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Data Analysis

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Data Analysis

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Capital Structure: capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this example is referred to as the firm's leverage. In reality, capital structure may be highly complex and include dozens of sources. Gearing Ratio is the proportion of the capital employed of the firm which come from outside of the business finance, e.g. by taking a short term loan etc. In our observation sample consisting of 28 companies we have tested the effect of asset structure and we have determined the asset structure based on the portion of total asset financed by companies fixed asset. To find out the linearity we have run the linier regression test and the result shows the following evidences

Variables Entered/Removedb Model Variables Entered Variables Removed Method 1 Asset Structurea . Enter a. All requested variables entered. b. Dependent Variable: Debt Ratio

a

R Square Adjusted R Square Std. Error of the Estimate R Square Change F Change df1 df2 Sig. F Change .003 -.035 .23876 .003 .089 1 26 .768

PAGE | 1

ANOVAb Model 1 Regression Residual Total Sum of Squares df Mean Square F .005 1 1.482 26 1.487 27 Sig. .005 .089 .004a .057

Coefficientsa Unstandardized Coefficients Standardized Coefficients Model 1 (Constant) Asset Structure B .666 -.066 Std. Error .127 .221 Beta t Sig. Collinearity Statistics Tolerance VIF

Decision:

From

the

ANOVA

and

Coefficient table we can see that the Beta has been determined at negative 0.58 which implies that Asset Structure negatively affects the capital structure meaning with larger portion of assets being financed by fixed assets reduces debt ratio which means theres a higher requirement for equity financing if the asset structure is highly financed by fixed assets. So, we cannot now reject the null hypothesis. However, before accepting the null, the statistical significance is needed to be checked before reaching any conclusion. The decision rule is to have the calculated p value should be less than the critical p value which is equal to 0.05 since the confidence interval is 95%. Based on the results, Calc-P=0.004 < Critical P=0.05 So, we should not reject the null hypothesis that Capital structure is not influenced by the Asset

Structure.

PAGE | 2

Hypothesis 2: H0= Capital structure is not influenced by the Sales Growth; 2< or =0 H1= Capital structure is influenced by the Sales Growth 2>0

Sales Growth: Sales growth is a major factor to consider for any company. Sales growth is a very efficient measure to justify companys financial health. Any sort of positive growth implies that a company is growing compared to the previous year. However, sometime there are some factors which are required to consider such as political instability which might cause a slowdown in sales might not necessarily mean a company is doing bad. To find out the sales growth the latest sales figure is divided by the previous years sales and then the rate of change is calculated. To find out the linearity between sales growth and capital structure we have run the linier regression test and the result shows the following evidences.

b

Variables Entered/Removed

a

. Enter

Model Summary

a

Square .006

PAGE | 3

Sig.

a

a

Unstandardized Coefficients Standardized Coefficients Model 1 (Constant) Sales Growth B .624 .019 Std. Error .048 .049 .078 Beta t Sig. 12.972 .000 .399 .693

1.000

1.000

Decision: From the ANOVA and Coefficient table we can see that the Beta has been determined at 0.078 which implies that sales growth positively affects the capital structure meaning with larger sales growth leaves a positive impact on debt ratio which means theres a higher requirement for debt financing if the firm undergoes a boost in revenue generation. So, we can now reject the null hypothesis. However, the statistical significance is needed to be checked before reaching any conclusion. The decision rule is to have the calculated p value should be higher than the critical p value which is equal to 0.05 since the confidence interval is 95%. Based on the results, Calc-P=0.693 > Critical P=0.05 So, we should reject the null hypothesis that Capital structure is not influenced by the sales growth. However, at any case any p-value greater than 10% automatically invalids the test and thus this hypothesis cannot be rejected or accepted and the result is invalidated thereby.

