Determinants of Capital Structure for Listed Industrial Product Companies in Malaysia

In: Business and Management

Submitted By adilaacu90
Words 10584
Pages 43
1

CHAPTER ONE
INTRODUCTION

1.1

Background of the Study

Financial strategy is the largest corporate financial decisions that are made by the financial management committee and it is the most crucial for all organization or company for their strategy to make profit to their firms. Financial strategy also will influence the capital structure. The theory of Capital structure is closely related to the firm’s cost of capital. It is one of the effective tools of management to manage the cost of capital. Capital structure is the mix of the long-term sources of funds used by the firm. The primary objective of capital structure decisions is to maximize the market value of the firm or achieving the maximization of shareholders wealth through an appropriate mix of long-term sources of funds and an optimal capital structure is reached at a point where the cost of the capital is minimum. To design the capital structure, the element that should consider is first, the wealth maximization is attained and second, is the best approximation to the optimal capital structure. In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities (Saad, 2010). In short, capital structure is a mixture of a company's debts (long-term and short-term), common equity and preferred equity in financing its assets. Capital structure is essential on how a firm finances its overall operations and growth by using different sources of funds and it is one of the most important decisions made by financial management.

2

The capital structure of financing pattern decision is a significant managerial decision. It influences shareholders’ wealth. As a result, the market value of the share may be affected by the capital structure decision. The capital structure decision is a continuous
process.…...

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