1) Critically evaluate what extent there exist an optimal capital structure either at the micro or macro level in Malaysia private sector companies?

2) Explain what extent the change in capital structure affect the cost of capital and discuss whether capital structure and dividend policy correlated?

Transcribed Image Text:

During the last 50 years or so, the role of financial management has undergone a tremendous change. The ownership structure, size of business firms, security markets, financial system and instruments have greatly changed. As a result, the role of a finance manager has become far more important than merely a fund raiser. The finance manager is expected to maximize the economic welfare of the owners, which is represented by the market value of the firm. To achieve this objective, one has to take a number of decisions. the most important being the investment, financing and dividend decisions. Do changes in capital structure affect the value of a firm? This question has been puzzling the minds of both the finance managers and academicians for the last 40 years, especially since the publication of the path breaking articles by Franco Modigliani and Merton Miller. In a perfect capital market, their irrelevancy model is perfectly valid and is supported by all. But, in case of an imperfect market, the views differ greatly and, as a result, til! date, no universally accepted model has been developed on this crucial issue. During the last 50 years or so, the role of financial management has undergone a tremendous change. The ownership structure, size of business firms, security markets, financial system and instruments have greatly changed. As a result, the role of a finance manager has become far more important than merely a fund raiser. The finance manager is expected to maximize the economic welfare of the owners, which is represented by the market value of the firm. To achieve this objective, one has to take a number of decisions. the most important being the investment, financing and dividend decisions. Do changes in capital structure affect the value of a firm? This question has been puzzling the minds of both the finance managers and academicians for the last 40 years, especially since the publication of the path breaking articles by Franco Modigliani and Merton Miller. In a perfect capital market, their irrelevancy model is perfectly valid and is supported by all. But, in case of an imperfect market, the views differ greatly and, as a result, til! date, no universally accepted model has been developed on this crucial issue.

Answer rating: 100% (QA)

The concept of an optimal capital structure suggests that there is a specific mix of debt and equity financing that maximizes a companys value while minimizing its cost of capital However determining ... View the full answer