| dc.description.abstract | Capital structure is one of the most basic and important research fields in the theory of corporate finance. Most of western corporations keep to the theory of sequence financing made by Myers and make debts as their priority in external financing considering it can enhance the corporate value. In Kenya, however, the strong preference of equity financing and low debt rate is diametrically opposed to the theory of capital structure and financing sequence. Corporate sector growth is vital to economic development. The issue of capital has been identified as an immediate reason why businesses in developing countries fail to start or progress. It is imperative for firms in developing countries to be able to finance their activities and grow over time if they are ever to play an increasing and predominant role in providing employment as well as income in terms of profits, dividends and wages to households.
This study has attempted to establish capital structure levels of tea companies in Kenya and find out factors that determine capital structures for the tea companies. The study made use of primary data and secondary data from unlisted tea companies and listed tea companies, at the Nairobi Stock Exchange (NSE) respectively. The following variables were extracted from the questionnaires and financial statements and measured as follows: Leverage was used as a proxy for capital structure, which was measured by the mean debt-equity ratio. Collateralizable value of assets was measured by ratio of the book value of fixed assets to total assets (Fixed assets/Total assets).
Size was measured by ratio of sales to total assets of the firm (Sales/Total assets). Profitability was measured by the ratio of earnings before interest and taxes to total assets (EBIT/Total assets). Growth opportunities were measured by book value of assets less book value of equity divided by book value of assets (Total assets- Equity)/Total assets. Liquidity of the firms was represented by the ratio of current assets to current liabilities (current assets/current liabilities) and Non-debt tax shield was measured by depreciation divided by total assets (Depreciation expense/total assets). The study findings show that capital structures is positively influenced by Collateralizable value of assets, Growth opportunities, Non-debt tax shield, Profitability and Liquidity.
The study further illustrates that not all factors have equal effect when it comes to determining capital structure and not all factors are significant in the determination of capitals structures of the companies. Size of the tea companies was found to be insignificant in the determination of capital structure. Managers of tea companies need to consider collateralizable value of assets, profitability, non debt tax shield, liquidity and growth opportunities when formulating capital structure policies for their firms. More emphasis should be given to collateralizable value of assets as its impact was found to be more significant. | en_US |
