Research on capital structure

1. Financial leverage
INTRODUCTION:
Financial Leverage isthe extentordegree towhichthe company’stotal capital iscomposed
of Debt.You’ve probablyheardthe termbefore,leverage,butwhatexactlydoes itmean?
Anothertermisgearing.Sowhenyouuse this,youare alsodoingwhat can be called
gearing.Inessence meansusingthe resourcesthatare available tomagnifythe positive or
negative aspectinthe final productorresult.
Usuallywhenyoudothistype of dealinginbusinessorfinance,itissimilarorsynonymous
withborrowing.ThisgreatlyinvolvesROA (returnonassets) andROE(returnon equity).The
mainpointisto make ROE higherthanthe ROA.If itis not,leverage orborrowingcanbe
used.
1.2 ResearchProblem
The study of leverage effectonStockReturniscrucial to understandthe behaviorof stock&
Its Returnthat textilesectorof Pakistanexperience intheirdailyactivities.Different
companiesselectedfordetailedanalysisfor the period2008 to December2011.
1.3 Objective of Study
The objective of thisstudyistocriticallyexaminethe possible effectsthata firm’s
• To check the impactof leverage onstockreturntextilesectorof Pakistan.
• Textile Sectorshave beenselectedforthe purpose inPakistan,the analysisof leverage
effectwouldfocusonthem.The time periodisspreadover5 years(2008 to 2012).
1. LITERATURE REVIEW:
Hamada (1972) and Rubinstein(1973) demonstrate thata firm’sbetashouldincrease if the
firmfinancesmore heavilywithdebt.Thesetheoriesare extensionof the pre-CAPMworkof
Modigliani andMiller(1969),whoshow that use of debtincreasesequityreturnvariability.
In hisanalysisof marketrisk,Hamadaconcludesthat21 percentto 24 percent of a firm’s
systematicriskcouldbe explainedbythe nature of itsfinancing.Hamada(1972) and
Rubinstein(1973) demonstrate thata firm’sbetashouldincrease if the firmfinancesmore
heavilywithdebt.
2. METHODOLOGY
3.1 DATA COLLECTION:
Secondarydata forthe purpose has beencollectedfromKarachi stockexchange,Annual
reports,Finance books,Moreoversome informationwascollectedfromdifferentwebsites.
The annual data of firmsistakenfromthe variousissuesof “Balance SheetAnalysis”
published byState Bankof Pakistan
3.2 PROCEDURE:
Annual reports of selectedcorporations have beencollectedfrom the industries and retrievedthe required
information. The stockprices of four years (2008, to 2011) of selectedindustries have beengatheredfrom their
websites. The totaltime ofdata collectionwas almost three to four weeks includedonlysecondarydata.
3.4 VARIABLE
3.4.1 Dependant
The dependantvariable inthisresearchisstockreturn.
3.4.2 Independent
The independentvariable isleverage, currentratios,stockprices.

2. Financial leverage
CONCLUSION:
As the researchhasbeenconductedwe foundthatotherthenSystematicRiskthere are some factors
whichcan alsoaffectthe return.We studiedthe CAPMmodel whichhasbeencriticizedlateronbecause
of notconsideringsome othervariableswhichcanalsocontribute indeterminingthe stockreturn.
Amongthose variablesonlyleverageeffectstudiedhere.Thisresearchpaperfoundthatthere is
significantlypositiveeffectof Leverage onstockreturninHighleverage portfolioandsignificantly
negative effectinlowerleverageportfolio,we concludedsuchdifferenceswhichoccurinvarious
portfolioof Pakistani marketbecauseof inefficientmarket.
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