The Determinant of Capital Structure

Using what you have learned in this course so far, you are required to write a research on capital structure theory, literature and application. Students are required to work individually to submit a research project consist of two parts:

Part 1: Literature Review on the Determinant of Capital Structure
This review should cover at least but not limited to the following points:
• What is the Definition and importance of capital structure decisions? (Performance area 1)
• Based on the theories of capital structure, why financial managers target specific capital structure.
(Performance area 2)
• Based on your analyses of Capital Structure Theories and previous literature discuss and propose main determinants of capital structure.
(Performance area 3)

Part 2: Case Study
The students should pick a company listed at QSE from any industry to collect financial data available to the public for the last three financial years (2017-2019). The student will use the relevant data to calculate the followings
• Cost of Equity
• Cost of Debt
• Weighted Average Cost of Capital (WACC)
Assess the link between WACC, Earnings Per Share (EPS) and Return on Equity (ROE) in your case company? If the financial manager decides to use more debt in financing new investments, can he reduce the cost of capital? (Performance area 3)
Based on the above calculated values for your selected firm and your analyses in part 1, write your perspectives about capital structure theories and the real world applications. Formulate recommendations for the company or suggest a solution(s) to the specific circumstances of your selected company. (Performance area 4)
• The recommended layout of your project is suggested to be as follows
• Cover Page
• Abstract
• Table of Contents
• Introduction (5%)
• Literature Review
o Definition and importance of capital structure decisions (15%)
o Theories of capital structure (15%)
o Empirical results from the literature about different determinants of capital structure (15%)
• Analysis for the Case Studies:
o The determinants of capital structure in the selected company (based on the survey and interview (15%)
o How the capital structure in the selected firm can be linked to the theories and literature of capital structure. (5%)
o Cost of equity (5%)
o Cost of debt (5%)
o WACC (5%)
o The impact of WACC on EPS and ROE (5%)

• Conclusion, Recommendations and Policy Implications 5%
• References 5%

Sample Solution