cement sector which is termed as a capital intensive industry. The study investigates the impact of capital structure on the firm’s performance in Cement Sector of Pakistan. The research study provides information about the Capital structure, its importance and its effect on firm’s performance in reference to usage of Debt option as well as, equity option. The research investigates the data of 12 Cement Companies operating in Pakistan. The corporate performance of the companies is judged with the help of Debt and Equity as well as from the Share price Performance.. The result shows that, cement sector prefers the use of Debt option in order to finance their operations. The reason is that cement sector is highly capital intensive industry therefore, requires a huge amount of investment. The Plant as well as, its daily operations is quite expensive to manage and therefore equity option would not generate that much amount as using debt has tax advantage too.