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HISTORICAL CASE STUDY: Evolution of the Capital Structure of San

Sebastian School, Inc. (1956-2019)

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One of the outputs submitted to


San Sebastian School
Senior High Department

Final output in Research in our Daily Life 1

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Of

Leoan Domingo
Gabriel Gonzales
Bea Cazharelle C. Laforteza
John Reyniell Rusiana
Uriel Shane Salvador

August 2019
CHAPTER I

INTRODUCTION

Background of the study

A company’s capital structure is disputably one of its most crucial decisions.

From a technical aspect, the capital structure is referred as the cautious balance

amid equity and debt that a business incurs to finance its assets, daily operations, and

future growth. From a tactical perspective however, it influences everything from the

firm’s risk identity, how easy it is to get funding, how expensive that funding is, the

return its investors and lenders expect, and its degree of insulation from both

microeconomic business decisions and macroeconomic recessions.

Classical Modigliani-Miller theorem (1958) asserts irrelevance of debt-to-equity

ratio for firm value. However, since the authors considered Arrow-Debreu environment

(complete markets, no taxes, absence of transaction and bankruptcy costs), the theory

about the debt irrelevance is hardly realistic. Later, Modigliani and Miller (1963) relaxed

a no-tax assumption and developed a theory about tax benefits of debt. That paper gave

rise to a serious academic discussion on the theory of capital structure.

By design, the capital structure reflects all of the firm’s equity and debt

obligations. It shows each type of obligation as a slice of the stack. This stack is ranked

by increasing risk, increasing cost, and decreasing priority in a liquidation event (e.g.,

bankruptcy). For large corporations, it typically consists of senior debt, subordinated

debt, hybrid securities, preferred equity, and common equity.


Every institution that is generated by the power of compensation indeed requires a

capital structure. Determining the best fit capital structure is equally relevant for small

businesses as it is for huge corporations. The ideal capital structure strikes a balance

between the risk and returns seeking to maximize the price of the stock while minimizing

the cost of capital. Capital structure cannot affect the total earnings of a firm but it can

affect the share of earnings available for equity shareholders. It minimizes the firm’s cost

of capital or cost of financing.

Capital structure plays an important role in service sector like in academic

industry. Capital structure decisions are vital as they to a large extent determine the

profits earned by a firm. Every institution that is spawned by coinage always starts with a

simple structure that will eventually turns out to be complex. This paper points out and

examine the continuous growth and changes of the capital structure of San Sebastian

School Inc. (SSS). Furthermore, this study will serve as a guide to beneficiaries in order

for them to acquire knowledge in terms of using capital structure.

Statement of the Problem

Specifically, it sought to answer the following:

1. What is the essence of having a particular capital structure in an academic

catholic institution? How it affects to the overall operations of the school?

2. How can the past capital structure of an institution differ from the present one?

3. How can the capital structure of SSS survive through the years?
Objectives of the study

To examine the history of the capital structure of San Sebastian School, Inc. is the

main objective of this study.

1. To examine the nature of the capital structure of San Sebastian School, Inc.

finance department and produce a basis for the future operations of SSS

2. To increment learning about capital structure to an institution that is generated by

the power of compensation; and

3. To utilize this study as a pattern for future analysis of capital structures

Significance of the Study

This study will be beneficial specifically to: a.) San Sebastian School, Inc. - This

study will serve as a basis for the future operations of San Sebastian School; b.) Firm,

Companies, Businesses – It helps to determine if the assets that is owned by the

organization is equal to the debt and equity of the business; c.) Accountants– It provides

additional knowledge about the nature of different capital structures to make their works

easier; and, d.) Students – this study will serve as a guide and basis for those students

who are interested in studying the nature of the capital structure of an educational

institution in the future that may benefit them and the society.

Scope and Limitation of the Study

This study will focus only on the Capital structure of San Sebastian School, Inc.

Finance; thereupon, this study was limited with the further discussion of more usage of

capital structure and more factors affecting the academic institution itself.
This study will be conducted at the San Sebastian School Inc. Finance office with

the help of Ms. Emerenciana R. Conde– a Senior Finance Manager in SSS – starting from

the month of August to October.