PAGE | 4

Hypothesis 3: H0= Capital structure is not influenced by the Asset Growth; 3< or =0 H1= Capital structure is influenced by the Asset Growth 3>0

Asset Growth: Asset growth shows the % change in a companys total asset. A company sometimes goes for capital expenditure to increase the revenue base or to achieve a higher profit growth. Alternatively, a companys total asset might also go up if huge amounts of inventory piles up within their stock. An asset growth is a very important measure in determining the capital structure of a company. If a company goes for expansion they sometime raise fund through debt financing or equity financing. Thus studying the relationship between asset growth and capital composition is expected to be very interesting from the perspective of finance.

Variables Entered/Removed

a

. Enter

Model Summary

a

Square .089

PAGE | 5

ANOVA Model 1 Regression Residual Total Sum of Squares df .132 1 1.355 26 1.487 27

F 2.529

Sig. .047

a

a

Unstandardized Coefficients Standardized Coefficients Model 1 (Constant) Asset Growth B .666 -.172 Std. Error .048 .108 Beta t Sig. 13.743 .000 -.298 -1.590 .047

1.000

1.000

Decision: From the ANOVA and Coefficient table we can see that the Beta has been determined at negative 0.298 which implies that Asset growth negatively affects the capital structure meaning with larger asset growth leaves a negative impact on debt ratio which means theres a higher requirement for equity financing if the firm undergoes a capital expenditure. So, we can thus accept the null hypothesis. However, the statistical significance is needed to be checked before reaching any conclusion. The decision rule is to have the calculated p value should be higher than the critical p value which is equal to 0.05 since the confidence interval is 95%. Based on the results, Calc-P=0.047 < Critical P=0.05 So, we should accept the null hypothesis that Capital structure is not influenced by the asset growth.

PAGE | 6

Hypothesis 4: H0= Capital structure is not influenced by the ROA; 4< or =0 H1= Capital structure is influenced by the ROA; 4>0

Return on Asset: The return on assets (ROA) percentage shows how profitable a company's assets are in generating revenue. This number tells you what the company can do with what it has, i.e. how many dollars of earnings they derive from each dollar of assets they control. It's a useful number for comparing competing companies in the same industry. Return on assets gives an indication of the capital intensity of the company, which will depend on the industry; companies that require large initial investments will generally have lower return on assets.

a

Removed

Method . Enter

Model Summary

a

Square .151

PAGE | 7

ANOVA Model 1 Regression Residual Total Sum of Squares df .224 1 1.263 26 1.487 27

F 4.610

Sig. .041

a

a

Unstandardized Coefficients Standardized Coefficients Model 1 (Constant) Return on Asset B .705 -1.748 Std. Error .054 .814 Beta t Sig.

Decision: From the ANOVA and Coefficient table we can see that the Beta has been determined at negative 0.388 which implies that ROA negatively affects the capital structure meaning with larger return on asset growth leaves a negative impact on debt ratio which means that firm with larger ROA relies less on debt financing and relies more on equity financing. So, we can thus accept the null hypothesis. However, the statistical significance is needed to be checked before reaching any conclusion. The decision rule is to have the calculated p value should be higher than the critical p value which is equal to 0.05 since the confidence interval is 95%. Based on the results, Calc-P=0.041 < Critical P=0.05 So, we should accept the null hypothesis that Capital structure is not influenced by the ROA.

PAGE | 8

Hypothesis 5: H0= Capital structure is not influenced by the ROA; 5< or =0 H1= Capital structure is influenced by the ROA; 5>0 Profit Margin: Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue. It is difficult to accurately compare the net profit ratio for different entities. Individual businesses' operating and financing arrangements vary so much that different entities are bound to have different levels of expenditure, so that comparison of one with another can have little meaning. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss, or a negative margin.

