Does Capital Structure of a Company Matter?

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SCHOOL:                                        Lincoln International Business School

MODULE:                                      Financial Management

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Does Capital Structure of a Company Matter?
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MODULE CODES:                      ACC2015M

LEVEL:                                            2

CO-ORDINATOR:                      Chau Le

HAND-IN DATE:                        12pm on Friday 8th January 2021

 

This assignment accounts for 30% of the total module marks.

 

Guidance:

Your assignment should:

  1. Include detailed references to a variety of literature sources;
  2. Include real-world examples supported by published reports and data you have used in your research;
  • Be submitted via Blackboard, using Turnitin.

Coursework:  Does Capital Structure of a Company Matter?

 

The Financial Times (29 January 2018) revealed some statistics about the dramatic trend of de-equitisation in European market as well as the US and emerging markets:

 

De-equitisation, the shedding by corporates of equity in favour of debt, has been the theme for the past decade as low interest rates allowed companies to borrow at costs that were previously unimaginable.

However, such explanations for de-equitisation are unsatisfying. So-called capital structure theory, known as Modigliani-Miller after the Nobel Prize-winning economists who developed it, says that, all things being equal, a company’s true value is independent of how it is financed

The cost of finance, whether in debt or equity, is neutral. That assumes the tax treatment of equity dividend payouts is the same as that of debt interest payouts and in most jurisdictions debt interest has an edge.

Nevertheless, with corporate tax rates in the US and UK cut to levels unimaginable a few decades ago, the relative benefits of debt issuance are less obvious than they once were”.

 

Required: Comment critically on the role of the financial managers in determining the suitable capital structure and relevant sources of finance of their organisations. 

 

Word count: Maximum 2,500 words

 

 

Further Information:

The relevant topic is covered briefly in Lecture 7. Students will need to do their own additional reading and research in order to achieve a good grade. Higher marks will be awarded to essays making considered use of appropriately referenced work. A good essay will (almost) certainly contain a clear description of relevant theories. A useful further consideration is the implications of the theory. Where appropriate, diagrams can be a good addition to your essay.

 

Criterion                                                                                                                  Maximum mark

Structure: ability to synthesise material

and present your ideas coherently                                                                             10%

Show understanding of theories                                                                                 30%

Use of relevant examples                                                                                                 20%

Development of ideas and evidence of wider reading                                      20%

Analysis and conclusions                                                                                                20%

 

 

 

Assessment Criteria – ACC2015 Assignment

Learning Outcome 0-29 30-39 40-49 50-59  60-69 70-79 80+
LO2

LO3

Fails to review the theories of capital structure and no attempt  made to discuss the role of financial manager  in determining sources of finance and the capital structure of a company. Demonstrates inadequate understanding of the capital structure and no attempt made to discuss the role of financial manager in determining an sources of finance and the capital structure of a company. There is only a partial explanation of the capital structure and some attempt made to explain the role of financial manager in determining sources of finance and the capital structure of a company.  There are clear description of both the theory and practice of capital structure and explain the  role of financial manager  in determining sources of finance and the capital structure of a company. Theory and practice of the capital structure have been analysed in a rational and consistent framework.  Common issues regarding the role of financial manager in determining sources of finance and the capital structure of a company are critically addressed. Theory and practice of the capital structure have been analysed in a rational and consistent framework.  Correct identification of the capital structure. A selection of issues is synthesised but with critical understanding of the role of financial manager in determining sources of finance and the capital structure of a company are addressed. A thoughtful critique of theories of capital structure. Critically and logically supported rational for the application of the theory in explaining the role of financial manager in determining source of finance and the capital structure of a company are addressed.

 

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