This action might not be possible to undo. Are you sure you want to continue?

Welcome to Scribd! Start your free trial and access books, documents and more.Find out more

m

**CORPORATE FINANCETERM REPORT
**

FACTOR INFLUENCING THE CAPITAL STRUCTURE OF TOBACCO SECTOR COMPANIES IN PAKISTAN

SUBMITTED TO: SIR JAMAL ZUBERI SUBMITTED FROM: FARAZ HALEEM SYED MUHAMMAD ALI FARAZ ILLAHI SECTION: A

10226 10320 10245

ACKNOWLEDGEMENT

We would like to thank Almighty Allah without whose blessings we would not had this opportunity to work on this report. We are indebted to quite a few people who had helped us from the beginning to the completion of this research report. Their timely and unconditional support has been a source of inspiration for the whole group which has made possible to complete our research report.

In the end, we would like to thank our teacher, Mr. H. Jamal Zubairi, Associate Professor and Head of Department of Accounting and Finance at our Institute of Business Management for his guidance throughout the project and has been acting as a facilitator and a mentor during this time and his unconditional support has been the source of motivation to perform at our best. Thank you Sir.

We completed the report on schedule and try our level best to cover the highlights of the topic. 2011 “REPORT ON FACTOR INFLUENCING THE CAPITAL STRUCTURE OF TOBACCO SECTOR COMPANIES IN PAKISTAN” Dear Readers: Our team has completed the report on “Factor Influencing the Capital Structure of Tobacco Sector Companies in Pakistan”. Yours sincerely. which is enclosed herewith. NAMES Faraz Haleem Syed Muhammad Ali Faraz Illahi ID 10226 10320 10245 CONTACT NUMBER 0333-7441212 0346-2211459 0332-3516339 . what are the structures of different companies. We hope that this report will give you a broad understanding about the topic. This report provides information regarding the concept of Capital Structure in Pakistani Tobacco Companies. This report is a summary of our research findings from the work that we completed during the December 2011. Corporate Strategies and their effectiveness with a brief survey conducted.LETTER OF TRANSMITTAL December 28th. there related Policies.

.......... 12 Market Conditions: .................................................................................................................................................................... 14 Pooled Regression Analysis .................................................................................................................................................................................................... 20 Table-3.............................................................................1: Regression Model Summary ........................................................................... 11 Capital structure: ...................................... 14 INDEPENDANT VARIABLES: ................................................................................................................................................................................................................................................................................................................................................TABLE OF CONTENT Contents Static Trade off Theory: ............................................................................. 16 Linear regression ....................................................2: ANOVA (b) ......................................... 18 Table-1: Descriptive Statistics (3-year summary) ........................................... 9 Pecking Order Theory: .................................................................................... 9 Signaling theory: .......... 16 PEARSON CORRELATION: HYPOTHESIS AND METHODOLOGY ............... 20 Table-3................................................................................................ 12 Growth Rate: ................................................................................................................................................................1: Regression Model Summary ................................................................................................................................................................ 12 DEPENDANT VARIABLES:..... 9 RESEARCH REVIEW .................................................................................... 19 Regression Analysis Results .................................................................................................... 20 Table-3............................................................3: Regression Coefficients & their significance ..... 17 The Regression Model ................................................................................................................................................................. 20 Table-3............... 21 .......................................................................................................................................................................

. The research holds importance for researchers. Liquidity (Quick Ratio). Still a well managed capital structure is extremely important to a firm’s profitability.ABSTRACT Signifying the optimal capital structure is a critical decision for any organization. The objective of this research study is to determine the influence of profitability: Return on Assets (ROA) and Return on Equity (ROE). The variation of Tobacco sector in Jasir Ilyas’s research was 99%. This report investigates the factors influencing the capital structure of tobacco sector companies in Pakistan. Tangibility of Assets (TG) and Non-debt tax shield (NDTS) on the capital structure of tobacco sector companies in Pakistan and this was to be tested for consistency of the results over the range of data. analysts and managers. only two variables which are tangibility of the assets and size of the firm. This result is important to maximize returns and to find the impact of such a decision on organization’s ability. were found to be highly significant. Similar research has been done by Jasir Ilyas in 2005 on combined non-financial sector of Pakistan. This study analyzed two firms in the tobacco sector. listed at the Karachi Stock Exchange for the period 2009-2011 quarterly using pooled regression in a panel data analysis. investors. Size of the Firm (SZ). Jasir Ilyas used same statistical tool that we are using. The results show that these six independent variables explain 98% of variation in the dependent variables. Growth (GT). performance as well as liquidity needs and helps to create good prosperity of the firm.

