Optimal Capital Structure of Industrial Companies listed in Amman Stock Exchange

Osama A. Sallam

Abstract


In a previous study, a model was suggested to relate between capital structure of industrial companies listed in ASE (represented by average debt ratio) as an independent variable, and systematic risk of these companies' shares (represented by beta coefficient) as a dependent variable. The previous study also suggested to use calculated beta coefficient to determine the optimal capital structure of industrial companies. To do so, the required rate of return on investing in a company's share has to be determined using CAPM (Capital Asset Pricing Model) then, EPS (Earning Per Share) of that company has to be discounted by the required rate of return calculated.

Researcher was motivated to check suggested model's practicality and to present a mathematical relationship that can help financial managers of Jordanian industrial companies take good decisions about their companies' capital structures. So, beta coefficients of industrial companies were estimated using the relationship suggested by the previous study, then CAPM was used to calculate required rates of return on investment in these companies' shares, then, required rates of return were used to discount EPS of each company. The resulted values were called "Theoretical Values" of each share.

If the model of the previous study holds, then the theoretical values calculated should explain the actual market prices of shares. So, a number of regression models were developed to describe relationship between theoretical values and market values of industrial companies shares. Regression models explained satisfactory percentages of market values variance. This study was concluded by suggesting a tested mathematical relationship that can be used to determine optimal capital structure of companies listed in industrial sector of ASE.


Keywords


Average Debt Ratio, Beta Coefficient, Required Rate Of Return, Theoretical Value, 2003 Events.

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