Presented By :

Muhammad Romaan Qamar Muhammad Kumail Hassan Saquib Hassan Abubakkar Habib Amir Ali Zaidi

CAPITAL STRUCTURE AND PROFITABILITY

Mix of the long term sources of funds used by the firm. Prudent capital structure requires answer to the following questions What should be maturity composition of the firms sources of funds??? In what proportion relative to the total should the various forms of permanent financing utilized???

CAPITAL STRUCTURE AND PROFITABILITY

The objective of the capital structure is the source of the funds used by a firm in the way that will increase the companys common stock price. Capital structure management is the objective by which firm seeks the mix of funds that will minimize its cost of capital.

IMPORTANCE OF CAPITAL STRUCTURE

Makes economic sense of the firms to strive to minimize the cost of the using financial capital. Both capital costs and other costs, such as the manufacturing cost share a common characteristic in that it potentially reduces the size of the cash and dividend that could be paid to the common stock holders.

IMPORTANCE OF CAPITAL STRUCTURE

Profitability is the primary goal of all businesses. Without profitability the business will not survive in the long run. Profitability is measured with income and expenses. Profitability is measured with an income statement because income statement is measure of income and expenses during a given time period.

CAPITAL STRUCTURE DECISION MAKING:

Have direct impact on firm value and return to stakeholders. UNLEVELED and LEVELED firms. Financial managers responsibility to raise the money for the investment in real assets. Issuance of shares or take loans.

LITERATURE REVIEW

(LAURANCE

BOOTH), Portability across different countries.

(RAGHURAM G. RAJAN), Determinants of Capital structure.

(STEWART), Mix of securities and financing

(ERIK BERGLOF), Problems of financial contracting.

FRAMEWORK

Two ways of thinking about capital structure.

Static tradeoff framework Old-fashioned pecking order framework

1. 2.

DATA/TERMINOLOGIES
KSE 100 INDEX EQUITY SHORT-TERM DEBT LONG TERM DEBT PROFITIBILTY

METHODOLOGY

How the proportion of debt and equity affects the profitability ? FUNCTION:
ROE=f (STD/TL, LTD/TL, SHE/TL, LTD /SHE, U)

ROE:

The profitability ratio

STD/TL: Corresponds to short-term debt to total liability LTD/TL: Shows the ratio of Long-Term Debt to Total Liability SHE/TL: It is the ratio of Share Holders Equity to Total Liability LTD /SHE: Corresponds to the Long-Term Debt to Share Holders Equity

DESCRIPTION OF RATIOS
ROE: Reinvested earnings to generate additional earnings Company's efficiency Returns on equity that are high and growing STD/TL: Portion of short-term debt is used in total debt The value of short-term debt that a company uses

LTD/TL: Value of long-term debt out of total debt Portion of long-term debt is used SHE/TL: Equity in relation to debt Excess earning available for dividend Greater margin of safety Lower risk LTD /SHE: Long-term debt compared to its available capital Identify risk exposure

RESULTS & DISCUSSION

Sectors selected Averages and standard deviation Performance of sectors

Proportion analysis

RESULTS & DISCUSSION

Fertilizer Sector:
Index Average Standard Deviation

ROE STD/TL LTD/TL SHE/TL

0.328594 0.771944 0.228056 0.941613

0.221084239 0.221882109 0.231732808 2.008654713

LTD /SHE

0.314748

1.076046782

Index

Average

Standard Deviation

ROE

0.240611

0.252326572

STD/TL

0.950483

0.056866476

LTD/TL

0.049517

0.066776577

SHE/TL

0.644447

1.262782892

LTD /SHE

0.026318

0.11588583

Oil and Gas Marketing:

Index Average Standard Deviation

ROE

0.174301

0.07058567

STD/TL

0.856325

0.133468824

LTD/TL

0.143675

0.122458627

SHE/TL

1.971033

0.901354066

LTD /SHE

0.289004

0.265712772

Oil and Gas Exploration:

Index Average Standard Deviation

ROE

0.283569

0.14484408

STD/TL

0.906538

0.107109764

LTD/TL

0.093462

0.116129665

SHE/TL

1.411654

1.098681229

LTD /SHE

0.180385

0.24426594

Cement Sector
Index Average Standard Deviation ROE 0.012989 0.798476188

STD/TL

0.569325

0.285958503

LTD/TL

0.43402

0.275472458

SHE/TL

2.034975

5.538369892

LTD /SHE

0.374572

6.614605791

Correlation among variables:

STD/TL STD/TL SHE/TL LTD/TL LTD /SHE ROE 1 -.123 -.746 -.182 .085 SHE/TL -.123 1 .162 .233 -.855 LTD/TL LTD /SHE -.746 .162 1 .002 -.096 -.182 .233 .002 1 -.225 ROE .085 -.855 -.096 -.225 1

Negative values indicates an inverse relationship which means that two variables move in the opposite direction. Whereas, positive value shows their movement in the same direction.

Regression:
Dependence of one variable, conventionally called a dependent variable, on one or more other variables called independent variable. We are using multiple regressions Fig. Variables Entered/Removed

Model Variables Entered Variables Removed Method

LTD/SHE, LTD/TL, SHE/TL, STD/TL

Enter

Regression (cont...)
Model R R2 Adjusted R2
Std. Error of the Estimate 1 .857 .735 .729 .27269

R is a multiple correlation coefficient. The coefficient of multiple determination lies between 0 and 1 R2 shows the variability in the dependent variable due to independent variables 27% accounted as an Error term.

ANOVA:

The various sources is used for testing the hypothesis that Capital structure of firms effects its profitability.
Model Sum of Squares df Mean Square F Sig.

Regression
Residual

51.595
18.636 70.231

4
174 178

12.899
.107

120.430

.000

Total

explains the variation in dependent variable due to our chosen independent variables

CONCLUSION

used more portion of short-term debt than longterm debt. higher the portion of short-term debt in total liability higher will be the return on equity. ROE has a negative correlation with the long-term debt. least square method we used proves our hypothesis that profitability is affected by capital structure. profitability of a firm is affected 73% by a mix of capital structure and 27% by other factors.

THANKYOU