Optimal financial mix is required to minimize the cost of capital : Study
By: Finance India
According to the study the companies should consider cost of capital more gravely while taking business decisions based on nature of particular industry to run the firm profitably. Various variables such as size, growth, tangibility, earning per share, dividend payout ratio and value of the firm directly affect the capital structure of the company says the study. The study helps the companies to assess the current scenario on the cost of capital in different selected companies.
According to the study, Businesses in India have to be more cost and quality conscious and allocate their scarce resources rationally, in order to meet the challenges of an increasingly competitive global market. The focus of this study is to find out connect of the firm's investment decision with financing decision.
The analysis in the study show that the behavior of increasing decreasing occurs because the firms within the same industry differ widely with the economic characteristics with different growth opportunities, different sizes, different asset base structure, and nature of different industries for India in the globalised business environment and the risk preferences of the various investors also differ. The study suggests that measuring and reporting these variables along with appropriate models and also after considering multiple factors will influence the companies to adapt more easily to changing conditions, in changing business financial environment which lead to increase strategic efficiency and effectiveness of companies.
The findings of the study indicate (a) cost of capital and value of firm are significantly inversely related in cement and chemical industry while (b) value of firm is significantly inversely associated with leverage in Metal industry, (c) Cost of capital is positively associated with cost of equity capital in IT industry (d) Value of firm is statistically significant having inverse relationship with leverage during the period of study (e) Size is another important variable significantly associated wit value off firm in Chemical, metal and IT. (f) Tangibility is negatively and positively significantly associated with value of firm and cost of equity in electricity, general engineering chemical, metal and IT ; (g) Size appears positively significant with cost of equity in Metal and in IT and Chemical industry for cross section year 2020, 2009, and 2008 respectably.