An Empirical Analysis of Relationship between Capital Structure and Profitability

Author(s)

Dr.Sadaf Mustafa , Amna Muhammad Shafi Azad , Ali Raza Muhammad Shafi Azad ,

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Volume 8 - February 2019 (02)

Abstract

the purpose of this study is to examine the tradeoff Theory of capital structure by Miller and Modigliani and the relationship of total assets with profitability. To process the research work the food and personal care sector of Pakistan Stock Exchange has been selected as the population. 30% of the population was taken as a sample for the study. So the six companies are selected, and five years annual reports are considered as a secondary data source. There are five variables in this study. Two variables are taken as explanatory and three variables as dependent. The explanatory variables are a debt to equity ratio to measure the changes in capital structure and total assets as whole a variable. The dependent variables are three which measures the profitability including return on equity, return on assets and a net profit of companies. Correlation matrix, descriptive statistics, and least square methods are used to analyze the data. Results approved the tradeoff theory, and it is proved that debt and assets have a positive relationship with profitability. In addition, the significance of the relationship varies with the measures of profitability

Keywords

Capital Structure, Profitability, Debt to Equity Ratio, Total Assets, Return on Equity, Return on Asset and Net Profit

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