The Drivers of Capital Structure

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UNIVERSITY OF NAIROBI

SCHOOL OF BUSINESS

COLLEGE OF HUMANITIES & SOCIAL SCIENCES

MASTERS DEGREE OF BUSINESS ADMINISTRATION

DIS 605 : FINANCIAL SEMINAR

FACILITATOR: MR NIXON OMORO

STUDENT NAME REG NO

KASEMBELI WALLACE D61/81594/2012

AGENGA BENTER ARWA D61/81595/2012

Section 1

1. Determine the drivers of capital Structure.

The primary factors that influence a company's capital-structure decision are:

Company size

Big firms are likely to be more leveraged than small firms. This is due to the huge capital assets that they posses

Management style

Management style ranges from aggressive to conservative. Conservative management is less inclined to use debts to increase profits while an aggressive management may try to grow the firm quickly using significant amount of debt toraise up the growth of the companies earnings per share.

Company's tax exposure

Debt payments are tax deductible. As such, if a company's tax rate is high, using debt as a means of financing a project is attractive because the tax deductibility of the debt payments protects some income from taxes

Growth rate

Firms that are in the growth stage of their cycle typically finance that growth through debt, borrowing money to grow faster. The conflict that arises with this method is that the revenues of growth firms are typically unstable and unproven. As such, a high debt load is usually not appropriate. More stable and mature firms typically need less debt to finance growth as its revenues are stable and proven. These firms also generate cash flow, which can be used to finance projects when they arise.

Financial flexibility

This is essentially the firm's ability to raise capital in bad times. It should come

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