financial accounting theory

WHAT IS THE OPTIMAL CAPITAL STRUCTURE OF MANUFACTURING COMPANIES IN DUBAI ?

ABSTRACTDecision of capital structure relies on the selection of theoretical fundamentals and practical consideration. It is not reasonable to base decisions entirely on theories at management level. In order to base decisions, the techniques used needs to be based on existing information and must be efficiently accomplished. Computing the entities optimal debt to equity ratio and its optimal maturity of its distributions of debts and assuming that entities main objective is maximization of total value and keeping in mind that the entity operates in an environment which is volatile with corporate income taxes and bankruptcy costs. An entity would issue equity is the market prices are high. We have shown how certain factors have a constant effect on the capital structure as it has a strong relation with the market prices. The analysis would also draw attention to capital structure being a cumulative outcome of the past events to time the equity marketplace. Certain suggestions for conducting a further research have been provided.

KEY WORDS Financial leverage, optimal capital structure, M&M theory, debt/equity ratio, EBIT-EPS, price earnings ratio.

INTRODUCTIONOne of most basic definition of a capital structures flows from how a firm would decide to raise money to carry out its operations, whether it heavily relies on debt component or wants to raise money through equity. This choice has to be made repeatedly over regular interval, which the entity decided upon after a mindful analysis of the environment it functions around and its capacity to issue and borrow. There are number of theories that have been put forward to clarify and explain the reasons for variations in debt ratios across entities. These theories imply that an entities decision of optimal capital structure is based on future benefits of whether incorporating debt or equity would be beneficial to them. Since the attributes of the entities are not directly observable, empirical work has put behind the needed theoretical research. Traditionally main objective of the entity has been maximization of owners equity. In a volatile environment, cash flows are uncertain and hence estimated inflows from operations, estimates of risk free interest rates existing in the economy and the capital investments planned in the future are required. In order to maximize shareholders wealth, finance managers needs to plan the capital structure and make investments in the way by which benefits would outweigh the cost of capital. Hence it could be said that an optimal capital structure has reached a point where the cost of capital is minimum. Many companies have experienced financial distress and bankruptcy caused by the last financial crisis which puts the capital structure decision at the center of many other decisions in the area of corporate finance. According to the irrelevance theorem of Modigliani and Miller (1958) there should be no association between the characteristics of the entity and the financial leverage. This theory also helps to comprehend how capital structure decisions are affected by the taxes and financial distress. Assuming the entity operates in a frictionless world, they can randomly choose its capital structure without incurring any costs. Assumptions such as no agency cost exist, investors could lend and borrow at the same time, stock and bonds are traded in a perfect market, etc. But in a world where frictions like information asymmetry between holders of debt and equity, conflicts between managers and shareholders, etc. exist, it still needs to be examined if this theory still implies. Value of the firm and its capital structure are positively related as interest payments are tax deductable expenses. Trade off theories explains benefits of prudent use of debt and the risk of extreme use of debt. The debt ratio is the solution variable in the proportion of debt in the capital structure. In order to understand the idea of maximizing the value of the entity, it can be seen in terms of minimizing the entities Weighted Average Cost of Capital (WACC). In the arguments of capital cost, investors thought it is important to provide least possible return when the entity has a low level of debt, as the entity will be less risky. However, adding more debt to capital structure will result in a lower WACC. To follow certain policies and decisions, some techniques needs to be accomplished and must be based on available information. This research would help us to understand that empirical framework. We will report capital structures theoretical base, draw attention to the problem faced when relating theories to reality and recommend a framework for empirical management decisions regarding the capital structure.

