Significance of the study
Definition of Key Term:
Data and Methodology
Definition of Variable
Dependent and Independent Variables
Assumption of Regression
RESULT AND ANALYSIS
Plot and Histogram Graph
Riddance Variable Test
Proof of Assumption for Regression
Linear Regression Model
CONCLUSION AND RECOMDENATION
This research/study has been conducted on the capital structure of the cement industry Pakistan taking the sample of 11 companies out of the population of 24 companies registered on the Karachi stock exchange of the period 2001 to 2015. This study used the least square method to find out the relationship of dependent and independent variables. It has taken leverage as a dependent variable and firm size, growth, liquidity, tangibility, non debt tax shield, and profitability as a independent variables, while the 3 independent variables have not supported the assumption (riddance test) of linear regression model, which is profitability liquidity and growth, thus its carry out the research on the remaining 4 variables which is dependent variable leverage and independent variables non debt tax shield, tangibility and firm size. The outcome of the research is demonstrated after analyzing that there is negative relationship in between the firm size and Non debt tax shield with leverage, while there is positive relationship in between the tangibility and leverage. So after analyzing it has been determined the main determinates of capital structure of the cement industry is tangibility of asset.
I would like to dedicate this thesis to our beloved parents who have been great sources of inspirations throughout our lives and they have provided a lot of moral support to us and enable us to become what we are today. I would also like to dedicate this thesis to our honorable teachers who gave us precious knowledge.
After acknowledging the blessing of my Allah helping us in our efforts, I would like to thank all the other helping hands who were with us in making this report a possibility. I would like to thank my supervisor Sir Nosherwan Khan, for his consistence, advice and support given during the writing up for this thesis, for giving us the opportunity to carry out this knowledge full study. His patience and constant feedback have been inspirational in finalizing. Without his encouragement and continuous support this study would have been a cropper. I would also thankful to my class fellow friend Muhabat Ali for their supports, guidance in completion of my thesis
CHAPTER I INTRODUCTION
The origin of the cement industry/trade in Pakistan is goes behind the independence of Pakistan; there were just 4 cement corporations after the independence of Pakistan. At that time the production/output of the cement industries was less than the half of the million tones capacity per annum, so it was great difference/gaps in the demand and supply of the cement in Pakistan. For fulfilling this difference/gap in the demand and supply it was required to import cement from abroad, when the cement industry private in 1991- 1992, then the production/output of the cement increased with the time period, and these production becomes surplus in 1997, which was efficient for accomplishing the demand of local needs as well as Pakistan started the exporting to abroad/foreign.
There are four (4) main kinds of cements is produced throughout the year, which is (1).ordinary Portland cement, (2) Portland B.F slag cement,(3).Sulphate resisting cement and 4) white cement, while in the Pakistan Portland cement is primary produced with the enormous quantity of tons annually.
At the present total listed operational Companies of cement industries on Karachi stock exchange are 24, which is in the operational. The currently production of listed cement industries according to their capacity is 74%, which is approximately45 million tones around yearly. In the 2013 the production of the cement industries was 33 million tones, while the domestic sale was 25 million tones.
The part/role of cement industry in the Pakistan development is very constructive. It contributes of 3 percent employment/jobs opportunities in the field of engineering, technical, labors and from other field to the Pakistani citizens either skilled or not. The cement industries are also contributes of 30 Billion Rupees to the Pakistan revenue in the form of tax, import etc. (ALI*, March,2015).
The Capital Structure is the combination of debt, equity and the retained earnings. Debt means that firm uses debt source of generating the funds in the form of debt, debenture, bond from the banks/financial institutes on interest basis, while the Equity/share source means that the firms using share source for generating the fund from general public/institutes in the form of common share and preference share. The share is basically ownership certificate of the firm, which is the firm inviting the general public to purchase them, and the firms pays dividend as a reward to the shareholder regularly. The Retained earning also might be used as a source of generating fund, which is the internal source financing of the company, while other sources are external. The firms retained some fund from their profit for their upcoming situation such like expansion of business/projects etc, so the firm can use this source also for financing which is very cheap as compared to other.
The ideal capital structure is very essential/necessary for the cement industry of Pakistan. Every firms/organizations do not use identical/unique capital structure ratio, because the decision criteria against the capital structure are varying from firm to firm, therefore it is very difficult task for the management/administrative of the firms/companies to took decision regarding the investment configuration/capital structure, because the main aims of ideal capital structure is to minimizing/decreasing the chances of loss (risk) and the cost of capital, and increasing the revenue /profits and the worth of capital/investment of the investor.
