Substantial parts of the literature concerning capital structure have dealt with issues regarding the leverage ratios. These leverage ratios have been analyzed in all kinds of ways, where most studies have explained observed patterns. Our research will also deal with leverage ratios but in an entirely new way. Our problem concerns the practical matter of deciding an appropriate capital structure and the possibility of improvements, which are formulated below. · How do the case companies decide their capital structure? · Are their current capital structures optimal or is there room for improvements? We have studied three companies within the real estate industry due to comparable issues. Our result reveals that the companies do not use any mathematical model when deciding their capital structure but they do consider many important factors. The business and financial risk have the largest impact on the decision even though there are individual variations. Tradition is another factor that seem to influence the management a lot. Our improvement investigation of the three case companies reveals three different scenarios….
Contents
. INTRODUCTION
1.1 BACKGROUND
1.2 PROBLEM DISCUSSION
1.3 PROBLEM AND PURPOSE
1.4 CONTRIBUTION
1.5 DELIMITATIONS
1.6 DISPOSITION
2. METHODOLOGY
2.1 SCIENTIFIC APPROACH
2.1.1 Choice of scientific approach
2.2 STRATEGIC APPROACH
2.2.1 Choice of strategic approach
2.3 RESEARCH DESIGN
2.3.1 Choice of research design
2.3.2 Case study design
2.3.2.1 Choice of case study design
2.3.3 Traditional prejudices against the case study strategy
2.4 THE QUALITY OF OUR RESEARCH DESIGN
2.4.1 Construct validity
2.4.1.1 The constructed validity of this thesis
2.4.2 Internal validity
2.4.2.1 The internal validity of this thesis
2.4.3 External validity
2.4.3.1 The external validity of this thesis
2.4.4 Reliability
2.4.4.1 The reliability of this thesis
2.5 ERRORS OF INFERENC
2.5.1 Interviewer effect
2.5.2 Instrument errors
2.6 COLLECTION OF DATA
2.6.1 Primary data
2.6.2 Secondary data
2.7 RELEVANCE
2.7.1 Practical relevance
2.7.2 Theoretical relevance
3. THEORETICAL FRAMEWORK
3.1 MODIGLIANI AND MILLER’S PROPOSITIONS
3.1.1 M&M proposition I with no taxes
3.1.2 M&M proposition II with no taxes
3.1.3 M&M proposition I with taxes
3.1.4 M&M proposition II with taxes
3.2 THEORETICAL MODELS
3.2.1 The Trade-off Model
3.2.1.1 Financial distress Capital Structure
3.2.1.2 Agency costs
3.2.2 Pecking order hypothesis
3.2.3 Signaling hypothesis
3.3 CONCLUDING COMMENTS ABOUT THE MODELS
3.4 OBSERVED PATTERNS
3.4.1 Cross-sectional studies
3.4.1.1 Country
3.4.1.2 Industry
3.4.1.3 Taxes
3.4.1.4 Assets
3.4.1.5 Profitability
3.4.1.6 Size
3.4.1.7 Growth
3.4.2 Time series studies
3.5 FACTORS DETERMINING CAPITAL STRUCTURE
3.5.1 Making use of the tax shield
3.5.2 Limitations to borrowing
3.5.3 Business risk
3.5.3.1 Industry
3.5.3.2 Growth rate
3.5.3.3 Asset structure
3.5.3.4 Factors that cause stability or variance in future earnings
3.5.4 Financial risk
3.5.4.1 Leverage level
3.5.4.2 Debt coverage ratio
3.5.4.3 Financial beta
3.5.4.2 Interest rate sensitivity
3.5.4.3 Financial flexibility
3.5.5 Business and Financial risk
3.5.6 Management attitudes
4. THE REAL ESTATE INDUSTRY
