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es statement of financial position, cash flow statement as well as statement of income of many existing and extinct companies based all over the world. Initially, a great deal of effort was made to define the independent and dependent variable required for the purpose of regression analysis. The regression analysis that has been done in this particular study is based upon gearing measures. Thus, in order to conduct this analysis, alternative definitions of gearing have been explained in the following paragraphs.
Non-equity liabilities to total assets: The book value of this gearing ratio is the ratio between the total debt plus trade credit and equivalent to total assets (equation 1). The market value of this gearing measure can be calculated by adjusting the value of the total assets, deducting the book value of equity and adding the market value of equity (equation 2). The equation can be represented as follows:
According to Rajan and Zingales (1995), the gearing measure serves as a proxy for the liquidation value of a company. The authors also argued that the value of this indicator may be significantly inflated, as it may only represent financial transactions, instead of assets.
Debt to Total Assets: This gearing measure is the ratio between the total debts to total assets (equation 3). The market value of this multiple is determined by adjusting the asset, by deducting the book value of equity and adding the market value of equity (equation 4) (Phillips, Libby and Libby, 2011; Fridson and Alvarez, 2011). The equation can be represented as follows:
Debt to Capital: This gearing measure is the ratio between the total debts to capital. The capital in the denominator represents the total debt plus the equity, which includes the preference shares as well (equation 5) (Rose and Hudgins, 2008). The market value of this gearing measure is calculated by adjusting market value of equity, instead of adjusting the book value of equity (equation 6). The equation can be
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A firm may be capitalized by several methods, which are generally divided into equity (ownership) and debt (borrowings). In conventional finance, these alternatives are generally decided upon based on considerations that are internal to the firm (dividend payout and capital costs) and external to the firm (economic, political, and regulatory considerations).
The author is reliable and presents good knowledge of the topic. Although theories are conflicting with some other research this is the good scholarly source. This source contributed more than enough in research work and target audience of the source is financial institutions, professionals, students, and stockholders.
Dozens of calls are made and hundreds of pages of financial reports are read, before the final capital structure decision is taken. It goes without saying that capital structure decisions are affected by a variety of internal, external, and other factors.
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Modigliani and Miller (1958) were the pioneers in examining the
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