The Drivers of Capital Structure
UNIVERSITY OF NAIROBI
SCHOOL OF BUSINESS
COLLEGE OF HUMANITIES & SOCIAL SCIENCES
MASTERS DEGREE OF BUSINESS ADMINISTRATION
DIS 605 : FINANCIAL SEMINAR
FACILITATOR: MR NIXON OMORO
STUDENT NAME REG NO
KASEMBELI WALLACE D61/81594/2012
AGENGA BENTER ARWA D61/81595/2012
Section 1
1. Determine the drivers of capital Structure.
The primary factors that influence a company's capital-structure decision are:
Company size
Big firms are likely to be more leveraged than small firms. This is due to the huge capital assets that they posses
Management style
Management style ranges from aggressive to conservative. Conservative management is less inclined to use debts to increase profits while an aggressive management may try to grow the firm quickly using significant amount of debt toraise up the growth of the companies earnings per share.
Company's tax exposure
Debt payments are tax deductible. As such, if a company's tax rate is high, using debt as a means of financing a project is attractive because the tax deductibility of the debt payments protects some income from taxes
Growth rate
Firms that are in the growth stage of their cycle typically finance that growth through debt, borrowing money to grow faster. The conflict that arises with this method is that the revenues of growth firms are typically unstable and unproven. As such, a high debt load is usually not appropriate. More stable and mature firms typically need less debt to finance growth as its revenues are stable and proven. These firms also generate cash flow, which can be used to finance projects when they arise.
Financial flexibility
This is essentially the firm's ability to raise capital in bad times. It should come
SCHOOL OF BUSINESS
COLLEGE OF HUMANITIES & SOCIAL SCIENCES
MASTERS DEGREE OF BUSINESS ADMINISTRATION
DIS 605 : FINANCIAL SEMINAR
FACILITATOR: MR NIXON OMORO
STUDENT NAME REG NO
KASEMBELI WALLACE D61/81594/2012
AGENGA BENTER ARWA D61/81595/2012
Section 1
1. Determine the drivers of capital Structure.
The primary factors that influence a company's capital-structure decision are:
Company size
Big firms are likely to be more leveraged than small firms. This is due to the huge capital assets that they posses
Management style
Management style ranges from aggressive to conservative. Conservative management is less inclined to use debts to increase profits while an aggressive management may try to grow the firm quickly using significant amount of debt toraise up the growth of the companies earnings per share.
Company's tax exposure
Debt payments are tax deductible. As such, if a company's tax rate is high, using debt as a means of financing a project is attractive because the tax deductibility of the debt payments protects some income from taxes
Growth rate
Firms that are in the growth stage of their cycle typically finance that growth through debt, borrowing money to grow faster. The conflict that arises with this method is that the revenues of growth firms are typically unstable and unproven. As such, a high debt load is usually not appropriate. More stable and mature firms typically need less debt to finance growth as its revenues are stable and proven. These firms also generate cash flow, which can be used to finance projects when they arise.
Financial flexibility
This is essentially the firm's ability to raise capital in bad times. It should come