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CapitalStructure Analysis


For purposes ofthis analysis, thecompany of choice is the Industrial and Commercial Bank of China.The institution is listed on the Hong Kong Stock Exchange under thecode 1398.The bank has been a remarkable performer over a number of years andis ranked by the Wall Street Journal as the second largest in termsof market valuation [ CITATION Emi15 l 1033 ].In addition, ForbesMagazine places the bank as among the fastest growing institutions inits Fortune 500 list [ CITATION Lau151 l 1033 ].The company, havingbeing set up in 1984,has been an established leader in the banking sector in China for thepast few years,especially since their restructure in 2005,and subsequent listing on the stock exchange in 2006.

Aside from thisquoted level of impeccable performance,the bank is deemed as being a stable business in the foreseeablefuture.This is largely attributed to the concrete capital structure behindthe company.The going concern has a capital structure that is a competent mix oflong term and short-term debt,as well as shareholder equity.The firm, however,has two classes of long-term debt.This, according to themanagement, is astrategy of the bank to control the liabilities in the short run [ CITATION Ind16 l 1033 ].

Critical Evaluation

In the determination of the optimaldebt to equity ratio for the Industrial and Commercial Bank of China,there are various factors that are in play.These could be probabilistic,determined by various historical market occurrences,projected and/or expected market activities,or conditions laid separately by several theories concerning thevarious financing decisions that are undertaken by the company underreview [CITATION HUA06 p &quot24 – 25&quot l 1033 ].In the process of determining the optimal capital structure, aninitial step would be to determine the optimal debt to equity ratio.This is achieved by first determining the same ratio for the companyunder review. The figure is then compared to the debt-equity ratio ofother similar firms in the sector or industry.

In the case of theIndustrial and Commercial Bank of China,their outstanding debt is valued at 435,460million RMB.The company’s equity shareholding is valued at 1,800,519million RMB [CITATION Ind161 p &quot76 – 78&quot l 1033 ].This places their debt to equity ratio at 11.335.This is quite a high figure, and at 1133.5%, indicating the highlevel of debt leverage used by the company as opposed to the numberof shares in the capital outlay of the company.

Despite this beinga seemingly high value of debt uptake by the institution,through its annual report for the year 2015,the company stated that it has undertaken several strides in carryingout innovation in and through various models of liability [CITATION Ind161 p 39 l 1033 ].As such, the company could have taken on more debt in the past fewyears as part of the innovative product they are testing.

It is also asimilar trend in the banking industry as shown by other banks withinthe sector, with eachindicating up to at least 10 billion in debt liability to outsidestakeholders. As such, the figure is not outrageous, since otherbanking institutions in similar stride ensure the average for theindustry is not low, thereby leaving the Industrial and CommercialBank of China under the scope of being viewed as a statisticaloutlier with regard to their debts incurred. In retrospect, the firmhas proven to be quite a moderate borrower when benchmarked againstother banks in the same region. This is in spite of its globalrecognition and growth tendencies over a period of a few years.

In a bid todetermine the firm’s optimal capital structure, we may make use ofvarious tools and methods. Among these is the use of researchersModigliani and Miller’s MM Theorem.In using this method, various other assets and resources maybe required, such as the financial statements from the year 2015 bythe Industrial and Commercial Bank of China,as well as the Annual Reports released by the company. Usingthese resources and inferring from the MM theory, we can identify thetheoretical per value share of the firm as suggested by the scholarsModigliani and Miller [CITATION Jon11 p 1306 l 1033 ].This value is then compared to the per share value obtained from thecompany’s statements so as to determine the company’s optimalcapital structure.

In order todetermine the capital structure, and the aforementioned optimal debtto equity ratio, the debt to equity ratios of several firms needs tobe obtained to get the sample optimal ratios of the industry. Theseare then used to calculate the weighted averages of the ratios, whichwill give the optimal industrial ratio. From this, one can comparethe obtained ratio of the individual firms to assess where they lieon the other firms as well as the industry average. In addition, thevalue of the levered firm should be computed in order to help plotthe optimal positions [ CITATION Lem08 l 1033 ]. This is calculatedas tabulated below, with the formulas at the top being thecalculations of the individual components of the levered firm formula– tax rate, debt of the firm, and the value of the unlevered firmwhich constitute the formula shown.



Vu = D + E


Tax expense


































In a bid tocalculate the value of the company as the unlevered value plus thediscounted value of the tax shield, the companys’ value iscalculated by adding two values. These values are the value of thecompany with no debt and the value of taxed shield obtained when thecompany is in financial debt.

