Does Capital Structure of a Company Matter?

SCHOOL:                                        Lincoln International Business School

MODULE:                                      Financial Management

MODULE CODES:                      ACC2015M

LEVEL:                                            2

CO-ORDINATOR:                      Chau Le

HAND-IN DATE:                        12pm on Friday 8^th 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