The available data and records are the only documents will be used by the

researcher to examine.

Definition of Terms

1. Assets - resources or things of value that are owned by a company as the result of

company transactions.

2. Capital Structure - the cautious balance amid equity and debt that a business incurs

to finance its assets, daily operations, and future growth

3. Compensation - the total cash and non-cash payments that you give to an employee

in exchange for the work they do for your business

4. Debts - an amount of money borrowed by one party from another.

5. Equity - the net amount of funds invested in a business by its owners, plus any

retained earnings.

6. Finance - the management of money and includes activities like investing,

borrowing, lending, budgeting, saving, and forecasting.

7. Finance Department- oversee incoming and outgoing payments, budget creation,

cash management, accounting, financial reporting and many other tasks related to the

finances of the organization.


8. Firm - an organization which sells or produces something or which provides a

service which people pay for.

9. Liquidation - is the process of bringing a business to an end and distributing its assets

to claimants

10. Shareholders - person, company, or institution that owns at least one share of a

company’s stock (equity)

11. SSS - San Sebastian School Inc.

12. Stakeholders- creditors, directors, employees, government, owners, suppliers, unions,

and the community from which the business draws its resources.
CHAPTER II

REVIEW OF RELATED LITERATURE

Theoretical Review

The modern theory of capital structure originated from Franco Modigliani and

Merton Miller paper of 1958 titled "The Cost of Capital, Corporation Finance, and the

Theory of Investment." Modigliani and Miller's theory argues that changes in capital

structure should not affect firm's market value or cost of capital in a perfect capital

market without taxes and transaction costs. It implies that the financial instruments.

Capital structure is encapsulated by Total Liabilities to Total Assets (TLTOTA)

and Total Equity to Total Assets (EQTOTA). The results indicate that capital structure,

represented by total liability to total assets, has a significantly positive impact on the

performance of the firm represented by Return on Equity (ROE), but not by Return on

Assets (ROA), Earnings per share (EPS), and Dividend Yield (DYIELD). The results

also indicate that lagged performance measures of ROA, ROE, EPS, and DYIELD have a

significantly positive influence on the current year’s performance measures of the firm.

Moreover, the results indicate that lagged macroeconomic variables of inflation have a

significantly negative relationship with certain performance measures (ROA, ROE, and

EPS). Furthermore, the results indicate that gross domestic product growth (GDPG) has a

significantly negative relationship with financial performance measured by EPS, but not

those measured by ROA, ROE and DYIELD. (Gharaibeh, 2015)


Previous Empirical Research

Min-Tsung (2009) studied the relative effects of debt and equity financing on the

operating performance. Results show that apart from high cash flow firm, debt finance

and debt financing have significantly negative consequence for operating performance.

It suggests a risk or danger in depending entirely on either debt or equity for raising

capital, but it is much safer and better to increase finance by both methods, with each

working together, at the same time.

Cited in the study of Capital Structure and its impact on Profitability: A Case of

Indian Hotel Industry showed that an attempt has been made to analyze the financial data

of 22 companies in hotel industry in India in order to establish the relationship between

the capital employed and profitability. The analysis is done with the help of descriptive

statistics and correlation analysis, in order to establish the association among variables. It

is observed that nearly 58% of the assets of the industry are funded by debt, indicating

that the industry is not highly geared. The correlation analysis indicates positive

relationship between debt variable and profit but slightly negative correlation among

other variables. (Rosario & Chavali, 2019)

However, a study carried out by Dare & Sola (2010). on capital structure and

corporate performance revealed that firm's performance is positively related to equity

financing and debt-equity ratio, while a negative relationship exists within the companies

and corporate performance in Nigeria petroleum. In a similar study conducted by

Babalola (2012) industry using a panel data and pooled regression found that leverage

ratio has significant positive effect on both the earning per share and dividend per share.
In both theoretical and empirical research, the correlation between capital

structure and value of a firm has generated quite a lot of arguments (Antwi, Mills &