LITERATURE REVIEWThroughout the literary works, discussion has been based on selecting an appropriate funding mix to optimize owners wealth. The correlation between capital structure and entity value is unambiguous both in theoretical and practical research due to varying results (Hatfield and Cheng et al., 1994, pp. 1--14). Diverse conditional theoretical designs have been suggested in the literature to illustrate changes in the investment components across organizations. Franco Modigliani and Merton Miller (1958) lay the groundwork that established the base for contemporary view on capital structure (Riyashad, 2012). They mentioned that in an ideal market with homogenous objectives of equivalent risk class, no taxes, 100 per cent dividend-payout ratio and constant cost of debt, the value of a entity is the same regardless of whether it finances itself with debt or equity (Dhankar and Boora, 1996). Their belief was that if an entity could lower its average cost of capital, profitability would increase thereby increasing the investors prosperity since the cost of equity is greater than the cost of debt (Entebang, 2002). Thus they stated that the percentage of debt utilization is irrelevant to a firm's value. However, this proposition was only legitimate under perfect market circumstances (without tax) which were not possible in actual world. In prevailing imperfect marketplaces, choice of debt /equity would certainly impact the value of the entity with the presence of tax-deductible interest payments that contribute to linear relation between firm value and level of debt (Entebang, 2002). Payment of interest on debt is a deductible expense for computation of tax liability whereas dividends are paid out of Earnings after Tax. This indicates that by enhancing gearing additional tax relief can be attained, reducing the after tax cost of capital which in turn improves earnings and hence value of the firm (Entebang, 2002). M&M incorporated this effect of tax on value and cost of capital of a firm in 1963. This suggested that high levels of financial leverage would be preferred by firms to take advantage of attractive tax shields. But Miller (1977) then added personal tax advantage of return on equity to the research that will counteract the tax advantage to the firm of using extra leverage and verified that maximum debt usage happens on a macro-level and not effective at the firm level (Brick and Mellon et al., 1983, pp. 45--67). Returning to the old consideration, he appealed that financing decisions are irrelevant with both corporate and personal taxes (Turjo, 2014). Due to the limited presumptions used in M&M theory, research on optimum capital structure delivered other concepts. On the other hand, DeAnglo and Masulis (1980) argues that interest tax shields may be trivial to organizations with other tax credits, such as depreciation, amortization and investment tax credits etc. They implied that, given these tax shield alternatives for financial debt, each entity will have "an exclusive internal leverage decision with or without related costs" (Hatfield and Cheng et al., 1994, pp. 1--14). This is justifiable because it is not only the benefit of tax deductible interest expense on debt that matters but also the financial risk it creates for the firm i.e. payment of interest and return of principal is obligatory for the business. Any default in meeting these commitments (bankruptcy costs) may force the business to go into liquidation. There is no such compulsion in case of equity, which is therefore, considered risk free. This led to the development of the following research questions:RQ1: On what basis do firms select a certain level of leverage in their financing decisions?RQ2: How does the use of debt aect rm value? Many potential explanations have been advocated for firms in determining a level of debt financing. The impact of financial leverage on the profitability of a business can be seen through EBIT-EPS. As debt increases, the marginalbenefitdeclines, while the marginal cost increases. Baxter (1967) argues that the extensive use of debt increases the chances of bankruptcy because of which creditors demand extra risk premium (Baxters, 1967, pp. 396-403). The trade-off concept by Kraus and Litzenberger, addresses this problem by taking into account the influence of taxes and bankruptcy cost. It states that the finest solution to financing decision is to achieve the least cost but highest benefit arising from it (Van Binsbergen and Graham et al., 2014, pp. 34-59). In this perception the gains of increased use of less expensive financial debt (lower return to creditors & tax benefits) are compared to the expenses of increased gearing (financial distress) so that a entity is able to enhance its economic welfare by concentrating on this trade-off (Myers, 2001, pp. 81-102). Thus the firm will borrow up to the extent where the marginal value of tax shield on additional debt is just compensated by the increase in present value of possible costs of financial distress (Michalak, 2013, pp. 221--228).Literature highlights the fact that often organizations prefer internal to external capital resources as exterior funding is costly because of information asymmetries between the management and security holders explained in the pecking order notion by Myers and Majluf (1984). Organizations prioritize their source of funds by making use of internal resources first and then moving on to debt financing and raising equity as a last alternative (Ratshikuni, 2009, pp. 1-59).This approach is not a good way to define financial leverage as firms with huge economical slack might not consider it necessary to adhere to the extent of complete chain of financing. Jensen and Meckling (1976) suggest that curtailing agency costs suffered due to issue of interest, by supporting directors interest with that of investors or use of debt to control management tendency for undue perquisite consumptions would help to conclude best possible level of debt (Myers, 2001, pp. 81-102). Agency problems might be between stockholders and managers who might not act in the best interests of stockholders. Jensen presented the link between this agency trouble and free income. Increasing the share of managers in the business or by raising the amount of debt would oblige managers to meet the payment requirements for debtholders otherwise the firm would face bankruptcy, thereby reducing the availability of free cash to management (Zhengwei, 2013, pp. 604--616). Ross brings to light the signaling concept (1977) that explains how the directors being the associates of an entity have a better awareness about the true surrender of future profits unlike investors do, who infer huge proportion of leverage as an indication of the entitys present constant income and eventual cash flows. Accordingly, a significant use to debt is considered as a signal of excellent quality by shareholders and thus profitability and financial leverage are favorably related (Turjo, 2014). Since large business organizations are assumed to be more varied than small businesses, researchers see them as more vulnerable to bankruptcy costs. Subsequently huge companies should employ more debt. However it is claimed by Marsh (1982) that smaller organizations have limited access to primary capital market. This is why they usually depend on loans from banks and become more obliged under debt than large corporations (Entebang, 2002).It is not debt or equity alone that constitutes the capital framework, rather a mix of both is chosen so as to derive the maximum net benefit at this ideal ratio. The valuable theories presented in literature till dates do not give a precise indication of what the judicious capital mix should be for a business. There has to strike a balance between tax advantage of borrowing on the one hand, and the increase in risk and related costs on the other. This leads to our final research question: RQ3: What is the ideal benchmark of debt to equity that a business needs in its industry to remain viable?

