Capital Structure Decisions

The present study is an attempt to find the relationship between capital structure and value of firm and to find the significance of differences in capital structures of different companies – inter and intra industry. Two hypothesis were framed and tested. bivariate correlation technique was used to find the nature of relationship between (i) capital structure and cost of capital, (ii) cost of capital and value of the firm and (iii) capital structure and value of the firm. Then, t-test was applied to test the significance of coefficient of correlation. Ftest was applied to test the significance of difference in capital structure. 30 companies listed on BSE Index were selected in the sample. The data for a 10 year period (2001-02 to 2010-11) are used. The main source of secondary data is Capitaline plus database. Seven companies have been excluded. Four of them are banks and three are excluded due to non-availability of data for the last 10 years. Primary data was collected through a questionnaire, mailed to the sample companies through post and e-mail. The questionnaires were sent to all 30 companies but since their response was poor, so the officials were contacted personally. In this manner, the data could be collected for a total 12 companies. The difference in capital structure of different companies whether they belong to the same industry group or different groups, was found to be statistically significant. This is because of the fact that qualitative values of the determinants of capital structure and their effect on value of the firm vary from company to company. Co-efficient of correlation between cost of capital and capital structure was found to be negative. The results support the view that increase in leverage decreases the cost of capital because debt is a cheaper source than equity. But the results are not statistically significant. This is because this relationship is affected by a number of factors, both quantitative and qualitative, whose effect on this relationship could not be isolated.