Documente Academic
Documente Profesional
Documente Cultură
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Of
Leoan Domingo
Gabriel Gonzales
Bea Cazharelle C. Laforteza
John Reyniell Rusiana
Uriel Shane Salvador
August 2019
CHAPTER I
INTRODUCTION
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
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
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.,
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
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
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
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
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,
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.
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 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
3. Compensation - the total cash and non-cash payments that you give to an employee
5. Equity - the net amount of funds invested in a business by its owners, plus any
retained earnings.
cash management, accounting, financial reporting and many other tasks related to the
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
and the community from which the business draws its resources.
CHAPTER II
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.
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
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
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
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
However, a study carried out by Dare & Sola (2010). on capital structure and
financing and debt-equity ratio, while a negative relationship exists within the companies
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
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
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)
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
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
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
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
Ofoegbu, 2017)
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
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
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
Sampling Design
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,
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
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
Data Gathering
knowledgeable about the topic and will be able to justify accurate information and
records. Target group specification is derived from defined research goals, specification
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
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
The records that are available in the finance department will be used to gather
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