Estimating the cost of weighted capital based on the static theory of capital structure

• Main Authors: Hama, Khanm Noori Kaka, Obaid, Hayder Jasim, Yasir, Mohanad Hameed
• Format: Conference Proceeding
• Language: English
• Subjects: Bankruptcy; Capital costs; Capital structure; Crude oil; Debt financing; Empirical analysis; Financing; Funding; Stock exchanges; Tradeoffs
• ISSN: 0094-243X; 1551-7616
• DOI: 10.1063/5.0199717

Static Trade-Off Theory suggests that companies define their own capital structure (CS) at a point where the tax-shield can benefit from borrowing and financial distress cost and bankruptcy cost are balanced. The best (CS) is a combination of debt and equity that aims to maximize the company’s values. Adding more debt increases the actual cost of debt and thus increase the capital cost. Therefore, companies differ in the differentiation between internal sources of financing or external sources, and this is due to the nature of the companies’ work and the objectives of management and shareholders. The research aims to identify these of companies in choosing funding sources, by an Iraqi empirical analysis of Iraqi industrial companies listed in the Stock Exchange with regard to (Static Trade-off Theory), To give preference between funding sources, the research sample consisted of (10) Iraqi industrial companies, and two periods (2011-2015) and (2016-2020) were tested due to changes in the political and economic situation of the country as a result of the entry of ISIS, the drop in oil prices and the Covid-19 pandemic, the results showed Financing with long-term debt is not available to Iraqi companies, and this in itself is an obstacle. As for managing companies to diversify sources of financing, companies also depends on internal sources of financing, specifically retained earnings, and therefore it can be concluded that the higher the profits of companies, the less their dependence on debt financing.