Determinants of Capital Structure: A case of Pakistani Pharma & Biotech Ind

日期 : Mar 2011 - Dec 2011

It is believed that the study of capital structure has motivated an extraordinary amount of research within the field of finance. Three major decisions of finance are Investment decision, finance decision and dividend policy decision. The investment decision concerned with the financing fix or capital structure or leverage. Capital structure decision describe about the debt and equity mixer. The term capital structure refers to the proportion of debt and equity. The financing decision of firm relates to the option of the proportion of these sources to finance the investment requirements. There are two characteristic of the financing decision. First, the theory of capital structure which shows the theoretical relationship between the service of debt and the return to the shareholders. The use of debt implies a higher return to the shareholders as also the financial risk. A proper balance between debt and equity to make certain an exchange between risk and return to the shareholders is necessary. A capital structure with a practical proportion of debt and equity capital is called the optimal capital structure. The element of financing decision is that there is an optimal capital structure and in what proportion should funds is raised to maximize the return to the shareholders and he determination of an suitable capital structure given the facts of a particular case (Chandra, 2004). The financing decision covers interconnected characteristic of the capital structure theory. When a firm expands it needs capital and that capital can come from debt or equity. Debt has two important advantages. First, interest paid is tax deductible which lowers debts effective cost. Second, debt holders get a fixed return so stockholders do not have to share their profit if the business is exceptionally successful. On the other hand debt has disadvantage.