Firms whose sales are relatively stable can use more debt and incur higher fixed charges than a company with unstable sales Competitive structure or stability of profit margin of the firms with high rate of return on investment uses relatively little debt. however. There are significant variations in the capital structures of different industries and different companies. Capital can be collected by using two sources which are debt capital and equity capital. Following are the basic factors which should be kept in view while determining the capital structure:Growth and stability of sales of firms that are growing rapidly generally need larger amount of external capital. Capital structure of a company is a mix of a company's long-term debt. as this firm is relatively highly levered. Debt capital is collected by issuing debentures. Regularity of cash inflows is much more important than . capital is the main element to establish and run its business activities smoothly. A company's proportion of short and long-term debt is considered when analyzing capital structure. preferred stock or retained earnings. Usually a company more heavily financed by debt poses greater risk. The floatation costs associated with debt are generally less than those for common stock. the management should target capital structure and initial capital structure should be framed with subsequent changes in initial capital structure to have it like target capital structure. Debts are in the form of bond issues or long-term notes payable. stability. specific short-term debt. bonds etc and this Debt Capital are related with fixed cost of capital. If profit margin is constant more debt is used. It is not possible to have an ideal capital structure. Equity capital can be collected issuing different shares like common stock. while equity is classified as common stock.INTRODUCTION In every business organization. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. There are many factors that affect capital structure. which provides insight into how risky a company is. so rapidly growing firms tend to use more debt. When people refer to capital structure they are most likely referring to a firm's debt-toequity ratio. rapidly growing firms often face greater uncertainty which tends to reduce their willingness to use debt. and certainty of such inflows. The selection of capital structure is also influenced by the capacity of the business to generate cash inflows. Their high rate of return enables them to do most of their financing with retained earnings. preferred stock etc. Therefore maintaining the balance of this capital is known as corporate capital structure. however. Some companies do not plan capital structure but they are still achieving a good prosperity. common equity and preferred equity. Short-term debt such as working capital requirements is also measured to be part of the capital structure. At the same time.

If investors demand preference shares. they can issue common shares. The consideration of retaining "Control" is also very important. Similarly. To maintain control within the hand of limited members. making the control difficult. The availability of funds is greatly influenced by the size of the enterprises. advertisement. The capital markets keep changing continuously. printing of prospectus. the cost of floating a debt is less than the cost of floating an equity issue. brokerage costs etc are incurred. The ordinary shareholder can elect the directors of the company. Due to the changing market sentiments. The company will save in terms of floatation cost if it raises funds through large issue of securities but the company should raise only that much of funds which can be employed profitably. Generally. A small company finds it difficult to raise debt capital. the company has to decide whether to raise funds with a common shares issue or with a debt issue. borrowing is costly. In large companies flotation cost is not a significant consideration. Marketability or lender's attitude refers to the readiness of investors to purchase a security in a give n period of time. it will bring new voting investors into the firm. equity or debt market). no more floatation costs. thus. If the firm wants to more equity shares the management right will be diversified. So at that situation equity capital is preferable. If company sells the common stock. underwriting and brokerage etc. As compared with other securities. more developed debt market means more debt used and vice versa. The capital structure will have to be customized to the attitudes of investors prevailing at the time of issue of capital.the average cash inflows. . Cost of capital if the cost of capital is too high. More developed equity market means more equity used and less developed equity means less equity used. A company with unstable and unpredictable cash inflows can no longer afford to depend on debts. Development of capital market is an important factor in capital structure. Size of the company is another factor. It refers to the extent which the capital market is developed (i. The terms of debentures are less favorable to small companies so they have to rely on equity share and retain earning for funding business. Floatation costs take place only when the funds are externally raised. the equity shares are more economical because they have least cost of capital. Large companies are generally considered to be less risky by the investors and.e. Floatation costs consist of some or all of the following expenses. This may lure the company to issue debt than common shares. preference shares and debentures to the public. a firm has to use more amount of debt or preferred stock because they have no management and voting right. In the processing of trading. firm must have issue of preference share capital.