In the capital structure trade off is consisted in between/amongst the risk and return. There is a general opinion that when the debt/liability source is increase in the firm then the chances of loss/risk factor increase/creates, which raises the cost of Capital and the share prices are goes down. Then immediately the investor/stockholder shows/takes interest in the share investment for the gaining of highly cost of capital and they are ready to takes risk of their investment. So indirectly the prices/value of the share/equity rises/increases and the debt goes down. The ideal/optimum investment configuration (capital structure) are at those point where equilibrium is consist in between/amongst the risk and return for gaining/achieving the overall objective of the firms.
Whenever the cement or any other industry taking any effective decision about their investment/expansion of business, then the management of the firm keeps in mind about their capital structure, in the earlier periods the cement industries have an optimistic/positive net cash flow as compared to currently. The cement industries have faces a lot of challenges such like the huge cost of capital, bankruptcy, failure in maintaining the ideal capital structure, cost of producing cement which is very costly/expensive, owed to the enormous cost of transportation, fuel etc. So the removal of these problems, it is needed of the best expertise of finance which has a specific knowledge and skills about the investment configuration/capital structure.
In Pakistan generally industries does not follow the ideal capital structure. So the companies can create/produce optimal/ideal capital structure when their financial exports have best knowledge of determinants of capital structure. The main aim of the research is to examine the all those elements which are affecting the capital structure of the cement industry. This study will give knowledge, information and awareness to all those people whose are interested in finance and capital structure such like investor, manager, financial exports businessman etc.
1) The main aims of this study are to examine the key determinants/elements which are disturbing/influencing the capital structure decision of the cement industries.
2) This study also tries to find out the main determinants of capital structure which is positive influence the capital structure of the cement industry.
3) This study recommended to the investor and financial exports to provide guidance about the all those determinants of capital structure of the cement industry of Pakistan, which are effecting capital structure decision, and its need attention during taking decision of capital structure.
4) This study will give knowledge, information and awareness to all those people whose are interested in finance and capital structure such like investor, manager, financial exports businessman etc.
- What are the main determinants of capital structure of cement industry
- To what extent Leverage, profitability, tangibility, firm size, Growth , Non Debt Tax Shield and liquidity affect the capital structure decisions of the listed companies in cement sector of Pakistan?
Significance of the study
This study will attempt to analyze the determinants of capital structure in a systemic manner and will provide practical and applicable guideline for anyone who wants to have insight of the topic. Research will introduce the main determinants of capital structure and their influencing factors. In general, it will cover each and every aspect of the subject but specifically it is related to capital structure of cement sector firms listed in Karachi stock exchange and their financing decision making. It will explore a variety of factors that influence the determinants of capital structure and manipulate the financial decision taken by the manager as well the success or the failure to these decisions.
Definition of Key Term:
Capital structure: The Capital Structure is the combination of debt, equity and the retained earnings
Debt: means that firm uses debt source of generating the funds in the form of debt, debenture, bond from the banks/financial institutes on interest basis
Equity: Equity/share source means that the firms using share source for generating the fund from general public/institutes. The share is basically ownership certificate of the firm, which is the firm inviting the general public to purchase them, and the firms pays dividend as a reward to the shareholder regularly.
Retained Earnings: Retained earnings is the internal source financing of the company, while other sources are external, the firms retained some fund from their profit for their upcoming situation such like expansion of business/projects etc, so the firm can use this source also for financing which is very cheap as compared to other.
Leverage: Financial leverage can be appropriately defined as the degree to which a firm is using the borrowed cash from debt and equity.
Firm Size: Firm Size means that what is the worth of firm in the form of their sale, profit and magnitude wise. It can measure through log of total asset or net sale.
Non Debt Tax Shield: Non-debt tax shield is used as a proxy of debt for taking the advantage of tax deduction. It is calculated through the depreciation divided by total asset.
Growth: Growth shows the increasing of firm in size it may be with respect to sale, profit and asset. It measure the gaps of last year with respect to current year either the firm size increases or decreases.
Liquidity: Liquidity mean how the corporation capability to pay their current liabilities over from their current Asset.
