Running Head: ARTICLE REVIEW 1

Corporate Finance

Student Name

Course Name

Professor Name

March 26, 2021

 Corporate Finance

1.

Determine if there is a link between the creation of capital and U.S. business, medical, and

energy sector production of businesses. The analysis's key aim is to decide how capital formation

influences companies' success in the sectors listed above, either negatively or positively. With

debt lending, the biggest drawback is that the corporation will ultimately have to pay back the

loan, which raises the overall risk. On the other hand, equity lending would not give the

corporation a tax advantage since the distributions cannot be taxed. Nevertheless, the company

would not have to refund anything, unlike debt funding. For the operation and financial stability

of microfinance institutions, capital formation is important. Do the capital structure and business

success have a direct relationship? If so, how far is this relationship?[ CITATION Col15 \l

1033 ]

2.

The authors of the analysis used in this paper are quantitative. Quantitative research deals

with numbers and statistics and qualitative research deals with definitions and terms in the

processing and interpretation of data. They are both necessary in order to obtain various types of

outcomes and to address the issue. The data used in this analysis have been gathered over ten

years, from 2004 to 2013. Data were obtained from secondary sources in this review, such as

Yahoo Finance and annual reports. The annual records have been downloaded via the website of

the U.S. Securities Exchange Commission. The sample companies were chosen randomly using

a stock screener from three distinct industries. The criteria contained an inventory price of $5,

and the company's registered office had to be in the United States. In the industrial, health, and
energy sector, 330 U.S. companies were chosen. It results in 300 comments per field. In the

industrial and healthcare sectors and the energy market, regression equations for each vector are

determined.[ CITATION Col15 \l 1033 ]

3.

The key results are the capital structure and corporate efficiency, based on the metric

used for defining company performance. The capital structure continues to have a negative

association with the return on investment and operational returns. It means that debt acceptance

would have an adverse effect on asset returns and operating returns. Industrial businesses can

then consider new funds if these percentages are not to be lowered. The arrangement of capital

seems to be positively related to the profit margin; and statically significant. It means that the

acceptance of more debt would have a positive effect on the operating margin. It represents the

principle of debt funding in order to benefit from the tax incentives. Companies in the industrial

sector should also aim to raise debt as their main source of funding if they want to increase

profits. As statistically negligible, the structure of capital tends not to be related to the share

price. It indicates the little effect on the company's stock price if a further debt is accepted.

Industries will then pursue debt or equity capital without worrying about asset reduction for

shareholders.[ CITATION Col15 \l 1033 ]

4.

In all three fields, the capital structure tends to negatively affect asset return and return on

operations, indicating that businesses are finding new finance because they have lost future

success by debt financing. As capital structure affects the profit margin favorably in the

industrial sector, it adversely affects the energy sector's profit margin and has no relationship
with the health sector. The economic relationship between margin and capital structure varies

from sector to sector.

It means that companies should finance debt but consider alternative funding in the

energy sector. Moreover, capital structure in all three industries did not have a connection to

equity prices; it was suggested that companies who would like to fund leverage could do so

without losing potential market results. The relationship between capital structure and corporate

efficiency is industry-by-sector and variable-to-variable. It did not conclude that the structure of

capital has a negative effect on corporate success. What we noticed was, though, the negative

effect of capital structures on the return on investment and the operating profit across all three of

these industries. Moreover, this analysis appears to affirm the hypothesis initially proposed by

Modigliani and Miller on the capital structure since we have observed that the capital structure

and share price are separate from each other in all three markets.[ CITATION Col15 \l 1033 ]

5.

Strength of the study

The article has researched capital structure's relationship with different theories such as

Pecking Order Theory, Modigliani and Miller, and the Trade-Off Theory. The models used in

this analysis were used to assess whether changes in the leverage affected business results. The

basic theory was that the relationships between the company's results due to debt improvements

were statistically substantial.[ CITATION Col15 \l 1033 ]

Limitation of the study

After the analysis, the authors could not conclude the relationship with the stock price in this

study. As statistically negligible, the capital structure seems not to be related to asset prices. It
implies that taking on additional leverage would not affect the company's stock price. Energy

producers will then pursue debt or equity finance without thinking about reducing shareholder

wealth[ CITATION Col15 \l 1033 ]

6.

Companies will typically opt to pay debt or equity. It must be agreed upon as a structure in

the decision on capital budgeting. The choice also relies on the company's funding source, cash

flow, and retention benefit for the company's main shareholders. By using a loan against the

issuance of shares, the lender would not be depleted. Shareholders must be stopped from

becoming rivals. From this analysis, we will further investigate how funding for its further

production is selected.[ CITATION Col15 \l 1033 ]

 References

Cole, C., Yan, Y., & Hemley, D. (2015). Does Capital Structure Impact Firm Performance: An

Empirical Study of Three U.S. Sectors. Journal of Accounting and Finance, 15(6), 57-65.