Other sources of tax shield In order to take the advantage of low tax.In countries like China and India where economic conditions are very suitable for business. . Level of economic development plays significant role in capital structure. Level of economic development is high then more debt is required.g.The growth opportunities of business can be either tremendous or very low. While determining capital structure. Higher growth opportunities exist then higher debt is used otherwise vice versa. having least agency cost is preferred but if there is agency problem than debt is used largely for funding the business. Agency costs are another factor in determining the capital structure. Depending upon the growth opportunities the debt ratio fluctuates. But dividends are not considered deductible expenses and they are paid out of profits after tax. borrowing is preferable for a firm because interest is considered as deductible expenditure according to the income tax law. Wherever economic development is taking place investors will be looking to invest there E. investors from all over the world are willing to invest in such countries. .

investors will interpret the signal negatively.e. equity-maximizing and value-maximizing firms make similar capital structure choices. Another impact of the signaling factor is the problem of the under pricing of equity. Furthermore. when financial distress costs are high. If the firms incur losses. retained earnings but if they need external financing. The benefits and costs associated with the debt option sets this target ratio. These include taxes. advertisements etc. direct and indirect costs. However. In order to avoid bankruptcy. originally developed by Ross (1977). rather than the combined interests of debt and equity holders. Direct costs include the administrative costs of the bankruptcy process. (1) As the interest payments are a tax-deductible expense. explains that debt is considered as a way to highlight investors’ trust in the company. if the firm is large in size.THEORETICAL FRAMEWORK Static Trade off Theory: Myers (1984) divides the contemporary thinking on capital structure into two theoretical currents. If the firm goes ahead of this optimal point it will default on the repayment of the loan due to which the control of the firm will be shifted from shareholders to bondholders who will try to recover their investments by liquidating the firm. cost of financial distress and agency cost. Signaling theory: This approach. the firm will issue equity to finance its project. states that firms follow a chain of command of financial decisions when establishing its capital structure. Initially. (2) As the level of debt increases the chance that a company default increases so there must be an optimal level of debt. Pecking Order Theory: The Pecking Order Theory (POT) put forward by Myers (1984) and Myers and Majluf (1984). So if the operating earnings are enough to meet the interest expense then firms will get the benefit of tax deductibility of interest expenses. The indirect costs occur because of change in investment policies of the firm in case the firm foresees possible financial distress. The first one is the Static Tradeoff Theory (STT). these costs constitute only a small percentage for the firm. . that is if a company issues the debt it provides a signal to the markets that the firm is expecting positive cash flows in the future. If a firm issues equity instead of debt for financing its new projects. firms prefer to finance their projects through internal financing i. training and education of employees. this tax benefit will fade away. Thus the higher level of debt shows the manager’s confidence in future cash flows. they decrease the tax liability thus providing cash savings. acting as an agent to shareholders. the manager tries to appropriate wealth from bondholders to shareholders by incurring more debt and investing in risky projects. they first they apply for a bank loan then for public debt and as a last resort. which explains that a firm follows a target debt-equity ratio and then behaves accordingly. Therefore Firms will use a higher lever of debt to take the advantage of tax benefits if the tax rates are higher. Pecking Order Theory has a more important effect on capital structures for firms that are managed in the interests of equity holders. as the principal and interest payments on debt are a fixed contractual obligation which a firm has to pay out of its cash flows. the firm will cut down expenditures on research and development. A firm may face two types of bankruptcy costs due to this.