Tangibility of Asset: Tangibility of Asset means that all those firms which has huge fixed asset are taking debt from financial institutes at a lesser rate as compared to the other firms, because the firms guaranteeing/surety the financial institution of their fixed asset as keeping as a security for their obtaining debt
Profitability: Profitability means the profit generated in the year over the using of total asset
CHAPTER II LITERATURE REVIEW
According to the study of (Syed Tahir Hijazi, 2006) whose examine the determinant of capital structure of the sample of 16 out of 22 corporation of cement sector registered on Karachi Stock Exchange. On the historical data regression model are applied for determining their outcome. The testing/analyzing shows the outcome/result of positive/ optimistic association/relationship of independent variable tangibility of asset and growth with the depended variable leverage, and has the adverse/negative relationship of independent variable size and profitability with the depended variable leverage.
In 2013(Qayyum, 2013) analyzed the factors of capital structuring of the cement industry taking a simple of 20 cement corporation of Pakistan with a historical facts and figure/data of the duration of 2007–2009. This research analyzed the effect of independent variable (profitability, assets tangibility, size, and growth rate) on the dependent variable of leverage. Which result shows that excluding the firm size, all other independent variable have the positive relationship/connection with the leverage, while the independent variable firm size have adverse/negative association with the dependent variable leverage.
According to (Talat Afza, 2011)whose research is originated on the study of previous research of (ZINGALES, December 1995) and(Laurence Booth, 2001).She analyzed the various sectors/industries through the using of sample of twenty two (22) corporation. Which was consist of Automobile seven(7)firms, Cable and Electrical Goods sample was (8)firms and the Engineering sectors corporations are (7)firms using as a sample for the aims of determine the variable/elements of capital structure through the help of using statistic facts and figure/data on regression model. The attitude of investment of these corporation have rest/depend on the provision for tax, configuration of asset, non debt tax shield, firm size, profitability and the liquidity of the firms. The outcome is in the provision/support of Pecking Order Theory and Static Tradeoff Theory. The independent variables liquidity, tax and cost of debt are taken in this study/research which has affected the leverage financing/investment decision.
According to the study of (Muhammad Rafiq, 2008 )which determined the factors of capital structure of the chemical sector of Pakistan, the researcher examined/studied the effect of independent variable on the dependent variables leverage, as per of their research the independent variable Tangibility of asset variable have the optimistic/positive association with the leverage, Which is regarding to the research of (HIJAZI, 2004). On the other hand it is distinction/differentiate with the research of (Michael C. Jensen, October, 1976)and(Stewart, 1977).and the independent variable Growth is optimistically/positively associated with the depended variable Leverage, Which is against/dissimilar with the (HIJAZI, 2004) whose declare the adverse/negative association in between the growth and leverage, while the other independent variable profitability have also adverse/negative association with the leverage, Which recommend that the corporation of chemical industry of Pakistan are using either less or high/huge debt. According to the (Syed Tahir Hijazi, 2006)firm size has the optimistic/positive relationship with the leverage. It further states that the bigger corporation is lending debt in huge volume then the minor/small corporations which are afraid from the high debt due to the bankruptcy, which approves the opinion against the size of the corporation with respect to leverage that the bigger corporation has a greater degree of leverage.
According to the study of(Attaullah Shah, 2007)which tried to determine the determinants/element of capital structure of the non-financial corporation, which are listed on the Karachi Stock Exchange. The research is consisting of 8year financial data of the duration of (1994-2002) of the non financial corporation. In the research 7 variable are examined , and showed their effect on the dependent variable leverage , as a result it was found that the highest leverage ratio are of textile corporations, because the all textile corporations control /authority are hold by the families due to their ownership so they better know about the keeping profit margin. They refuse/decline the tax from their profit to the government as well as declined the dividend to the investor. The normal profit are going to be goes down/negative for the entire/whole years which is finally increase the debt ratio in their investment. So the independent variable Asset tangibility has positive association with the leverage.
According to the research of (Ayesha Mazhar, 2010)whose examine the determinants/element of the capital structure of the 91 government and private corporations. This study shows the positive/optimistic association of Firm size and the firm growth with the depended variable leverage. The Examination of both government and private firms by the Spearman association indicates that the Government firms in Pakistan are using high debt instead of equity then the private corporations. It express further more that the independent variable tangibility of asset in the government/public firms have the optimistic/positive association with the depended variable leverage. The corporations growth rate have also equal/identical tendency in the Government and Private Corporation. In the private organizations, the firm size has optimistic/positive associations with the leverage, but in the government firms it has negative/adverse association with respect to leverage. The Profitability variable in the public/ government corporations has the optimistic/positive association, but in the private firms it has adverse association with the leverage.