Zhao, 2012). Contemporary theories and empirical research primarily use data from

developed western economies. Few types of research have been carried out on the

perspective of developing economies. (Chandrasekharan, 2012)

Pouraghajan & Malekian, (2012) carried out a study on capital structure

determinants of quoted firms in Nigeria using multiple regression models. The

results revealed that the cost of equity, the existence of a benefit of tax shield,

competitors capital mix, profitability and firm dividend policy positively determine the

capital structure of quoted companies in Nigeria. The implication is that the higher

the cost of capital, the existence of advantages of debt tax shield and level of

operating profits, the higher the debt/equity ratio of the firm. On the other hand, the

cost of debt, parent company influence and fear of financial distress are not

determinant of capital structure. It implies that the higher the cost of debt, increased

possibility of financial distress and heightened caution from parent company reduces

the amount of debt in firms' capital structure.

Capital Structure

Correlation and regression analysis are used to explore the relationship between

dependent variable leverage and other independent variables like tangibility, size, non-
debt tax shield, growth opportunity, profitability and business risk. It is found that

tangibility, non-debt tax shield, size and growth opportunity have significant effect of the

leverage of the capital structure of the companies. The other two variables, profitability

and business risk have insignificant effect on the capital structure of the companies.

(Shrabanti, 2014)

According to Nguyen (2014) in her research entitled “How Firm Characteristics

Affect Capital Structure: An Analysis of Finnish Technology Industry” The finding

statistically confirms the positive relationship between the firm’s size and its capital

structure. Furthermore, the negative relationships of the firm’s profitability and liquidity

with capital structure are clarified. Meanwhile, the correlations of growth rate and interest

coverage ratio with capital structure are insignificant.

Profitable firms depend more on equity as their main financing option. Yet

recommendations based on findings are offered to improve certain factors like the firm

must consider using an optimal capital structure and future research should investigate

generalizations of the findings beyond the manufacturing sectors. (Shubita et. al., 2012)

Lambert and Larcker (1986) argued that managers of firms financed mostly with

equity (where there are a large number of shareholders with very small shareholding

power) tend to have this behaviour. In this case, since it will be difficult to regroup all the

shareholders to pressure and control the management and as a result, the shareholders

prefer to sell their stocks instead of incurring agency costs to solve this problem.

On the other hand, companies with a small number of shareholders with large

shareholding can more easily regroup themselves to pressure and control the management
on how to run the firm. The study of McConnell & Muscarella (1985) showed that the

profitability of firms increase considerably when managers are given shares of the

company. This is because the managers will work in the interest of the shareholders since

the managers themselves own shares of the firm.

Shareholders will guide the management to invest in projects with higher

expected returns which entails a higher risk level so that they can get a return. It is here

that the conflict of interest arises since debt holders will impose certain restrictions so

that the firm can repay their debt obligations by preventing them from making risky

investments (Florackis, 2008). Hence, there are the managers, shareholders and debt-

holders try to impose different strategies this might render the governance structure of the

firm becomes constrained. It can be argued that if debt-holders exercise too much

pressure on the management of the firm, this can lead to a drop in performance since the

debt-holders will prefer that the firms invest in less risky projects to meet 5 the debt

obligations and prevent the firms to invest in projects that can ensure long term return

and comprising of a higher level of risk.

Capital Structure of showed a positive and significant effect on financial

performance proxies by Earnings Per Share, Return on Capital Employed, Return on

Equity but its impact on Return on Assets is insignificant. The result of our study

portrays that capital structure of the Construction and Real Estate Sector firms listed on

the Nigerian stock Exchange has a significant impact on firms’ financial

performance based on the following performance proxies (Earnings per Share,

Return on Capital Employed, Return on Equity) but does not significantly

influence return on assets. It also provides additional study evidence on capital


structure and performance of Nigerian construction and real estate sector. (Rufus &

Ofoegbu, 2017)

Therefore, firm's performance is absolutely associated to equity financing and

debt-equity ratio. The higher the complexity of the cost of capital, the existence of

advantages of debt tax shield and level of operating profits, the higher the debt/equity

ratio of the firm. On the other hand, the cost of debt, parent company influence and

fear of financial distress are not determinant of capital structure. It implies that the

higher the cost of debt, increased possibility of financial distress and heightened caution

from parent company reduces the amount of debt in firms' capital structure.

