Optimal capital structure for JSE listed companies

Abstract

This report details a study of capital structure for JSE listed companies. The study considered historical financial information for JSE listed companies over the period 1987 to 2009 and asked two central questions, with the benefit of hindsight. Firstly, could JSE listed companies have used more debt to finance their operations during this period? Secondly, how much additional debt could these companies have used and thereby increase shareholder value? An optimal debt ratio maximises shareholder value by optimising tax benefits of debt. This study analysed data for 97 companies that were within the top 160 JSE listed companies. For each year of data, debt was increased while maintaining certain pre-selected debt service ratios, to determine how much additional debt these companies could have had. These ratios were interest coverage, cash coverage and DSCR. The results indicate that in most sectors of the JSE companies could have used significantly more debt to finance their operations over the past 22 years. By so doing these companies would have increased shareholder value over the years. Copyright