According to the study of (Hamid Ahmad, 2013)it’s examined the factor effecting capital structure and the stock return/yield. In this study 100 non financial organizations have been taken for the period of 2006-2010 This research work based on the structural model to calculate/determine of capital structure and stock yield. The GMM (Generalized Method of Moments) model was taken to project the model to minimize the problem. The study shows the outcome/result that the profitability, growth, and liquidity are the important determinants of capital structure with respect to the leverage. The Profitability has adverse/ negative association with leverage as positive association with the stock yield. The Growth variable has an optimistic/positive association with the leverage, while the liquidity has shown the adverse association with the leverage .The Firm size has no association with the leverage and the stock yield, further this research explain/indicates that the pecking order theory of investment configuration is well describe the sponsoring attitude of the Pakistani corporation. It recommends that they have not certain debt ratio but the track the pyramid/hierarchy in their ways of sponsoring. The research further describe that the Pakistani non financial industries corporations have a preference to adopt the inner sources of funding/financing instead of outer/external source of finance.
According to the study of (Ume Salma Akbar, 2012)whose examined the sample of 16 corporations listed on Karachi Stock Exchange in the sector of personal care good of Pakistan of the duration of 2001 -2008, and examined the data by using of the different test or equation such like pooled regression adjusted with cross sectional variation. In this study have taken the six variable i.e. firm size tangibility of assets, profitability ,growth, tax rate and earning volatility were examined as a factors/determinants of the leverage. The regression model originates the result about their relationship of six variables measure 89% of the factors affecting leverage. After studying it was found that just two variable size and growth opportunities have positive association with the leverage. The research result backing the Static Tradeoff Theory, which are predicts a optimistic/positive association in between the firm size and leverage. The Growth in assets is funded through the debt which rises rate. In short/simple words for the corporation who have the higher growth have needed further cash streaming/ flows needed which is not filled/sponsored through the internal source of finance so the corporation goes to the external funding/financing in the form of debt and takes loan. While the other independent variable such like profitability, tangibility, tax rate and earning volatility have negative association with the leverage.
As Stated by (Pervez Akhtar, 2013)in their research about the capital structure determinants of chemical sector of Pakistan. The researcher took the sample of 34 chemical companies of Pakistan listed on Karachi Stock Exchange for their research. It takes dependent variable leverage (Debt/Equity) and the five independent variables are Profitability, Growth, Financial Cost, Size, and Tangibility. The research shows the result that the financial cost and tangibility are positive associated with the leverage, whereas the other remaining independent variables have the adverse association with the dependent variable leverage (Debt/Equity).
In 2011(Tariq Naeem Awan, 2011)tried to determine the determinants’ of capital structure of the sugar and allied industry of Pakistan listed on Karachi stock exchange. This research originates that a certain sector capital structure have shown/ displays the exclusive characteristic which are not generally shown actual in the collective/joint examination of different industries. This research work are consist of the sample of 33 corporation in the sugar sector, which are registered on the Karachi Stock Exchange for the dated of 1999-2004 and examined the data through the operating of regression in a group of data study/examination. The researcher selects the dependent variable leverage and independent variable firm size, tangibility of assets, profitability and growth, for the studying the association of independent on depended variable through the support of regression. The researcher has originated the noteworthy association of firm size and profitability with leverage, and the tangibility and growth variable have the optimistic/positive associations with the leverage. Moreover the outcome of the firm size and the growth are none worthy statistically. Thus it might be accomplished that the profitability has adverse association with the leverage in the situation of listed Sugar and Allied corporations of Pakistan.
According to the study of (Faiza Saleem, 2013) in 2013 whose tried to determine the determinants of the investment configuration of the oil and gas sector corporations data of the duration 2006 to 2011 registered on KSE (Karachi Stock Exchange). On the historical data various regression model/technique have been applied for the purpose of examining the association of dependent variable (Leverage) and independent variables (Firm Size, Tangibility of Assets, Profitability, and Sales Growth). The research shows the result of all independent variables has major effect on the dependent variable leverage. The result further express that the independent variable firm size, tangibility of assets and profitability have the optimistic/ positive association with the leverage, While the sale growth have adverse association with the leverage. So the research recommended that if the internal source of finance (retained earning) is not efficient for the developing/growing firms, then the firms have only one choice of funding is external source of finance (debt) for forthcoming extension/growth. The profits/earning does not indicate the actual picture of the corporation outcome/performance, so the creditors desire the guarantee in the form of security of the certain due on the fixed assets high proportion of the intangible assets, so for the firm it is difficulty in borrowing the long term debt for the reason that the intangible assets could not be collateralized. So due to these reasons the growth have the adverse association with the leverage.