Capital Structure Pre and Post Global Financial Crisis Dissertation

Capital Structure Pre and Post Global Financial Crisis - Dissertation Example When debt financing is concerned, it includes borrowing from the banks, financial leasing, and bond issuing in the bond market. Equity financing mainly constitutes the retained earnings and issuing of additional shares in the stock market. Capital structure has its own importance in a company. There are primary two reasons supporting this fact. Firstly, debt and equity having differences in the costs, in the interest rates, and the required rates of return, there arises a need have an appropriate combination of debt and equity that can maximize the value of the firm by reducing the total cost of the company. This is achievable through the capital structure of the company (Broyles, 2003, pp.303-304). Secondly the knowledge and understanding of capital structure proves important since the borrowing of capital has an influence on the financial risk of the firm. The volatility of the net income or earnings per share of a company increases with the interest payments that represent additio nal fixed expenses for the company. This in turn increases the payment of interests on the issuing of bonds. The cost of equity capital also increases in the stock market as a result of borrowing. All these factors might eventually lead a company to financial distress or risk that leads to the increasing need for an appropriate capital structure (Broyles, 2003, p.304). ... primary aim of the study is to evaluate the capital structure of firms in the UK before the global economic crisis in the years around 2007 and after the financial crisis in the years 2011 or 2012. In order to achieve the above mentioned aim of the study, the following objectives have been considered: Review theories on capital structure in order to determine how it might change during a period of prolonged recession and liquidity crisis. Compare and contrast the capital structure of public UK companies in 2007 and in 2011/2012. Evaluate the extent to which any changes in capital structure are due to the ongoing global crisis. Capital Structure: An Understanding towards the Effect of Economic Crisis: There are four basic theories related to capital structure of a firm. These are: Net Income Theory of Capital Structure: This theory stresses on a firm’s ability to choose a capital structure where the level of share capital or equity is less than the debt of the firm. This helps a firm to increase its market value and thus decrease the weighted average cost of capital of the company. If the content of the debt in the capital structure mix is high, it is referred as financial leverage increasing which increases the value of the firm (Theories of Capital Structure, 2010). Thus it can be understood that when there is an economic crisis prevailing in a country, the availability of the debt reduces that affects the ration of the debt to equity and hence the capital structure of a firm would alter as a result. Net Operating income  Theory of Capital Structure: According to this theory, the concept of increasing financial leverage does not exist. It believes that changing the capital structure of a firm does not bring any change in the overall financial cost and value of the