The Impact of Thin-Capitalization Rules, Research Paper Example

Introduction

This research proposal is based on the topic of business finance and the topic I have selected is ‘Capital Structure’. In this research paper I will define what capital structure is and develop a thesis statement. This research will also explain the goals and the objectives of the mentioned topic. Once the goals and objectives are established I will define the background of the problem and the solution of it. I will use scholarly resources in the form of literature review to support my thesis  statement. In the end I will also summarize the issues and will provide the conclusion/ summary of the report.

Thesis statement

To describe how the capital structure impacts the profitability of the firm?

Project objectives and goal

Goal: The objective and goal of this research is improve the profitability of the 100 manufacturing firms listed in the stock exchange with the help of changing their capital structure.

Objectives: 1) In order to enhance the profitability of the company the capital structure plays a crucial role. The objective of this report is to help 100 manufacturing firms listed in the stock exchange to enhance their profitability with the help of changing their capital structure. 2) As there exists a relation between the capital structure and profitability, altering these firms to an optimal capital structure will aid the organization to achieve its strategic goals and be profitable. 3) Thirdly, capital restructuring will help these manufacturing firms to enhance their operations. 4) The capital structure of these 100 manufacturing firms can affect their  investment decisions and its capital value.

Background of the problem

According to Danis, Daniel & Toni (2014), ‘Debt is the long term of the company’s capital structure which comprises of bonds and borrowing of fixed types.’ No matter if the financial condition of firms capital structure is in problem, the share or stake holders of the company cannot desire full and immediate reimbursement as long the interests on the debts paid by the company (Danis, Daniel, & Toni). In difference, usually bank debt is subjected to allow the loan to the lender. And from investors review, the percentage of debts is greater than the percentage of total debt. The debts which are funded gives more wiggle to the capital structure of the company.

The capital structure not changes the firm values, and if to utilize additional debts and to remove interest expenses there is a particular incentive in achieving tax savings. Other than that outside equity also play a vital role in capital structure specially in high  technology firms. It is the largest source of funding beside owner equity and outside debt (Gill, Amarjit, Nahum, & Neil). In financing outside equity is also considered as the largest source. in the sector of high tech only the score of low credit firms shows capital structure which looks same as the average firm, so important source is owner equity rather than outside debts of financing.

Literature Review

The value of the creation of shareholder in company’s capital structure is an essential in financial management. According to Robb, Alicia & David (2012), “ the business value is based on the expectation of the going concern and comprises of values at present which gives the expected cash flows in the future”. These cash flows are generated by discounted by cost of capital and assets of the company.  We can see that the weight average cost of capital has an impact on the business value directly (Zeitun, Rami & Gary). In Morellec, Erwan, Boris & Norman models (2012), they suggests that the firms value rises with the rise in leverages as the markets value is increasing. So that it shows the value of the firm is an increasing factor of leverage because in the corporate level of deductions in taxes of interests payment. Nevertheless,  considering the response to the capital structure to change the exposure in taxes of corporate (Shubita, Mohammad, & Alsawalhah).

In some of the conditions the firms value is not being affected by the capital structure. Dividing the funds of the company’s capital structure into shares which is related to dividends, debts and capitals which increase the value of the company. Buettner, Thiess & et al (2012) concluded that there exists no link between return on investment and capital structure. Ratio between price earning and capital structures are independent. He moreover emphasized that the ‘realworld’ is surprising.  Xu & Jin (2012) defined that the firm’s capital structure has direct influenced on the profitability. They advised that financial executives must emphasis on different characteristics of capitals structure. In other ways the enterprise of the capital structure will be unstable producing bad influence on the profitability.

Personal Statement

In the light of this article I surveyed the scholarly reviews which proved that capital structure has the influenced on profitability of the firms. This also analyze that firms are strongly and positively linked to profitability ratios. This research also shows the positive impact on firms capital structures. By showing aforementioned reviews of the renowned scholars with the help of different studies we get to know that the response towards capital structure also has a positive influence on firms profitability.

However, it concludes that the decisions does not agree and are vital for taking practices of the financial decisions. Utilizing above detailed measure of capital structure, the impact on profitability has no impact on debts of long term, as these debts or the total debts that effects negative impact on profitability of firms.

Work cited

Buettner, Thiess, et al. “The impact of thin-capitalization rules on the capital structure of multinational firms.” Journal of Public Economics 96.11 (2012): 930-938.

Danis, András, Daniel A. Rettl, and Toni M. Whited. “Refinancing, profitability, and capital structure.” Journal of Financial Economics 114.3 (2014): 424-443.

Gill, Amarjit, Nahum Biger, and Neil Mathur. “The effect of capital structure on profitability: Evidence from the United States.” International Journal of Management 28.4 (2011): 3.

Morellec, Erwan, Boris Nikolov, and Norman Schürhoff. “Corporate governance and capital structure dynamics.” The Journal of Finance 67.3 (2012): 803-848.

Robb, Alicia M., and David T. Robinson. “The capital structure decisions of new firms.” Review of Financial Studies (2012): hhs072.

Shubita, Mohammad Fawzi, and J. M. Alsawalhah. “The relationship between capital structure and profitability.” International Journal of Business and Social Science 3.16 (2012): 104-112.

Xu, Jin. “Profitability and capital structure: Evidence from import penetration.” Journal of Financial Economics 106.2 (2012): 427-446.

Zeitun, Rami, and Gary Gang Tian. “Capital structure and corporate performance: evidence from Jordan.” Australasian Accounting Business & Finance Journal, Forthcoming (2014).