Variables Entered/Removed Variables Model 1 Variables Entered Profit Margin

a b

Removed

Method . Enter

Model Summary

a

Square .274

PAGE | 9

ANOVA Model 1 Regression Residual Total Sum of Squares .407 1.080 1.487 df 1 25 26

Mean Square

Sig.

a

a

Unstandardized Coefficients Standardized Coefficients Model 1 (Constant) Profit Margin B .739 -1.485 Std. Error .053 .483 Beta t

Decision: From the ANOVA and Coefficient table we can see that the Beta has been determined at negative 0.523 which implies that profit margin negatively affects the capital structure meaning with profit margin leaves a negative impact on debt ratio which means that firm with larger profit margin relies less on debt financing and relies more on equity financing. So, we can thus accept the null hypothesis. However, the statistical significance is needed to be checked before reaching any conclusion. The decision rule is to have the calculated p value should be higher than the critical p value which is equal to 0.05 since the confidence interval is 95%. Based on the results, Calc-P=0.005 < Critical P=0.05 So, we should accept the null hypothesis that Capital structure is not influenced by the profit margin.

PAGE | 10

Hypothesis 6: H0= Capital structure is not influenced by the Tobins Q; 6< or =0 H1= Capital structure is influenced by the Tobins Q; 6>0 Tobins Q: Tobins Q is the ratio between the market value and replacement value of the same physical asset. If the market value reflected solely the recorded assets of a company, Tobin's q would be 1.0. If Tobin's q is greater than 1.0, then the market value is greater than the value of the company's recorded assets. This suggests that the market value reflects some unmeasured or unrecorded assets of the company. High Tobin's q values encourage companies to invest more in capital because they are "worth" more than the price they paid for them.

Variables Entered/Removed

a

. Enter

Model Summary

a

Square .034

PAGE | 11

ANOVA Model 1 Regression Residual Total a. Predictors: (Constant), Tobin's Q b. Dependent Variable: Debt Ratio Sum of Squares .050 1.437 1.487 df

F .911

Sig. .090

a

Coefficients

Unstandardized Coefficients Standardized Coefficients Model 1 (Constant) Tobin's Q B .544 .059 Std. Error .101 .062 Beta t Sig.

Decision:

From

the

ANOVA

and

Coefficient table we can see that the Beta has been determined at 0.184 which implies that Tobins Q positively affects the capital structure meaning higher measure of Tobins Q leaves a positive impact on debt ratio which means that firm with TQ relies more on debt financing and relies less on equity financing. So, we can thus reject the null hypothesis. However, the statistical significance is needed to be checked before reaching any conclusion. The decision rule is to have the calculated p value should be higher than the critical p value which is equal to 0.05 since the confidence interval is 95%. Based on the results, Calc-P=0.090 > Critical P=0.05 So, we should reject the null hypothesis that Capital structure is not influenced by the Tobins Q.

PAGE | 12

Hypothesis 7: H0= Capital structure is not influenced by the Company Size; 6< or =0 H1= Capital structure is influenced by the Company Size; 6>0 Company Size: Company size basically means the size of total asset held by a company. The size of the asset base is a very important measure in determining the companys value. Often the market capitalization is highly correlated with a firms asset value. If a company holds more assets it has a larger number of shares outstanding in the capital market and vice versa. To bring the asset size into a calculable figure the log of total assets have been undertaken instead total asset.

a

Removed

Method . Enter

Model Summary

a

Square .142

PAGE | 13

ANOVA Model 1 Regression Residual Total Sum of Squares df .211 1 1.276 26 1.487 27

F 4.300

Sig. .048

a

a

Unstandardized Coefficients Standardized Coefficients Model 1 (Constant) Company Size B 1.037 -.129 Std. Error .200 .062 Beta t Sig.

Decision: From the ANOVA and Coefficient table we can see that the Beta has been determined at negative 0.33 which implies that Company Size negatively affects the capital structure meaning higher measure of Companys size leaves a negative impact on debt ratio which means that firm with larger size relies less on debt financing and relies more on equity financing. So, we can thus accept the null hypothesis. However, the statistical significance is needed to be checked before reaching any conclusion. The decision rule is to have the calculated p value should be higher than the critical p value which is equal to 0.05 since the confidence interval is 95%. Based on the results, Calc-P=0.045 < Critical P=0.05 So, we should accept the null hypothesis that Capital structure is not influenced by the profit margin.

