Impact of capital structure on profitability and financial leverage: A comparison of two different industrial sector of Pakistan

Abstract

Capital structure is the use of different options to finance the assets of the firm. A firm can select different types of structure which includes equity structure or debt structure or the mixture of different types of financing. Capital structure may consist of common stock, preferred stock, debenture, TFC’s, PTC’s, loans from banks and several different equity choices which include preferred stocks in an effort to raise the overall value of the firm. In their effort to optimize value, firms vary according to their different mixes of capital structures. This has given rise to various theories of capital structure that aim to explain the difference in the capital structures of firms over time and across different regions. On the contrary, empirical evidence is often not consistent at any stage in substantiating the theory of a specific capital structure. This project is tries to cover the question that how the capital structure impact the financial leverage and profitability of the public listed firms belonging to the pharmaceutical and automobile sector. As Pakistan is the emerging economies and there’s not much work done in the field of comparing two different industries in the view of profitability, financial leverage and capital structure because this area is unexplored.