HYPOTHESIS: To test whether there is a linear relation between debt financing and value of a firm (EPS). The impact of financial leverage on the profitability of a business can be seen through EBIT-EPS analysis in following three situations.Situation 1 : There is no debt (unlevered business). Situation 2: Debt of AED 10,00,000 is assumed.Situation 3: Debt of AED 20,00,000 is assumed.All debt is at 10% per annum and tax rate of 30% applies. Earnings before interest and tax is assumed to be AED 400,000. Total funds used are AED 30,00,000.Situation 1Situation 2Situation 3

EBIT400,000400,000400,000

Less: Finance Costnil100,000200,000

EBT400,000300,000200,000

Less: Tax120,00090,00060,000

EAT280,000210,000140,000

No. of shares of AED 10 each300,000200,000100,000

EPS0.931.051.40

The company earns AED 0.93 per share if it is unlevered. With employment of debt its EPS rises respectively. It is because the cost of debt is lower than the return that company earns on funds employed. The company earning a return on investment of 13.33% (EBIT/Total Investment *100), (400,000/30,00,000*100). This is higher than the 10% interest it is paying on debt funds. This is the situation of favorable financial leverage, where profit earned by equity shareholders increase due to the presence of fixed financial charges like interest. Now considering another case where all the assumptions are similar except that the companys earnings before interest and tax is now AED 200,000. Situation 1Situation 2Situation 3

EBIT200,000200,000200,000

Less: Finance Costnil100,000200,000

EBT200,000100,000nil

Less: Tax60,00030,000nil

EAT140,00070,000nil

No. of shares of AED 10 each300,000200,000100,000

EPS0.470.35nil

In this example the Earnings per share is falling with increased use of debt because the companys rate of return on investment (ROI)is less than the cost of debt that is 6.67% (200,000/30,00,000*100), whereas interest rate on debt is 10%. This is the situation of unfavorable financial leverage. An increase in debt may enhance the EPS, but at the same time it also raises the financial risk of the firm. Ideally, a company must choose that risk-return combination which maximizes shareholders wealth. The debt-equity mix that achieves it, is the optimal capital structure.

