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University of Bahrain

College of Business Administration

FIN 620: Corporate Finance


Sem. I, 2014-2015

Capital Structure &


Firm Value
Done by:
Jabber Al-Gannami (1998-1524)
Alaa Al-Saffar
(2008-0113)
Major: Master in Engineering Management
Instructor: Dr. Batool Asiri
Presented on: 29th-Dec-2014

Contents

Objective
Literature Review
Methodology
Results
Conclusion
Criticism

Topic Objective:
Capital Structure and Firm Value
Relationship of (Debt & Equity) vs. FV

Country: Nigeria
Corporate: Banking
# Banks: 15
Period: 2007 to 2012

Literature Review:
Theoretical studies : Capital Structure and Firm Value
Theory

Relationships of (Debt & Equity) vs. FV

Modigliani and Miller


Hypothesis 1958

Under perfect Market condition.

Trade- off theory

putting into consideration that debt is


favorable over equity.

Net Income Approach

Putting into consideration that leveraged firms


having higher net income comparing with
unleveraged firms.

Net Operating Income


Approach

Under the assumption of constant cost of


capital and Net Operating Income

Pecking Order theory: by


Supa Tongkong (2012):
under pecking order
hypothesis

Under hypothesis said that the firm prefer


internal financing rather than external
financing.

The Market Timing


theory -Benk, and Levine
(2004)

Putting into consideration that time plays a


crucial role in choosing whether to prefer
equity (if was low) or debt, to maximize firm
value.

Literature Review:
Empirical studies : Capital Structure and Firm Value
Study

Relationships of (Debt & Equity) vs. FV

Chowdhury and
Chowdhury (2010) Bangladesh economy from
the year 1997 to 2003

They explained that the cost of capital has a


negative correlation from the result, thus
should be kept as minimum as possible.

Supa Tongkong (2012)examine the factors


influencing capital structure
decisions

Observed that a positive relationship exist


between a firms debt and its median industry
leverage.
Observed that a positive relationship exists
between firm size and growth opportunity; and
firm leverage.
Negative relationship exist between
profitability and leverage as stated in pecking
order theory.

Ogbulu and Emeni (2012)


exanimate emerging
economy like Nigeria

Equity capital as a component of capital


structure is irrelevant to the value of the firm.

Methodology:
Type

of Study: Empirical

Data Source: Financial Statements


Model:
OLS: Ordinary Least Square
Validity:
Hetero-Scedasticity Test
Is residuals are random?
Or Follow a pattern?

Results:

Mode
Dependent Variable: FIRM_VALUE
l:

Method: Least Squares


Date: 11/18/13 Time: 21:17
Sample (adjusted): 1 127
Included observations: 104 after adjustments

Debt >
Equity2 SE Debt <<
Debt
2 SE Equity >>
Equity
p Debt =
0.03
p Equity =
t 0.00
Debt
>> 2
t Equity
<<
2 >
Debt
Equity
R2 value near 1
Our Model Is
Good
Express 98% of
FV

Results:

Validatin
Dependent Variable: RESID^2
g:
Method: Least Squares
Date: 11/23/13 Time: 15:56
Sample: 1 127
Included observations: 104

No Pattern for
Residuals
All t-values
<2

All ps >>
0.05
R2 value is low
Error has no
Linear

Conclusion:
1. The findings shows that capital structure decision have
implication on the values of the firm.
2. The Debt play significant role in maximizing (FV),
while Equity have minimum contribution towards
magnifying the value of the banking firm.
3. Finding is in line with the Trade-off theory.
Therefore study recommend that management of banks as
well as regulatory institutions adopts policies that tends
towards the use of debt instruments so as to maximize the
value of the firm, thus the shareholder wealth.

Criticism:
1. The model had only two factors (debt and Equity), there
might be other factors that effect (FV), either in a
positive or negative way.
2. There were no consideration of the risk associated with
adopting policy towards debt.
3. There were no mention of developing non-linear model
that describe the (FV) against leverage in the case of
bankruptcy.

Q&A:

Thank You!
Questions?