Choice between debt

and equity and its impact

on business performance

Presented By:
Muhammad Areeb
Hassan Tariq
Abstract

 Article analyze
 how the firms choose between debt and equity while
making a financing decision
 how choice effects the performance of their business.
 Maple Leaf Cement Company Ltd
 Results:
 Equity financing
Introduction

 The financing decision is one of the decisions

which are vital for the financial health of any
company
 Martin and Scott (1974) did multiple discriminate
analyses based on established policy which is a
function of certain financial characteristics
Introduction

 Opler, and Titman (2001) the choice of issuing

equity or debt is also affected by the market
conditions and share prices of a firm
 firm’s share prices are bullish (Equity)
 Gatchev(2009) proved that equity is the predominant
source of finance in situation (profit shortfall,
investment in intangible asset and generated growth )
 R&D
 Advertising campaigns and
 Investment opportunities
Hypothesis

 Ho: More equity in financing mix does not affect

the business performance in a positive manner.

 H1: More equity in financing mix affects the

business performance in a positive manner.
Methodology
 The ratios chosen are 5 ratio analysis on Maple Leaf Cement
Factory Ltd
leverage, liquidity, profitability, dividend payout ratio and
price per earning ratio.
 A. Leverage
 X1 = Total debt/ total assets
 X2 = Earnings before interest and expenses/interest expense
 X3 = Cash flow/ interest expense
 B. Liquidity
 Y1 = Current assets/current liabilities
 Y2= Current assets/total assets
Methodology

 C. Profitability
 Z1 = Cash flow/net worth
 Z2 = Net income/total assets
 Z3 = Cash flow/total assets
 D. Dividend Payout Ratio
 = Dividends per share/earnings per share
 E. Price per Earning Ratio
 = Price per share/earnings per share
Leverage

 Company's methods of financing or to measure its

ability to meet financial obligations.
 Whose financial leverage is lower than that of a
set target or industrial benchmark
Liquidity

 Firm’s ability to meet its current obligations

 If firm cannot pay its short-term debt, cannot
maintain a long term debt-paying ability and
satisfy its lenders
 Bankrupt
 Current debt paying ability
 Cash generating ability
 Efficiency of the use of current assets and current
liabilities
 If liquidity of a firm will be higher
 Profitability

 It is the ability of a firm to generate earnings.

 It is vital for stockholders as they derive revenue as dividends.

 Profitability ratios used was return on assets.

Dividend payout ratio

 It is the percentage of earnings paid to

shareholders as dividends.

 An increase in payout ratio can lead to an

increased use of debt financing.
Price per earning ratio

 A high price per earning ratio suggests that

investors are expecting higher returns and hence
are willing be pay higher price.

 If market price of a companies share increases

then firm will prefer to issue equity instead of
debt.
Data

 Leverage ratio of the firm remained lower than the

industrial benchmark.

 Coverage ratios were also better than the

industrial benchmark.

 Liquidity ratios have not relation with debt

incurrence.
Conclusion

 The discussion concludes that a firm opts for debt

financing when its leverage ratio is less than the
industry benchmark.

 When a firm faced a loss it issued equity while

going for debt when its profitability is increasing.