The study accepts the hypothesis which states that with the increase in the Tangibility of the firm. For Non Debt Tax Shield as an independent variable the study rejects the null hypothesis as the study found that the slope of NDTS variable is directing towards the negative relationship of NDTS and firm’s leverage. as found in slope of the tangibility in both analysis techniques.TOBACCO SECTOR OF PAKISTAN There are two firms in this sector and this research study includes all of them. debt to equity ratio also increases. Size of the firm in this sector is a significant variable according to the both regression techniques. both the tests were significant for the growth variable. However. The study rejects the null hypothesis regarding the Tax Rate and accepts the alternative statement of the study which states that with an increase in the tax rate the firm’s debt also increases. Profitability of the firm is negatively related to the firm’s leverage.. showing negative relationship with the firm’s debt ratio. The study found that the growth as independent variable is not significant in any of the regression techniques. Thus the study accepts the null hypothesis of the study which states that with the increase in the size of the firm the debt financing decreases. With the increase in the growth opportunity of the firm. . Variation is related to the values of independent variable. This variable is found to be significant in both the analysis techniques. the debt ratio of the firm also increases.

According to the Pecking Order Hypothesis. Initially. between shareholders and managers and debt holder and equity holders. A study by Miao (2005) provides a competitive equilibrium model of capital structure and industry dynamics. It does not matter what the firm’s dividend policy is. Filbeck and Krueger (2005) highlighted the importance of efficient working capital management by analyzing the working capital management policies of 32 non-financial industries in the US. In other words. entry. For example it implies that high growth industries have relatively lower leverage and turnover rates. . It does not matter if the firm’s capital is raised by issuing stock or selling debt. bankruptcy costs. Agency cost hypothesis suggests that firm’s managers are mainly interested to maximize their own benefits than to maximize shareholders wealth. the value of a firm is unaffected by how that firm is financed.LITERATURE REVIEW RESEARCH REVIEW Modigliani & Miller (1958) forms the basis for modern thinking on capital structure. The capital structure choice reflects the tradeoff between the tax benefits of debt and associated bankruptcy and agency costs.e. firm sets target debt-equity ratio according to the nature and requirements of business and then gradually moves to achieve it. Their findings reveal that significant differences exist among industries in working capital practices over time. firms make financing. investment. and asymmetric information.e. Jenson and Meckling (1976) developed agency cost hypothesis and identifying the two types of conflicts i. and exit decisions subject to idiosyncratic technology shocks. Myers and Majluf (1984) and Myers (1984) made a valuable addition in capital structure literature by providing Pecking Order and Static Trade-off Hypothesis respectively. The basic theorem states that. Trade-off hypothesis proposed that firm should have optimal capital structure based on balancing between the benefits of debt and costs of debt. the firm should follow specific hierarchy for financing its assets. This effect has a number of testable implications. The interaction between financing and production decisions influences the stationary distribution of firms and their survival probabilities. The analysis demonstrates that the “equilibrium” output price has an important feedback effect. agency cost. Therefore. and in an efficient market. the firm utilize internally generated fund i. the stockholders of the firm try to discourage these interests by means of monitoring and control actions which also prospects cost i.e. In the model. retained earnings then debt and If more funds are required then assets are financed by equity capital. in the absence of taxes.

bonds. the interest rate to borrow may be higher than a company would want to pay.IMPORTANT TERMS Capital structure: The capital structure shows the way a corporation finances itself through combination of equity sales. Market Conditions: Market conditions influence company's capital-structure condition. More stable and mature firms typically need less debt to finance growth as its revenues are stable. and loans. equity options. Growth Rate: Firms that are in the growth stage borrowing money to grow faster through debt financing but high debt load is not appropriate. the minor the optimal debt ratio of the company. A company is more financially flexible when it has lower debt level. Financial Flexibility: Financial flexibility is essentially the firm's ability to raise capital in bad times. An aggressive management may try to grow quickly and can use large amounts of debt to speed up the growth of the company's earnings per share (EPS). Companies should make an effort to be careful when raising capital in the good times without expanding its capabilities too far. Company's Tax Exposure: all the debt payments of a company are tax deductible. using debt to finance a project is attractive because the tax deductibility of the debt payments protects income from taxes. If a company's tax rate is high. it may be prudent for a company to wait until market conditions return to a more normal state before the company tries to access funds for the plant. The larger the business risk. it is less inclined to use debt to increase profits. Management Style: when management's approach is more conservative. . If the investors are limiting companies' access to capital because of market concerns. Optimal capital structure refers to the combination that minimizes the cost of capital in order to maximize maximizing the stock price. In that situation. Factors that Influence a Company's Capital-Structure Decision:Business Risk: Business risk of a company is the basic risk that company faces due to its operations.

