An Overview of Capital Structure of Engineering Industry of Bangladesh

Abstract

Analysis of capital structure gives an overall scenario of the company's strength and capacity to acquire capital for running as well as growing its business. Equity and Debt are two chief financing sources of a company. Equity can be in the form of common stock and preferred stock; and debt, primarily in the form of bonds and notes and then it can be in the form of loans and advances from financial institutions. As both these two genres have unique sets of risk and return, choice of the financing source is always a critical parameter for the financial managers of any company. This report particularly focuses on the capital structure preferences of the companies in the engineering industry of Bangladesh and also to test the influence of various independent factors in the capital structure and the conformity of these factors with the predictions drawn by capital structure theories. With this objective, the cost of debt and equity of the selected companies have been analyzed, various leverages as well as ratios were calculated and finally, the influence of different influencing independent factors on capital structure has been tested. 'fhe analyses and calculations of this report entirely depend on secondary data collected from the annual reports of the selected companies and Dhaka Stock Exchange (DSE). The capital structures were determined by calculating the debt and equity portions of total value of the firm and then the costs of these two financing sources were computed separately the summation of which resulted in the total costs of capital. The use of Degree of Operating Leverage (DOL), Degree of Financial Leverage (DFL) and Degree of Total Leverage (DTL) resulted in the calculation of the riskiness and also in the profit potential of the entire firm. Finally, the influence of the independent factors like operating leverage, growth rate, tangibility, debt service capacity on capital structure was tested and a conclusion drawn on the influence of the factors and checked those with the popular theories.