I NEED WRITE PROPOSALSUBJECT :determinants of capital structureand dividend policies in Saudi Arabia? Normallya proposal should be between 1500 and 2000 wordsHISPROPOSALWILL PROVID FOR ENGLAND...

Running Head: PROPOSAL: DETERMINANT OF CAPITAL STRUCTURE IN SAUDI
ARABIA 1
Proposal: Determinant of capital structure in Saudi Arabia
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PROPOSAL: DETERMINANT OF CAPITAL STRUCTURE IN SAUDI ARABIA 2
Proposal: Determinant of capital structure in Saudi Arabia
General Overview of the project
Corporate capital structure is an important aspect which helps in maximizing the value of the
firm. Capital structure is the composition of the company‟s sources of financing. Capital
structure means to decide that how company assets are financed. There are different types of
capital sources used by company to finance assets of firm like debt, preferred Stock, and
common equity.
In this paper, we will strongly focus on analysing the determinants which affects the capital
structure of the firms in Saudi Arabia. Several characteristics will be taken into consideration
which includes the economic and the financial condition of the firm as well as the firms
determinants.
Identification of relevant information
The capital structure decision is one of the most crucial decisions faced by a firm. Capital
structure refers to the proportion of firm‟s liabilities and owner‟s equity. Capital structure
decisions can influence the value of the firm through the earnings available to the
shareholders and the cost of capital.
Therefore, a company should select a capital structure that maximizes the value of the equity
shares and at which the cost of capital is the least. Such a combination of debt and equity is
called the optimum capital structure. This highlights the consequence of an appropriate
capital structure. Modigilani and Miller (1958), however, came up with an irrelevance
proposition that under certain assumptions the market value and it cost of capital of any firm
is independent of its capital structure.
Extensive consideration has been given to the relationship between industry membership and
capital structure. The capital structure of a firm is likely to be highly influenced by the
industry in which it operates. The nature of industry can be one of the most important
PROPOSAL: DETERMINANT OF CAPITAL STRUCTURE IN SAUDI ARABIA 3
elements in determining the degree of financial leverage a firm can safely include in its
capital structure.
It is generally accepted that in a given industry, firms have similar leverage ratios and that the
leverage ratios vary across industries (Harris and Raviv, 1991).
Bradley, Jarrel and Kim (1983) provide empirical evidence that firm leverage ratios are
industry related. Their theory highlights three firm-specific factors that influence the firm's
optimal capital structure: the variability of firm value, the level of non-debt tax shields, and
the magnitude of the costs of financial distress.
These three factors are considered to quite plausibly exhibit important industry
commonalities. Titman and Wessels (1988) suggests that firms manufacturing machines and
equipments require the availability of specialized servicing and spare parts and will find
liquidation costly. Such firms are likely to be financed by relatively less debt.
According to Gerestenbeg “Capital Structure of company refers to composition of its
capitalization and it include all long term capital sources i.e. loans, reserves, shares &
Bonds”.
According to Schwart “Capital structure of business can be measured by the ratio of various
kinds of permanent loan and equity capital to total capital.”
Capital Structure theory & Optimum Capital Structure
Determination of optimum capital structure is difficult because number of factors influenced
capital structure. There is no one definite model because of varying circumstances of various
business undertakings. That‟s why companies use different capital structure. Capital Structure
theory explains the effect of capital structure on value of firm and overall cost of capital.
Different capital structure theories tell us about the optimum capital structure however
practically it is very difficult to achieve because there are number of factors influence capital
structure and it is very difficult to calculate fall in market value of equity share on account of
PROPOSAL: DETERMINANT OF CAPITAL STRUCTURE IN SAUDI ARABIA 4
increase in risk due to high debt content in capital structure. There are many theories like Net
income approach, net operating income approach , traditional theory , Modigliani‟s and
miller capital – structure theories tries to explain capital structure by taking some
hypothetical assumptions but many other theories like Trade-off theory , Pecking Order
theory , Opportunity theory etc. considers factors from real world.
Key research questions
The two main objectives and research question of this paper are:
1. Identifying the important determinants that affect the capital structure decision of Saudi
Arabia firms
2. Examining the impact of the global financial crisis on the capital structure of Saudi Arabia
firms.
Methodology
Research methodology can be termed as “A systematic inquiry whose objective is to provide
information to solve managerial problems” (Saunders, 2009). The research will be analyse
different factors which affects the capital structure of the company. The research that will be
conducted will be exploratory study as well qualitative and quantitative study with which we
will be able to conduct the research.The researcher needs to adopt the case study strategy so
that the researcher is able to gain in depth knowledge and understanding of the particular
topic in concern as well as svereal capital structure throeis like Net income approach, Net
operating income approach, Traditional theory, Modigliani and Miller‟s [MM] capital-
structure theory, Trade –Off theory and Pecking order theory. All the above theories tell us
theoretical relation between cost of capital & value of firm. All theories tell us about
optimum capital structure. A firm‟s optimal capital structure is defined as the structure that
would maximize its stock price.
PROPOSAL: DETERMINANT OF CAPITAL STRUCTURE IN SAUDI ARABIA 5
Different capital structure theories tell us about the optimum...