Phillip Morris . The data is obtained from balance sheet. Pakistan Tobacco 2. The study used in the financial data of these firms is over the years of 2009-2011 Quarterly. The sample size for the report is 2 companies and they are: 1.SAMPLE SIZE AND SOURCE OF DATA Our study is about the Tobacco sector of Pakistan. income statement and cash flow statements of these companies’ quarterly reports.

High ratio indicates an inefficient use of working capital which reduces the company’s ability to carry accounts receivable and maintain inventory and usually means a low cash reserve. Return on Assets (ROA). = Increase in asset value this year over last year / last year value This shows the percentage increase in Total Assets over the period of years. Leverage can increase the shareholders’ return on their investment and often has tax advantages INDEPENDANT VARIABLES: B. C. It shows the level to which an investor utilizes borrowed money. Leverage: CS = Total Debt / Total Assets Leverage refers to the percentage of assets financed by debt and it is calculated by taking the total debt as a percentage of total assets. Quick Ratio (QR) and Non-debt tax shield (NDTS). Tangibility of assets: TG = Fixed Assets / Total Assets It’s a measure of the extent to which fixed assets are financed with owner’s equity. Growth (GT). The size of a firm has a significant impact on the capital structure. Firm Size (SZ). and Return on Equity (ROE). These variables were used to identify positive or negative impact on the capital structure of tobacco sector companies in Pakistan and are explained in detail below. Highly leveraged companies may be at risk of bankruptcy if they are unable to make payments on their debt. Firm Size: SZ = Log (sales) Size of the firm should be measured by taking the natural log of the sales to smoothen the variation over the periods considered. D. Tangibility of assets should be calculated as the ratio of fixed assets to total assets.DEPENDANT & INDEPENDENT VARIABLES DESCRIPTION We used total of eight variables in our study and they are as follows: Leverage (CS). . This will often limit the ability to respond to increased demand for products or services. DEPENDANT VARIABLES: A. The size of a firm plays an important role in determining the kind of relationship the firm enjoys within and outside its operating environment. the greater the influence it has on its stockholders as the larger size firms have enough resources. Tangibility of Assets (TG). The larger the firm.

Quick Ratio: QR = (Current Assets – Inventory) / Current Liabilities QR is an indicator of a company's short-term liquidity. Return on Equity (ROE): ROE = (Net Income / Shareholder’s Equity) x 100 ROE measures the rate of return on the ownership interest (shareholders' Equity) of the common stock owners. These deductions reduce taxpayers' taxable income for a given year or defer income taxes into future years. Non-Debt Tax Shield: NDTS = Annual depreciation charges / Total Assets A reduction in taxable income for an individual or corporation achieved through claiming allowable deductions of depreciation and annual investment tax credits. The basics and use of this ratio is similar to the current ratio in that it gives users an idea of the ability of a company to meet its short-term liabilities with its short-term assets. H. It is also known as the "acid-test ratio" or the "quick assets ratio".E. it is best to compare it against a company's previous ROA numbers or the ROA of a similar company. F. ROE is equal to a fiscal year's net income (after preferred stock dividends but before common stock dividends) divided by total equity (excluding preferred shares). It is the amount of net income returned as a percentage of shareholders equity. ROA for public companies can vary substantially and will be highly dependent on the industry that is why when using ROA as a comparative measure. It tells you what earnings were generated from invested capital (assets). . The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. it is a clear indication that the company's current assets are dependent on inventory. If the current ratio is significantly higher. Return on Total Assets (ROA): ROA = (Net Income / Total Assets) x 100 It indicates how profitable a company is relative to its total assets and how efficiently a company manages its assets in order to generate income. It is calculated by dividing annual depreciation charges by the Total Assets of the company. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. G.

linear regression refers to a model in which the conditional mean of y given the value of X is an affine function of X. data are modeled using linear functions. or some other quartile of the conditional distribution of y given X is expressed as a linear function of X. linear regression focuses on the conditional probability distribution of y given X. and unknown model parameters are estimated from the data. Like all forms of regression analysis. In linear regression. The statistical tools used for analyzing the data are:- Pooled Regression Analysis Linear regression is an approach to modeling the relationship between a scalar variable y and one or more variables denoted X. Less commonly. linear regression could refer to a model in which the median. . rather than on the joint probability distribution of y and X.STATISTICAL TOOLS The software we are using to develop hypothesis and analyze the data is SPSS (Statistical Package for Social Sciences) which is a computer program for statistical analysis. which is the domain of multivariate analysis. Such models are called linear models. Most commonly.

