According to Sekar et al. (2014), capital structure is the combination of the company's capital raised.

This combination or combination affects the total cost of capital. Typically, the capital structure will
consist of both equity and debt (Fumani and Moghadam, 2015). Equity comprises equity share capital,
preference share capital, share premium, free reserves, excess earnings, contingent provisions and
development rebate reserve. On the other hand, debt comprises all borrowings from government,
semi-government, statutory financial corporations and other agencies, as well as term loans from
banks and other financial institutions. Also included are all deferred payment obligations and debts
(Hirdins, 2019). The proportion of equity and debt to total capital is determined by the company based
on its financial standing and ability to raise cash (Kadim et al., 2020).

According to Fumani and Moghadam (2015), the capital structure decision is crucial because it affects
the earnings per share and the wealth of the shareholders. Capital structure is the most critical decision
that must be made by every organisation, and the pros and cons of these decisions play a significant
role in shaping the future of every business. Modigliani and Miller (1958) established the
contemporary capital structure theory. According to Myers (2001), there is no reason to assume a
general account of the debt-equity option. Numerous verified ideas about capital structure allow us to
comprehend the debt-to-equity ratio that corporations pick. These theories can be categorised into two
groups: those that anticipate the presence of an optimal debt-to-equity ratio for each firm (so-called
static trade-off models) and those that assert there is no well-defined goal capital structure (pecking-
order hypothesis) (Fumani and Moghadam, 2015). In static trade-off models, the optimal capital
structure is understood as the ideal solution to a trade-off, such as a trade-off between a tax shield and
the costs of financial distress in trade-off theory. The optimal capital structure is attained, according to
this theory, when the marginal present value of the tax shield on extra debt equals the marginal present
value of the costs of financial distress on additional debt (Fumani and Moghadam, 2015).

The pecking order theory, on the other hand, implies that there is no ideal capital structure. Companies
are expected to favour internal finance (retained earnings) over external funding (Chen and Chen,
2011). And when internal funds are insufficient, companies may choose debt over equity. According
to Fumani and Moghadam, (2015), there is no well-defined optimal leverage since there are two types
of equity, internal and external, with one at the top and the other at the bottom of the pecking order.
Consequently, there are a number of conditional theories of capital structure, but very little is known
about their empirical applicability. The capital structure decision is one of the most important
considerations a firm must make when seeking financing. Poor choices would have negative
consequences. Many financially sound businesses have lost due to unwise decisions (Vo and Ellis,
2017).

Since a corporation can utilise any or all of the various sources of funds to satisfy its complete
financial needs, a company's entire capital may be comprised of all such sources. Capital has been
linked to the term 'structure'. The term 'capital' can be defined as the firm's long-term funds. Several
factors influence the capital structure of an enterprise. According to Fumani and Moghadam (2015),
the following are included:

Business Risk

Excluding debt, business risk is the fundamental operational risk for a corporation. The appropriate
debt ratio decreases as business risk increases.

Company's Tax exposure

Debt service is tax-deductible. Consequently, if a firm's tax rate is high, utilising debt to finance a
project is advantageous since the tax-deductibility of loan payments shields a portion of profits from
taxation. Consequently, debts are the cheapest source of capital. And during periods of prosperity,
debenture holders and creditors are not permitted to share in the gains, allowing the corporation to
retain the majority of its earnings. Moreover, the existing equity stockholders will reap the benefits.

Financial Flexibility

Essentially, this is the company's ability to raise capital in difficult times. When sales are expanding
and earnings are robust, it should not come as a surprise that companies have no difficulty raising
financing. However, a company's robust cash flow during good times makes it easier to raise
financing. Businesses should make efforts to be judicious while raising cash during prosperous times,
avoiding exceeding their means. The smaller a firm's debt level, the greater its financial flexibility. A
corporation with excessive debt may not be able to raise cash through debt.

Management Style

There is a range of management styles, from aggressive to conservative. The more cautious a
management's attitude, the less likely it is to enhance profits through debt. Aggressive management
may attempt to grow the company rapidly, utilising high amounts of debt to accelerate the increase in
earnings per share (EPS).