METHODOLOGYThe aim of this pilot study is to determine what would be the optimum capital structure of a company by using quantitative methods of research & analysis. This study deals with study of secondary data which is by studying the capital structure of manufacturing companies listed in UAE financial market and calculating their debt equity and Earning per share ratio as well as their price earnings ratio. The ratio have been calculated from the year 2009 to 2012 with the help of audit financial annual reports published on the Dubai financial market website. This sample consists of 15 manufacturing companies. We have also compared each company leverage ratio or debt ratio to its industry ratio so as to find their optimum structure and reason for the same. With a large number of companies listed in the UAE stock market it is therefore we easy to obtain reliable data.Data collection We have used quantitative methods for research & analysis. Quantitative measures This study has been conducted on basis of quantitative measures and therefore involves use of secondary data which is been taken from Dubai financial market. This study involves selecting 15 firms from the manufacturing industry in Dubai so as to understand their optimum capital structure. This study is divided into three main sections:-1) Calculation of debt equity ratio this section deals with calculation of debt equity ratio from year 2009 to 2012 by dividing total liability by total equity from the statements of financial position. The main purpose of this ratio is to measure the amount of capital contributed by the creditors and amount of capital contributed by the shareholders. 2) Earnings per share ratio this is most important section of our deals which helps us to understand which companies make most benefit out of their capital structure and helps in forming a optimum structure . The earnings per share can be calculated by dividing the profit after tax by share capital also it is directly mentioned in the audit financial reports and statements. 3) Price earnings ratio this ratio is calculated by dividing market price per share by earning per share to earnings per share. This is one of the most important sections of study as it deals with what the market is ready to pay the company for its stock and its financial position in the market.

RESULTS & DISCUSSIONS Table 1Debt to equity ratio2009201020112012

National industries group holdings 1.891.561.881.65

Al Jazeera steel products company0.961.121.251.33

Gulf general investments co and subsidiaries 1.552.040.290.23

Gulfa mineral water and processing industries co0.680.840.760.68

National cement co 0.320.210.280.38

Arabtec holding and its subsidiaries 2.331.81.671.54

Dubai refreshments 0.350.330.40.42

Emirates refreshments0.560.721.140.8

United foods company0.860.470.590.29

Arab heavy industries company0.250.20.180.18

Table 2Earnings Per Share 2009201020112012

National industries group holdings -0.27-0.2-0.260.14

Al Jazeera steel products company-0.0060.0150.0240.027

Gulf general investments co and subsidiaries 0.110.54-0.6-0.16

Gulfa mineral water and processing industries co0.0052-0.39890.0070.007




Emirates refreshments0.1-0.380.130.03



Table 3Price Earning Ratio2009201020112012

National industries group holdings -3.753.857.14

Al Jazeera steel products company-16.676.674.173.7

Gulf general investments co and subsidiaries 9.091.851.676.25

Gulfa mineral water and processing industries co192.312.51142.86142.86




Emirates refreshments10.1-2.677.8138.46



One of the most important things on a firms balance sheet is the amount of debt. Debt includes the firm's current and non-current liabilities which are the obligations the firm intends to pay. From the analysis we identified the ideal debt-equity ratio of manufacturing companies is 2:1. From the above table 1 we see that two companies namely national industries group holdings and gulf general investments co and subsidiaries have debt-equity between 1 to 2 times , these companies irrespective of higher debt are operating and thereby 40%-50% debt to equity is reasonable. There are few companies which have ratio of 0.96, 0.68 etc indicating a very low debt composition but it enables that funds are managed properly and company is capable of funding itself through equity and is self sufficient. One company namely arabtec holding and its subsidiaries has debt-equity ratio of 2.33 which is more than the ideal ratio so the company needs to look at its financial statements more carefully and choose better equity options. This company is funded through more of debt so investments in this company might be risky.An earnings per share is a portion of a companys profit allocated to each number of share. A good earnings per share indicates that a company is able to generate good profit with respect to number of shares in the company. A low earnings per share indicates that the company is not able to generate enough profits. However a company with high earnings per share does not necessarily indicate that its a good and financially sound company that is if a companys earning estimates is high with a high debt-equity ratio; it will increase the financial risk as well. This means payment of interest and return of principal on debt is obligatory which would directly affect a companys financial position and also more borrowing would be required for its operations.The price earning ratio tells us how much the market is willing to pay for a companys earnings. Higher price to earnings ratio indicates that the market has high hopes for the future of the share and therefore it has bid up the price. However a high ratio is not always a positive indicator because it may result of the overpricing of shares. And similarly a lower price to earnings ratio does not always mean a negative indicator because it may mean that the share is sleeper that has been overlooked by the market.

