Optimal Capital Structure – a Case Study of Three Real Estate Companies
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OPTIMAL CAPITAL STRUCTURE
– A case study of three real estate companies
ABSTRACT
Substantial parts of the literature concerning capital structure have dealt with issues regarding the leverage ratios. These leverage ratios have been analyzed in all kinds of ways, where most studies have explained observed patterns. My research will also deal with leverage ratios but in an entirely new way. My problem concerns the practical matter of deciding an appropriate capital structure and the possibility of improvements, which are formulated below.

How do the case companies decide their capital structure?
Are their current capital structures optimal or is there room for improvements?
I have studied three companies within the real estate industry due to comparable issues. My result reveals that the companies do not use any mathematical model when deciding their capital structure but they do consider many important factors. The business and financial risk have the largest impact on the decision even though there are individual variations. Tradition is another factor that seem to influence the management a lot. My improvement investigation of the three case companies reveals three different scenarios. India Bulls could really improve their capital structure by increasing the leverage level without causing financial distress. DLF had a capital structure that was optimal or at least very close to optimal.

1. INTRODUCTION
This research deals with questions concerning orporate capital structure. It examines how three real estate companies decide their capital structure in a real life context. It also examines if there is room for improvement when the companies decide upon their capital structure. Finally, it presents my conclusion based on the case studies.

1.1 BACKGROUND
Modern corporate finance theory was born with the publication of Modigliani and Millers (M&M) theoretical model about corporate capital structure in 1958. They shoid that, in a capital market free of taxes, transactions costs, and other frictions, the choice of a firms capital structure could not affect its market valuation.

Much of the capital structure theory during the past forty years has involved examining how robust the model is to more realistic assumptions regarding market frictions and the information sets available to managers and shareholders. The development of agency theory in the 1980s, coupled with detailed research into the extent and effects of bankruptcy costs during the 1980s, leads to a yet more detailed view of the utility of the basic M&M capital structure theory. Finally, cross-cultural examination of observed capital structure patterns in non-U.S. industrialized countries has led to my current mainstream view that corporations act as if there is a unique, optimal capital structure for individual firms. This results from a trade-off between the tax benefits of increasing leverage and increasing agency and bankruptcy costs that higher debt entails.

The fact that there seems to be an optimal capital structure for each individual firm is very interesting, due to the fact that a companys result to a large extent depends on what structure it has. This creates incentives for companies to revise their current capital structure.

1.2 PROBLEM DISCUSSION
Substantial parts of the literature concerning capital structure have dealt with issues regarding the leverage ratios. These leverage ratios have been analyzed in many different ways. My research problem will also deal with these ratios but in an entirely new way. I have not been able to find any material concerning how companies should decide these leverage ratios in practice, except for some theoretical models. These models are unfortunately not applicable in practice because of their inability to deal with important factors such as the firms asset structure.

It would therefore be interesting to investigate how companies determine their capital structure since the lack of literature within the area is as great as it is. Could it be the case that companies have developed their own models? Is the difference in the decision process big between companies within the same industry? Does the highest levered company have a totally different procedure from the lost levered company?

It could be suspected that there exist possibilities for companies to improve their capital structures because of the lack of theoretical guidelines. To be able to examine this kind of questions i believe that i need to investigate companies that are as comparable as possible within the same industry. I will therefore investigate a refined industry, since this approach enables a fair comparison. I have examined all industries in India and come to the conclusion that the real estate industry suits my purpose best. This is because all companies within the real estate industry experience very similar businesses, i.e. buying, selling, managing and acquiring real estate properties.

1.3 PROBLEM AND PURPOSE
My purpose is to solve the research questions stated below, which are formulated on the basis of the problem discussion. It concerns the practical matter of deciding the appropriate capital structure and the possibility of improvements.

How do the three case companies decide their capital structure?
Are their current capital structures optimal or is there room for improvements?
1.4 CONTRIBUTION
My thesis will shed new light on a specific area of capital structure, namely how companies decide their capital structures. Much work has been done in the statistical field, i.e. comparing leverage ratios through cross sectional analysis or other comparisons. Except for the inapplicable theoretical models i have not been able to find any material concerning how companies should act when determining their capital structure,. My study will complement existing studies since i are investigating important

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Optimal Capital Structure And Case Companies. (June 12, 2021). Retrieved from https://www.freeessays.education/optimal-capital-structure-and-case-companies-essay/