Abstract:
The way a company's activities are financed can impact its value. One of the biggest challenges managers face is deciding the capital structure to be adopted by the company to maximise its value. The research problem is to identify which form/s of funding a company should adopt in order to maximise the advantages and minimise the disadvantages that each funding source presents.
A case study was conducted in Mcel for the period between 2009 and 2011. The choice of this institution was due to the fact that Mcel is one of the largest companies and presents organized and audited accounts. The aim of the study is basically to measure to what extent the financial structure adopted by the institution maximises its value.
The target rate of long-term debt to total capital is in the range 26-40 % (Brigham 2001:594), ie, it is in this interval where a company maximises its value. Analysing the financial statements of Mcel it seems that Mcel presented in long-term debt to total capital 28, 34 and 24 % in the years 2009 to 2011, respectively, which means that in the last year, according this criterion, the company is below recommended levels.
Another index considered is the Times Interest Earned (TIE) which is required to be more than 2 or 2.5 (Brigham 2001:590). When it is below that level, the institution's financial flexibility is reduced and there is greater likelihood of financial difficulties. In the years 2009 and 2010, Mcel TIE was below recommended levels (0.62 and 1.33, respectively). In 2011, the company had a TIE far above the recommended (9.45), which means that the institution may borrow certain amount of debt and still having a good financial flexibility. Thus, according to this criteria, it can be considered that Mcel is operating in a suboptimal in respect to the use of debt.
From the conducted analysis, it is concluded that Mcel is operating in a suboptimal in respect to the use of debt. Thus, it is recommended that Mcel resorts to greater use of third party funds to levels
between 26-40% to total capital in order to increase its value, however, without compromising its financial flexibility