Companies(0verall review) Debt-equity ratio(2009-2012)Earnings per share(2009-2012)Price-earning ratio(2009-2012)

1) National industries group holdings Ideal ratio (ie; 2:1)Negligible earningsCostly

2) Al Jazeera steel products companyIdeal ratioNegligible earningsCostly

3) Gulf general investments co and subsidiariesIdeal ratioNegligible earningsCostly

4) Gulfa mineral water and processing industries co.Low Negligible earningsOver priced

5) National cement co.Very low debt LowReasonable

6) Arabtec holding and its subsidiaries Very low debt LowReasonable

7) Dubai refreshmentsIdeal ratioNegligibleCostly

8) Emirates refreshmentsLow NegligibleOver priced

9) United foods companyLowNegligibleLow priced

10) Arab heavy industries companyLowNegligibleReasonable

National industries group holdings, Al Jazeera steel product company, gulf general investment co and subsidiaries and Dubai refreshments debt equity ratio is ideal that is 2:1, it has negligible earnings about 1per share but the price earning ratio ranges between 3-11dhs indicating that it is costlier. It has negative price earning ratio at the initial stage, which shows that market does not have confidence on the performance of the company. However it depends on market and economic conditions. Companies like Gulfa mineral water and processing industries co and emirates refreshments have low debt-equity ratio, which is good indicating less risk. Creditors usually like to have a low debt-equity ratio because it gives them greater protection against their money but the stockholders like to get benefit from the funds provided by creditors so they like to have a high debt-equity ratio. Their earnings per share are negligible but the price earning ratio ranges from 10 to 192 Dhs over the 4 years of both the companies indicating it is overly priced by the management. Some companies like national cement co, Arabtec holding and its subsidiaries and united foods company have a low debt equity ratio which is a good sign and the company is at low risk but in 2009 for Arabtec holding and its subsidiaries the debt-equity ratio is 2.33 which is more than the ideal ratio it means that more assets are financed through debt than those financed by money of shareholders. Its earnings per share is less than 1dhs which is low indicating that the company is not able to generate enough profits. This is a situation of unfavorable financial leverage. And price earning ratio ranges from 2 to 11 which is low priced. Arab heavy industries company have a low debt to equity ratio and their earnings per share is good ranging from 31 to 135 so higher the EPS better it is and price earning ratio ranges from 0.74 to 3.21 which is reasonable (Dfm.ae, 2014).

REASEARCH QUESTIONS: RQ1: On what basis do firms select a certain level of leverage in their financing decisions?Magnitude of the effect of determinants of capital structure varies from company to company. Important factors identified which determine the choice of ideal capital structure are cash flow position, interest coverage ratio, return on investment, cost of debt and equity, tax rates, risk consideration of debt in terms of bankruptcy costs, regulatory framework and capital structure of other entities. Amount of budgeted cash flows must be taken into account before borrowing as it not only covers fixed cash payment obligations but there must be sufficient extra cash for other operations. A high interest coverage ratio will indicate a lower risk for the entity failing to meet its interest payment obligations. An entitys ability to use greater debt is supported by higher ROI or else it leads to unfavorable leverage situation as observed in hypotheses. Moreover, higher debt can be used if raised at a lower rate. However, debt can be used only upto a level since higher debt increases the financial risk for a entity which is ultimately borne by equity shareholders, who therefore facing more risk would demand for a higher rate of return. This makes it more expensive than debt. Where tax is concerned, higher rate makes debt relatively cheaper and increases its attraction verses equity. If an entitys business risk is lower, the capacity to use debt increases and vice-versa. Also an entity is expected to operate in an regulatory framework that influences its choice of source of finance. A debt-equity ratio of other companies operating in the same industry is a useful guideline for managers, but at the same time they should be mindful of their business risk.