Growth Rate

Typically, firms in the expansion phase of their life cycle finance their growth through debt,
borrowing money to expand more quickly. This strategy is problematic because the revenues of
growth companies are often inconsistent and uncertain. Therefore, a high debt load is typically
inappropriate. Stable and mature companies often require less debt to finance expansion because their
revenues are established and stable. Additionally, these businesses create cash flow, which may be
utilised to finance developments as they occur.

Market Conditions

Market conditions can have a major impact on the capital-structure state of a company. Consider a
company that needs to borrow money for a new factory. If the market is struggling, meaning that
investors are restricting enterprises' access to money due to market fears, the interest rate that a
company must pay to borrow may be greater than it would prefer to pay. In such a case, it may be
smart for the firm to wait till market circumstances return to normal before attempting to obtain
finance for the project.

Several studies have been undertaken to assess how capital structure affects a company's worth. Some
research discovered a positive correlation, some a negative correlation, and others found no
correlation. Antwi et al. (2012), for instance, give evidence about the impact of capital structure on a
company's value. The analysis was conducted on all 34 Ghana Stock Exchange (GSE)-listed
companies for the year ending December 31, 2010. In an emerging economy such as Ghana, equity
capital as a component of capital structure is relevant to a firm's value, while long-term debt was
shown to be the most important factor in determining a firm's value. This study suggests that corporate
financial decision-makers should use more long-term debt than equity capital to finance their
operations, as long-term debt has a greater impact on business value.

Draniceanu et al. (2013) investigated the connection between capital structure and enterprise value.
This study was conducted between 2003 and 2012 with 48 companies listed on the Bucharest stock
exchange (Romania). According to the findings of the study, capital structure has a positive effect on
corporate value. In addition, the study found that variable business size (size), revenue growth rate
(growth), and capitalization of equity/book value of equity all have a favourable effect on firm value.

In addition, Hoque et al. (2014) investigated the effects of capital structure policies on the value of the
firm. Based on the opinions of eighty respondents from twenty manufacturing enterprises listed on the
Dhaka Stock Exchange, the study was conducted. The empirical analysis of the study was restricted to
the period between 2008 and 2012. Respondents ranked financial risk, profitability, availability of
funds, productivity, liquidity, operating risk, growth rate, appropriate timing, corporate tax, the
stability of sales/investments, etc. as the most significant determinants of capital structure policy.

In addition, Farooq et al. (2016) investigated the effect of financial leverage on the firm value of
Pakistani cement sector enterprises. The study utilised data on annual financial statements from 19
companies listed on the Karachi Stock Exchange (KSE) from 2008 to 2012. The findings of the study
indicate that capital structure has a positive effect on business value and a high level of statistical
significance (1 percent). Ater (2017) offered information regarding the relationship between capital
structure and the value of a company. The study drew on secondary data from 36 businesses listed on
the Nairobi Securities Exchange (NSE) from the year ended December 31, 2011, to 2015. The
findings revealed a statistically significant correlation between the capital structure and market value
of non-financial enterprises listed on the Nairobi Securities Exchange. Before deciding to use long-
term debt to finance operations, the study suggests that businesses weigh the marginal benefit of using
long-term debt to the marginal cost of using long-term debt. Long-term debt influences a company's
value similarly to equity capital.