The positive relationship between the firm’s size and its capital structure.

Moreover, the negative relationships of the firm’s profitability and liquidity with capital

structure are elucidated. Meanwhile, the correlations of growth rate and interest coverage

ratio with capital structure are irrelevant.


CHAPTER III

METHODOLOGY

Sources of Data

A. The Respondents

This study aims to gather data from the head treasurer of the Finance Department

in San Sebastian School, Inc. The senior treasurer is the only personnel who can

provide truthful information about the history of the capital structure of San Sebastian

School, Inc. from 1965 up to 2019. The head of the Finance Department is the sole

person who can clench and access records from all transactions involving San

Sebastian School, Inc.

B. Sample Data

Since the researchers will conduct a study about capital structure, they will

analyze the data and the records of transactions that implicate money to know if there

is a progress among the previous and current capital structure of San Sebastian

School, Inc. These data will help in the evaluation of development of the educational

institution and conserves the history of the organization itself.

Sampling Design

A purposive sample is a non-probability sample that is designated based on

characteristics of a population and the objective of the study. The researchers will use purposive

sampling; this study has a definite purpose and targeted respondents. This study aims to enquiry
the person, who is senior and knowledgeable about the growth of the capital structure and its

overall operations, specifically the head of finance department of San Sebastian School, Inc.

Ethical Considerations

The San Sebastian School, Inc. is generated by the power of compensation. It is a private

matter that is not shared to anyone to protect the firm’s reputation, avoid deception, and the risk

of mugging. San Sebastian School, Inc. archives data, such as personnel files, customer data,

financial transactions that are confidential. Researchers will keep the institution’s information,

records, and data with utmost privacy and confidentiality.

The Instruments

The researchers will use data and records that are explicitly found in the Finance

Department of San Sebastian School, Inc. to gather all the evidence that will serve as proof and

bases; this includes the data and records in accordance with the money state of the school. A

one-on-one interview will be conducted that is composed of an open questions under a

questionnaire with regards to the research’s statement of the problem. Open-ended questions are

free-form survey questions that allow a respondent to answer in open text format such that they

can answer based on their complete knowledge and understanding. The response to these

questions is not limited to a set of options.


Data Gathering Procedure

The study followed this step by step procedure as shown in figure 1.

Finding suitable respondents

Asking for the consent of the respondents

Data Gathering

Interview Data, Records, Transactions

Figure 1. Data Gathering Procedure

Finding suitable respondents


Researchers need to find the respondent who is appropriate whereas this person is

knowledgeable about the topic and will be able to justify accurate information and

records. Target group specification is derived from defined research goals, specification

of the needs to interview according to whose responses most interest us.

Asking for the consent of the respondents


Making consent from the respondent and informed consent form is a must thing to

do such as it will serve as a proof whereas the respondent officially approved to

participate on their research with regards to their topic. Indicated in these papers are the

benefits that may be achieved through the voluntary participation and if there is a
possibility of harm, it needs to be described so that the participant can make an informed

decision to continue or not.

Data Gathering

A. Interview

The researchers will conduct an interview with the head of finance department

that is composed of the open ended questions about the institution’s capital structure with

regards to the research problems.

B. Data and Records of Transactions

The records that are available in the finance department will be used to gather

information about the educational organization’s transactions involving money. These

data will serve as a proof for the continuous growth of the school’s operations.

Research Design

The researchers will find suitable respondents that they can interview to gather

appropriate information. Then, making of the consent from the respondent and informed consent

form is a must. After these consents have been processed, they will interview their targeted

respondent using an open-ended questionnaire and scan through the records to acquire their

needed informations in accordance to the research problem. The information that is assimilated

will be kept private and confidential.

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