RQ2: How does the use of debt aect entities value? In context of Dubai, no debt is to be used both in corporate and personal financing according to the famous misconception about interest being taboo in Arab countries. How debt is planned and acquired in the Arab countries differs from the Western markets. According to M&M theory, there should not be a relative preference for debt or equity in the non-taxed economies, where other factors are equal (e.g., risk, bankruptcy, liquidity, maturity, agency and information asymmetry costs). However, in taxed economies the presence or absence of corporate taxes and the relative treatment of personal taxes on interest and dividends may have a bearing on corporate capital structure as proved by other researchers. According to the absolute figures in Table 1, Companies were found to differ slightly in capital structure irrespective of belonging to the same industry group. This is because of the fact that the magnitude of the effect of determinants of capital structure vary from company to company. The results of the study show that significant positive relationship exists between financial leverage and profitability of the firm. This evident from declining earnings per share of Arabtec holding plc from 2009 to 2012. As the debt-equity ratio falls down from 2.33 to 1.54 in 2012, the earnings per share simultaneously decreases from 0.41 to 0.09. The study also throws light on the positive relationship between size and financial leverage. The financial leverage increases as size of firm as measured by total assets or total sales increases. RQ3: What is the ideal benchmark of debt to equity that a business needs in its industry to remain viable? From the analysis conducted, we conclude that the firms operating in the manufacturing industry do have a similar trend of debt-equity ratios over the years. However Earnings per share differ. There is a linear relation between the proportion of debt and EPS for all the entities which justifies that the usage of debt is related to earnings per share/profitability as the ideal benchmark for manufacturing companies is 40%-50%. However Earnings per share is negative for some companies because they are not able to generate enough profits. EPS values below zero mean that the company is losing money and is the reason behind the possibility of negative P/E ratio. Therefore managers will target certain financial leverage level depending on the earnings instability of the firms.

LIMITATIONS: The research includes manufacturing companies that are listed on the Dubai Financial Market. Our observations were limited to secondary data (quantitative data) as our source for research. Primary data (qualitative data) was difficult to obtain as the research was undertaken on large scale companies operating in manufacturing industry to which we couldnt contact directly. Also due to time constraints we couldnt conduct surveys. This made us heavily reliable on secondary data. We had to be cautious while interpreting our findings and suggesting their recommendation as the annual reports for some years were incomplete in terms of the accounting period. The major reason for not conducting a survey was the lack of appropriateness of students as audience to attain highly accurate analysis of our research topic. Finally, the optimal ratio is difficult to set because it differs from industries to industries.The main drawbacks of debt financing are that it becomes a permanent burden to the company in the form of interest to bondholders or creditors which is fixed and legally mandatory regardless of whether the company is in a profitable situation not. Debt also calls for creation of provisions for repayment in cases of insolvency as it has a fixed maturity date. Debt is a highly risky form of long term financing as Non-payment of interest and principal on time can lead company to bankruptcy. Debenture indentures are restrictive in nature thereby limiting the company's operating flexibility. The major drawback of equity funding is the dilution of control over the business due to distributed authority. Moreover, some sales of equity, like initial public promotions, are very complex and expensive to manage. Such equity funding may require complex legal filings and significant amounts of documentation to adhere to various rules (Accountlearning.blogspot.ae, 2014).