Ho: ROE is not directly related to Leverage (CS) of the firm. H1: Non-debt tax shield (NDTS) is directly related to Leverage (CS) of the firm. H1: Firm (SZ) is directly related to Leverage (CS) of the firm. Ho: ROA is not directly related to Leverage (CS) of the firm. Ho: Firm (SZ) is not directly related to Leverage (CS) of the firm.HYPOTHESIS PEARSON CORRELATION: HYPOTHESIS AND METHODOLOGY The object of the study is to see the linkage of financial indicators to Capital Structure which is the Leverage (CS) of tobacco industry. H1: Tangibility of Assets (TG) is directly related to Leverage (CS) of the firm. H1: Growth (GT) is directly related to Leverage (CS) of the firm. H1: Quick Ratio (QR) is directly related to Leverage (CS) of the firm. . H1: ROA is directly related to Leverage (CS) of the firm. Ho: Growth (GT) is not directly related to Leverage (CS) of the firm. Ho: Quick Ratio (QR) is not directly related to Leverage (CS) of the firm. In order to achieve this objective we tested the following hypotheses: Ho: Tangibility of Assets (TG) is not directly related to Leverage (CS) of the firm. Ho: Non-debt tax shield (NDTS) is not directly related to Leverage (CS) of the firm. H1: ROE is directly related to Leverage (CS) of the firm.

Panel data analysis facilitates analysis of crosssectional and time series data. We use the pooled regression type of panel data analysis. also called the Constant Coefficients model. is one where both intercepts and slopes are assumed constant. Therefore the equation for our regression model will be: CS = β0 + β1 (TG) + β2 (SZ) + β3 (GT) + β4 (ROA) + β5 (ROE) + β6 (QR) + β7 (NDTS) Where CS = Leverage TG = Tangibility of assets SZ = Firm Size measure by Log of sales GT = Growth ROA = Return On Assets ROE = Return On Equity QR = Quick Ratio NDTS = Non-debt text shield .EMPIRICAL RESULTS & ANALYSIS OF THE FINDINGS The Regression Model This study uses panel regression analysis. The cross section company data and time series data are pooled together in a single column assuming that there is no significant cross section or inter temporal effects. The pooled regression.

3395 1.0547 StDev Minimum 0.1556 0.4296 14. According to output.3919 1.1831 0.4645 0.0100 -0.0932 0.7729 0.5754 15. Table-1: Descriptive Statistics (3-year summary) Variable CS TG SZ ROA ROE QR NDTS GT Mean 0.61 0.0669 0.Analysis & Results This section contains the results of the descriptive and regression analysis. Theoretically speaking. for each company).47 0. fixed assets/total assets too should be lower than one.4758 0.1746 Maximum 0. same as in Jasir Ilyas.0024 0.0381 0.4510 0. total debt/total assets ratio should be less than one or one at maximum. Table 1 shows the summary of descriptive statistics for the variable values in the sample (11 quarters over a period of 3 years.0054 -0.68 0.299 11.0135 0.3520 Theoretically.1512 -0.7157 0.0191 0.0711 0.1378 0. .0190 0. However.1704 0. we use gross fixed assets/ total assets ratio as a measure of tangibility.0672 0. our variables are lying between -1 and +1.

Dependent Variable: Leverage .1: Regression Model Summary Table-3.018 0. .097 . Predictors: (Constant). Size of the firm.1: Regression Model Summary Model R 1 .2: ANOVA (b) Model 1 Sum of Squares Regression Residual Total 0.959 Std. Return on Equity.973 .001 F 72. Dependent Variable: Leverage Table-3. Predictors: (Constant).704 df 7 14 21 Mean Square 0. Quick Ratio.Regression Analysis Results The following tables present the results of pooled regression analysis.685 0.986 Adjusted R R Square Square .036821 a. Non-Debt Tax Shield.247 Sig. Return on Assets b. Growth. Growth. Error of the Estimate . Table-3. Size of the firm. Tangibility of Assets. Return on Equity.000a a. Return on Assets b. Quick Ratio. Tangibility of Assets. Non-Debt Tax Shield.