Le Thi et al. (2013), on the other hand, investigated the relationship between foreign ownership ratio,
capital structure, and corporate value for 203 non-financial enterprises listed on the Vietnamese stock
market between 2008 and 2011. The association between foreign ownership ratio and capital structure
and business value is negative. In contrast, control variables, such as profitability, short-term solvency,
and firm size, have a positive effect on the value of the company. The capital structure (DA, SDA)
shows an inverse relationship with business value (Tobin's Q), according to research conducted by
Mai (2020) using data from 35 plastics and packaging firms registered on a stock market between
2012 and 2018. Business performance (ROA) and asset size (QMTS) have a favourable effect on firm
value among the control factors.
In contrast, Rajhans et al. (2013) investigated empirically the factors that influence the creation of firm
value. Based on market capitalization in their industry, sixteen firms from the Metal, Fast Moving
Consumer Goods (FMCG), Information Technology (IT), and Automobile industries listed on the
Bombay Stock Exchange (BSE) from 2002 to 2011 were identified. Several variables, including Net
sales, Profit, Fixed Assets, dividend pay-out ratio, and capital structure, have been identified as the
financial variables affecting a company's value, based on evidence from numerous sources. Their
findings support the Modigliani and Miller hypothesis that capital structure has no effect on the value
of a company. Nonetheless, this research result implies that WACC has a substantial impact on the
firm's worth. Fixed assets, net sales, and profit are further major characteristics found by the proposed
model. The research will assist managers and policymakers in assessing various financial indicators in
order to boost the firm's value and make reasonable decisions.

Asiri et al. (2014) attempted to determine how financial parameters, such as the price-earnings ratio
and market-to-book ratio, explained the value of Bahrain Bourse enterprises. From 1995 to 2013, all
listed firms on the Bahrain Bourse, with the exception of the closed ones, were utilised. Return on
assets (ROA) is the most influential element in determining market value, followed by financial
leverage and beta. In addition, the research demonstrated that the firm's size had a considerable impact
on its market value. The firm's size was determined by its total assets and Tobin's Q ratio. In this
regard, investors interpret tiny firms differently than giant organisations, and growing firms differently
than firms with no growth. In the sector analysis, it was determined that ROA is the most important
component in determining the firm's worth.

From the analysis above, it can be noted that several empirical findings differ in terms of the
impact of capital structure on the value of the firm. The findings show that there are different
factors that influence the capital structure of the firm as well as the value of the firm.
References

Antwi, S., Mills, E.F.E.A. and Zhao, X., 2012. Capital structure and firm value: Empirical
evidence from Ghana. International Journal of Business and Social Science, 3(22).

Asiri, B.K., 2015. How investors perceive financial ratios at different growth opportunities and
financial leverages. Journal of Business Studies Quarterly, 6(3), p.1.

Chen, L.J. and Chen, S.Y., 2011. How the pecking-order theory explain capital structure. Journal
of International Management Studies, 6(3), pp.92-100.

Drăniceanu, S.M. and Ciobanu, A., 2013. Capital structure and firm value. Empirical evidence
from Romanian listed companies. Retrieved May, 1, p.2017.

Farooq, U., Maqbool, M.Q., Waris, M. and Mahmood, R., 2016. Liquidity risk, performance and
working capital relationship of cash conversion cycle: an empirical study of the firms in
Pakistan. International Journal of Information Research and Review, 3(3), pp.1946-1951.

Fumani, M.A. and Moghadam, A., 2015. The effect of capital structure on firm value, the rate of
return on equity and earnings per share of listed companies in Tehran stock exchange. Research
journal of Finance and Accounting, 6(15), pp.50-57.

Hirdinis, M., 2019. Capital structure and firm size on firm value moderated by profitability.

Hoque, J., Hossain, A. and Hossain, K., 2014. Impact of capital structure policy on value of the
firm–A study on some selected corporate manufacturing firms under Dhaka Stock Exchange.
Ecoforum Journal, 3(2), p.9.

Kadim, A., Sunardi, N. and Husain, T., 2020. The modeling firm's value based on financial
ratios, intellectual capital and dividend policy. Accounting, 6(5), pp.859-870.

Modigliani, F. and Miller, M.H., 1958. The cost of capital, corporation finance and the theory of
investment. The American economic review, 48(3), pp.261-297.

Myers, S.C., 2001. Capital structure. Journal of Economic perspectives, 15(2), pp.81-102.

Rajhans, R.K., 2013. Financial determinants of firm's value: evidence from Indian firms.
ZENITH International Journal of Business Economics & Management Research, ISSN, pp.2249-
8826.
Sekar, M., Gowri, M.M. and Ramya, M.G., 2014. A study on capital structure and leverage of
Tata Motors Limited: Its role and future prospects. Procedia Economics and Finance, 11, pp.445-
458.