4.1 HISTORY
4.2 TREND OF TODAY
4.3 THE FUTURE
4.4 POLITICAL DECISIONS
4.5 OPERATIONAL DECISIONS
4.6 INDUSTRY KEY FIGURES
4.6.1 Size
4.6.2 Business risk
4.6.2.1 Unlevered beta
4.6.2.2 Percentage of residential and commercial properties
4.6.3 Financial risk
4.6.3.1 Leverage level
4.6.3.2 Equity ratio
4.6.3.3 Debt coverage ratio
4.6.3.4 Interest rate sensitivity
4.6.3.5 Financial beta
4.7 BUSINESS AND FINANCIAL RISK
4.7.1 Business risk and debt coverage ratio
4.7.2 Business risk and leverage level
4.8 COMPARING KEY FACTORS
4.8.1 Comparing leverage level with debt coverage ratio
4.8.2 Comparing leverage level with borrowing rate
5. THE CASE OF CASTELLUM
5.1 INTRODUCTION
5.2 CASTELLUM’S CAPITAL STRUCTURE
5.2.1 Leverage ratios
5.2.2 Equity ratios
5.3 CAPITAL STRUCTURE IN THE FUTURE
5.4 WACC AND SHAREHOLDER VALUE
5.5 HOW CASTELLUM DETERMINES CAPITAL STRUCTURE
5.6 ANALYSIS OF CASTELLUM’S CAPITAL STRUCTURE
5.6.1 Making use of the tax shield
5.6.2 Limitations to borrowing
5.6.3 Business Risk
5.6.3.1 Industry average
5.6.3.2 Unlevered beta
5.6.3.3 Factors that cause stability or variance in future earnings
5.6.4 Financial risk
5.6.4.1 Leverage level
5.6.4.2 Debt coverage ratio
5.6.4.3 Financial bet
5.6.4.4 Interest rate sensitivity
5.6.5 Coping with financial risk
5.7 CONCLUSIONS
5.7.1 How Castellum determines its capital structure
5.7.2 Improvements in Castellum’s capital structure
6. THE CASE OF WALLENSTAM
6.1 INTRODUCTION
6.2 WALLENSTAM’S CAPITAL STRUCTURE
6.2.1 Leverage ratios
6.2.2 Equity ratios
6.3 CAPITAL STRUCTURE IN THE FUTURE
6.4 STRATEGY REGARDING CAPITAL STRUCTURE
6.5 WACC AND SHAREHOLDER VALUE
6.6 HOW WALLENSTAM DETERMINES CAPITAL STRUCTURE
6.7 ANALYSIS OF WALLENSTAM’S CAPITAL STRUCTURE
6.7.1 Making use of the tax shield
6.7.2 Limitations to borrowing
6.7.3 Business risk
6.7.3.1 Industry average
6.7.3.2 Unlevered beta
6.7.3.3 Factors that cause stability or variance in future earnings
6.7.4 Financial risk
6.7.4.1 Leverage level
6.7.4.2 Debt coverage ratio
6.7.4.3 Financial beta
6.7.4.4 Interest rate sensitivity
6.7.5 Coping with financial risk
6.7.5.1 Strategies for financial flexibility
6.8 CONCLUSIONS
6.8.1 How Wallenstam determines its capital structure
6.8.2 Improvements in Wallenstam’s capital structure
7. THE CASE OF PLATZER
7.1 INTRODUCTION
7.2 PLATZER’S CAPITAL STRUCTURE
7.2.1 Leverage ratios
7.2.2 Equity ratios
7.3 CAPITAL STRUCTURE IN THE FUTURE
7.4 HOW PLATZER DETERMINES CAPITAL STRUCTURE
7.5 ANALYSIS OF PLATZER’S CAPITAL STRUCTURE
7.5.1 Making use of the tax shield
7.5.2 Limitations to debt financing
7.5.3 Business risk
7.5.3.1 Industry average
7.5.3.2 Unlevered beta
7.5.3.3 Factors that cause stability or variance in future earnings
7.5.4 Financial risk
7.5.4.1 Leverage level
7.5.4.2 Debt coverage ratio
7.5.4.3 Financial beta
7.5.4.4 Interest rate sensitivity
7.6 COPING WITH FINANCIAL RISK
7.7 CONCLUSIONS
7.7.1 How Platzer determines its capital structure
7.7.2 Improvements in Platzer’s capital structure
8. OVERALL CONCLUSIONS
8.1 SUGGESTIONS FOR FURTHER RESEARCH
9. BIBLIOGRAPHY
10. APPENDICES
10.1 APPENDIX 1
Author: Hede, Johan,Eriksson, Magnus
Source: Goteborg University
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