Explaining Analysis of the Relationship between Capital Structure, Cost of Capital and Yield Base Value

One of the key issues financial managers are expected to take care of for maximization of shareholders’ wealth is assessment of the best combination of firm resources or the very capital structure. In such capital structure, financial resources are so allocated that with little Cost of Capital a greater rate of return is realized. Therefore, the capital structure which increases firm value or minimizes total Cost of Capital is claimed to be the optimum capital structure. One of the capital structure theories known as the Net Operating Income (NOI) approach maintains that a firm’s Cost of Capital is independent of leverage and its value is not affected by capital structure. Present research, in an independent effort, examines the impact of capital structure and Cost of Capital on the Yield obtained via different measures for the companies in the Iranian capital market. The used Yield-based measures in this study are Earnings to Price ratio (E/P) and free cash flow yield or Free Cash Flow to Price (FCF/P). Of the total population of the listed companies on the Tehran Stock Exchange (TSE), 75 companies whose financial information during 2007-2011 was available were selected as the statistical sample subjected to further investigation. The results revealed inverse and significant impact of the changes in capital structure on Yield- Base Value of the companies on the Iranian capital market. According to the findings, in the understudy firms, the Cost of Capital was almost indifferent to the changes incapital structure. In addition, (changes in) Cost of Capital could not adequately explain the Yield- Base Value of the company (lack of significance in the relationship of the two variables).

Capital Structure, Cost of Capital, Value