CONCLUSION:Despite valuable theories presented in literature till date, conclusions drawn are still not satisfactory as to what should be the ideal capital structure for a firm or entity. The topic of capital structure is multi faceted with many factors (eg; bankruptcy, risk, liquidity, maturity, agency and information asymmetry cost) that affect its choice. Organizational size plays a significant role in determining the level of leverage a firm holds and its term maturity. Increase in size leads to higher leverage and debt maturities in their capital structures. Diversity of larger organizations reduces their risk of failure, allowing them to increase their leverage and extend their debt maturities. Information asymmetries and high inflation rates in Dubai causes firms to face greater interest rate expenses. As a result, debt financing becomes expensive for companies and hence internal financing is preferred. Our results show that firms irrespective of their size are affected by all macroeconomic variables which shape their leverage and debt maturity decisions. Large firms prefer longer term maturity with the increases in economic growth; moreover, they continue to be financed by short term debt despite the increases in interest rate. As a result, firm level determinants of capital structure and debt maturities are the same for all firms regardless of their size. Firms follow the maturity matching principle and pecking order on their debt financing decisions. We draw the following major conclusions from the results. Regardless of how the firm defines, in accordance with the capital structure theory, the importance of firm level variables, such as tangibility and profitability is confirmed. According to the results, private, small, medium and large firms follow the maturity matching principle and pecking order on their debt financing decisions. But listed firms prefer equity financing to long term debt financing. Moreover, internal funds do not have an impact on the debt financing decisions. Results of hypothesis were in line with the research findings that there exists a positive relation between debt usage and profitability of a firm. In conclusion, organizations management employs financial leverage mainly to increasethe companys earnings per shareand its return-on-equity. However, it brings along with cost of increased earnings variability and risk of financial distress or bankruptcy. Therefore the management needs to consider the business risks involved, its tax position, the financial flexibility of capital structure, when determining the optimal capital structure. Our research answers are justified to some extent with the support of secondary data analysis. If money borrowed is invested effectively it can enhance and boost companys future earnings and also it is not necessary that high debt is always not favoured, as observed in our analysis of manufacturing firms. The target capital structure is the mix of debt, preferred stock, and common equity from which the firm intends to raise capital. This decision determines the overall cost of capital and financial risk of the enterprise. A further research needs to be conducted considering the important variables that have not been appropriately measured in the empirical test, leverage impact on non financial stakeholders and also capital structure dynamics like debt maturity, effects of collateral, and the other alternative source of finance like credit lines and leases. REFRENCES: Accountlearning.blogspot.ae. 2014. Adantages And Disadvantages Of Long-Term Debt Financing | Account-Management-Economics. [online] Available at: http://accountlearning.blogspot.ae/2013/01/merits-and-demerits-of-long-term-debt.html [Accessed: 6 Apr 2014].Bas, T., Muradoglu, Y. and Phylaktis, K. 2011. Capital Structures around the world: Are small firms different?. [e-book] pp. 1-40. http://ifrogs.org/PDF/EMF2010/BasMuradogluPhylaktis2010.pdf [Accessed: 6 Apr 2014].Baxters, N. 1967. Leverage, risk of ruin and cost of capital. 22 (3), pp. 396-403. Available at: http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1967.tb02975.x/abstract [Accessed: 6 Apr 2014].Brick, I., Mellon, W., Surkis, J. and Mohl, M. 1983. Optimal capital structure: A multi-period programming model for use in financial planning. 7 (1), pp. 45--67.Dhankar, R. and Boora, A. 1996. Cost of Capital, Optimal Capital Structure, and Value of Firm: An Empirical Study of Indian Company. 21 (3), Available at: http://www.vikalpa.com/pdf/articles/1996/1996_july_sep_29_36.pdf [Accessed: 06.04.2014].Dfm.ae. 2014. Dubai Financial Market, PJSC. [online] Available at: http://www.dfm.ae/pages/default.aspx?c=1060 [Accessed: 6 Apr 2014].Entebang, S. 2002. The Determintants of Optimal Capital Structure: An Empirical Investigation Of Malaysian Construction (Property) Companies. [online] Available at: http://ir.unimas.my/441/1/samaon_samson_entebang.pdf [Accessed: 6 Apr 2014].Hatfield, G., Cheng, L. and Davidson, W. 1994. The determination of optimal capital structure: the effect of firm and industry debt ratios on market value. 7 (3), pp. 1--14.Michalak, A. 2013. Theoretical Conceptions of Optimal Capital Structure. pp. 221--228.

Myers, S. 2001. 'Capital Structure. 15 (2), pp. 81-102. Available at: http://solvay.ulb.ac.be/cours/farber/Ofin/Reading%204%20Capital%20Structure.pdf [Accessed: 06.04.2014].Ratshikuni, M. 2009. Optimal Capital Structure for JSE listed companies. [e-book] pp. 1-59. http://upetd.up.ac.za/thesis/available/etd-05072010-145024/unrestricted/dissertation.pdf [Accessed: 6 Apr 2014].Riyashad, A. 2012. IS THERE AN OPTIMAL CAPITAL STRUCTURE IN THE UK TELECOMMUNICATION INDUSTRY ?. 2 (2), Available at: http://www.euroasiapub.org/IJRFM/Feb2012/2.pdf [Accessed: 06.04.2014].Turjo, T. 2014. An Insight into the Capital Structure Determinants of the Pharmaceutical Companies in Bangladesh. [online] Available at: https://www.academia.edu/2475147/An_Insight_into_the_Capital_Structure_Determinants_of_the_Pharmaceutical_Companies_in_Bangladesh [Accessed: 6 Apr 2014].Van Binsbergen, J., Graham, J. and Yang, J. 2014. An Empirical Model of Optimal Capital Structure. 23 (4), pp. 34-59. Available at: http://onlinelibrary.wiley.com.ezproxy.mdx.ac.uk/doi/10.1111/j.1745-6622.2011.00351.x/abstract [Accessed: 06.04.2014].Zhengwei, W. 2013. Optimal capital structure: case of SOE versus private listed corporation. 7 (4), pp. 604--616.

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