768 3.229 Std.168 p .048 0.512 0.902 0.379 0.0003 0.129 0.085 0.004 0.3: Regression Coefficients & their significance Unstandardized Coefficients Model 1 B (Constant) Tangibility Firm Size Growth ROA ROE Quick Ratio NonDebt TaxShield -0.001 0.411 -0.Table-3.009 0.694 3. Error 0.047 .105 t Stat -2.017 0.008 0.094 -0.137 -4.302 1.979 2.128 0.339 -3.611 -4.422 0.381 1.922 1.value 0.012 0.064 -2.030 0.

Expected & Observed Relationships: Determinant Tangibility Firm Size Growth Profitabilty: ROA Profitability: ROE Quick Ratio Non Debt Tax Shield Measure Fixed Assets/Total Assets Log Of Sales percentage of increase in total assets ROA ROE Net current assets/current liabilities Annual Depriciation/current liabilities Expected Relationship Direct Inverse Direct Inverse Inverse Inverse Inverse Observed Relationship Direct Direct Direct Inverse Direct Inverse Inverse . The Adjusted R-square is slightly below the R2.1) shows that the four variables i.411 ROE – 0. growth. non debt tax shield and quick ratio explain nearly 98% of variation in the response variable leverage.229 NDTS The above tables show the results of the regression analysis.Regression Equation CS = .302 ROA + 1. size. The value of R-square (R2=0.973: Table 3.381 + 1. This means that the choice of capital structure is mainly defined by these six variables in the tobacco sector.379 TG + 0.094 QR – 0. profitability and tangibility.154 GT – 4.e.0.048 SZ + 0.

besides firm size and ROE.Conclusion In this study we analyzed a sample of 2 firms in the tobacco sector by using a pooled regression model to measure the determinants of capital structure of the firms in the Pakistan tobacco industry. which expects a positive relationship between firm size and leverage. . Firm size is positively correlated with leverage thus suggesting that the bigger the firm size the more debt they will use. The results were found to be as expected. Thus the results comply with the Static Tradeoff Theory.

Vol. Raviv. 88. Vol.K. the American Economic Review.Z. philipmorrispakistan. Capital structure and the informational role Of debt. 2 Frank. and Goyal. 67 Harris. “Corporate Income Taxes and the Cost of Capital: A Correction”. “The Cost of Capital. No. the American Economic Review. 1958. and A. No.. F. Modigliani. 321-349. “Testing the pecking order theory of Capital structure”. M. 3 . Journal of Finance 45. Vol.pk/ www. and Miller. M.com. M. E. V. Journal of Political Economy. M. No. Journal of Financial Economics.. and Miller.H. 1963. Corporation Finance and the Theory of Investment”. 1980.com.Bibliography Journal of Managerial sciences volume 2 by Jasir Ilyas o www.. F. 3 Modigliani. Vol.H.. 1990. 48. “Agency Problems and Theory of the Firm”.ptc.pk Fama. 2003a. 48.

Analysis on the tobacco industry

Analysis on the tobacco industry

- MB0045 Financial Management
- southeastern steel company dividend policy Financial management
- Corporate finance EQ
- Copy of Valuation
- WC Management Project Final Report 2007
- NOTES ON FM
- im10
- Alm
- Alternative Investments
- Capital Structure of NTPC.docx
- Boassoj
- Leverage Analysis
- FM-1
- Finance
- Captial Structure Project in Reliance
- Financial Management
- Working Capital
- 43641402-MB0045-Set-1
- Investment Pattern of Investors (2)
- Funcations of financial management
- MB0045 Financial Management
- Financial Modeling
- Lecture 5 Financial Statement Analysis
- Basics of FM - Module I
- Financial Statements and Analysis
- Project
- FM
- Definition Off Balance Sheet
- Capital Structure 1

Are you sure?

This action might not be possible to undo. Are you sure you want to continue?

We've moved you to where you read on your other device.

Get the full title to continue

Get the full title to continue listening from where you left off, or restart the preview.

scribd