PAGE | 14

H0: Capital Structure is not a function of Assets Structure, Sales Growth, Asset Growth, ROA, Profitability, Tobins Q and Company Size. H1: Capital Structure is a function of Assets Structure, Sales Growth, Asset Growth, ROA, Profitability, Tobins Q and Company Size. On the previous test we have found out that on individual linearity testing only Tobins Q has been found to leave any impact on the capital structure of the given companies. However, in reality all the variable works at the same time which is why a test of multiple linearity is also required to see whether they collectively leave any impact on the capital structure or not.

Variables Entered/Removed Variables Model 1 Variables Entered Company Size, Tobin's Q, Asset Growth, Sales Growth, Asset Structure, Profit Margin, Return on Asset

a

Removed

Method . Enter

Model Summary

a

R Square .586

Square .434

.17999

a. Predictors: (Constant), Company Size, Tobin's Q, Asset Growth, Sales Growth, Asset Structure, Profit Margin, Return on Asset b. Dependent Variable: Debt Ratio

PAGE | 15

ANOVA Model 1 Regression Residual Total Sum of Squares .872 .616 1.487 df

F 3.843

Sig. .095

a

a. Predictors: (Constant), Company Size, Tobin's Q, Asset Growth, Sales Growth, Asset Structure, Profit Margin, Return on Asset b. Dependent Variable: Debt Ratio

r Unstandardized Coefficients Model 1 (Constant) Asset Structure Sales Growth Asset Growth Return on Asset Profit Margin Tobin's Q Company Size B .474 .207 .035 -.130 -4.280 .211 .250 -.036 Std. Error .286 .196 .040 .092 2.359 1.169 .087 .069 .175 .137 Standardized Coefficients Beta t 1.657 1.054 .882 Sig. .114 .305 .389 .171 .085 .859 .010 .606 .791 .898 .873 .086 .128 .338 .694 1.265 1.113 1.145 11.655 7.788 2.955 1.441 Collinearity Statistics Tolerance VIF

-.224 -1.421 -.914 -1.814 .074 .727 -.093 .180 2.865 -.524

a

Variance Proportions Return Condition Asset Sales Asset on Model Dimension Eigenvalue Index (Constant) Structure Growth Growth Asset 1 1 2 3 4 5 6 7 8 5.409 .860 .790 .647 .196 .059 .030 .009 1.000 2.508 2.617 2.891 5.253 9.537 13.540 24.804 .00 .00 .00 .00 .00 .02 .01 .96 .00 .00 .00 .02 .13 .69 .06 .10 .01 .39 .46 .01 .09 .01 .03 .00 .01 .27 .36 .19 .04 .07 .07 .00 .00 .01 .00 .01 .01 .01 .67 .29 Profit Margin .00 .01 .00 .03 .05 .02 .81 .08 Tobin's Company Q Size .00 .00 .00 .00 .17 .09 .26 .47 .00 .00 .00 .00 .00 .15 .07 .78

PAGE | 16

Residuals Statistics Minimum Predicted Value Residual Std. Predicted Value Std. Residual a. Dependent Variable: Debt Ratio .2401 -.31570 -2.136 -1.754 Maximum 1.0639

Mean .6311

N 27 27 27 27

To find out the impact of these variables collectively on the capital structures we have conducted the multiple liner regression test. We have found out that the significance level was calculated at 0.095 which means Calculated P=0.95> Critical P=0.05 So, at 5% significance level we can reject the null hypothesis that Capital Structure is not a function of Assets Structure, Sales Growth, Asset Growth, ROA, Profitability, Tobins Q and Company Size. Therefore we can conclude saying, Capital Structure is a function of Assets Structure, Sales Growth, Asset Growth, ROA, Profitability, Tobins Q and Company Size

PAGE | 17

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