Capital Structure of Non-financial Companies in Egypt - Dissertation Example

In accurately defining capital structure there are a number of complicating issues. Some researchers have noted that the definition is somewhat controversial, leading to a diversity of opinions and factors implemented in its determination. One of the central issues in defining capital structure is that of debt ratio. In these regards, there are highly divergent forms of the debt ratio, with those relating to determining capital structure within two categories. The first such categorical distinction concerns the debt ratio as understood inclusively as total debt.

Conversely, a number of researchers have advanced a broader concept definition. For instance, Bevan and Danbolt (2002) while generally focusing on long-term debt structures, analyzed firms that implemented high percentages of short-term debt structures, and argued that these structures demonstrate minimal explanatory results. In these regards, trade credits are understood as have a major impact on variables that factor into explanations. Graham and Harvey (2001) highlighted the importance of book values as financial managers generally implemented these values in making decisions.

It’s also notable that some researchers implement both market value and book value ratios intermittently and obtain similar results in both scenarios.For firms, capital structure constitutes an overarching template to which they apply financing solutions, of which equity and leverage function to generate profits. As conditional upon a number of elements within the firm then, the capital structure would be determined. As corporations have emerged in markets throughout the world, the examination of capital structure has become a highly relevant topic for researchers.

In these regards, the prevailing topic has been determining firm financing, particularly in regards to developing markets, or markets with country-specific characteristics.  The overriding interpretations of capital structure generally attribute their establishment to developed markets and indicate that developing regions adopt this structure in their decision making. One of the seminal works in the field is that of Modigliani and Miller (1958). This work contains theories that have been foundational for individuals examining corporate financing; in addition, it was the first work that examined the optimal capital structure and proposed that the value of a firm and its investments as emanating from the capital structure was irrelevant.

The argument for the irrelevance of these factors was related to the fact that firms can issue any sorts of financing without considering business risks and outcomes, as they have an invariable weighted average cost of capital (WACC) which precludes the consequences brought on as a result of debt and equity in terms of the firm’s value. It follows that as equity is high cost, to recover the benefit of implementing a debt approach, firm managers implement inexpensive debt options; therefore, the total cost of capital remains constant (Myers, 2003).