This rate (Ku) iscalled the required return to assets or unlevered rate. The value ofthe company with no debt is calculated by discounting the free cashflow and using the rate of required return to equity that would beappropriate for the company if it had no debt. The required return toassets is less than the required return to the equity if the companyhas debt on its capital structure as, in this case, the shareholderswould bear the financial risks implied by the existence of debt. Thereturn to equity (Ke = Ku) is equivalent to the weighted average costof capital, as the only source of financial being used is the capital

A comparativeanalysis is performed in order to benchmark the Industrial andCommercial Bank of China against three of the (other) leading firmsin the same industry.The firms selected for this analysis are the Bank of China,which has a market capitalization value of 903.97billion renminbi.The company has a debt value of 14,542,334million renminbi, andan equity holding value of 434,309million.As such, the debt toequity ratio of the Bank of China is 33.48.In addition, theBank of China doubles up as the proxy for determining the Ku.This is because the firm has the lowest value of debt. As such, theBank of China is used in the determination of the Return on Equity.

Another firm usedin the analysis is the China Construction Bank Corporation,whose debt stands at 16,684,600million renminbi, whilethe value of their outstanding equity is 1,445,083million renminbi [CITATION Ban16 p &quot21 – 32&quot l 1033 ].A third firm used in this analysis is the Agricultural Bank of China,whose debt value stands at 15,995,275million renminbi, andtheir equity value is 1,211,885million renminbi.






Wt Avg

Bank of China






China Construction Bank Corporation






Agricultural Bank of China






Industrial and Commercial Bank of China









These figuresbring the debt to equity ratio of China Construction Bank Corporationand the Agricultural Bank of China to 11.55and 13.199respectively.From these, the optimaldebt to equity ratio for the industry is computed,resulting in a figure of 17.39.This, as observed,is higher than the debt to equity ratio of the Industrial andCommercial Bank of China whose debt to equity value was 11.34.This, therefore,leads to the deduction that Industrial and Commercial Bank of Chinais not operating at an optimal capital structure.This is mainly due to the high levels of debt taken up by thecompany, whereas therehas not been much change in the structure of shareholders equity,leading to an imbalance.

Various theories may be used to explain the probabilistic causes ofsuch an imbalance.Among these theories is the trade-off theorem by Modigliani andMiller. In this theory, the researchers lay claim to the idea thatthe firm should always use leverage as far as the optimal debt toequity ratio composition is not exceeded [CITATION Jon11 p &quot1309 – 1311&quot l 1033 ].The reasoning behind this is that since debt is tax deductible, it issort of a gain to the firm that issues debt as opposed to issuing ofshares as dividends paid out to shareholders are subject totaxation. The theory, therefore, fronts the suggestion that there aretax savings to be enjoyed if a firm issues debt rather than shares.Commentary on the theorem has stated that most firms fall under theoptimal level of capital structure suggested in the theory.

In the case of theIndustrial and Commercial Bank of China, and from the analysisperformed earlier, is below the optimal position suggested byModigliani and Miller. In addition, the firm was also below theindustry optimum calculated. AS such, there arises from this theoryanother possible reason for the firm to continue taking on more debt.Due to its position below the optimal capital structure position, thefirm may have used the MM approach as a means to get better savingsthrough a trade-off between debt and equity financing. In such arealization, the company may rake up more debt in a bid to pursueseveral projects, while at the same time saving up on taxes up tothe optimal capital structure position.

The simplerModigliani and Miller approach, also known as the capital structureirrelevance view may also be used to explain the rationale behind thecompany under review not having an optimal capital structure.For one, the premise ofa perfect market under which the second case of the MM approachthrives may be absent.In this line of thought,there may be unequal access to information,leading to a given party,say a competitor, toget some information that could bear them an advantage beforehand.This may include information regarding a better source of financingthan the mainstream ways.Such could lead to an uptake of cheaper financing by the competition,leaving the firm struggling with more expensive sources [ CITATION Abo05 l 1033 ].

Implicationsto the shareholder

Itis a proven fact that the capital structure of the target firm wasidentified as being below the optimal level proposed by theModigliani and Miller theory as well as the computed optimalstructure of the industry. In spite of the advantages presentedregarding this position, the implications such a move has on thecompany shareholders has not been developed. The increase of debt asa method of financing by the company as opposed to increasing theoutstanding number of shares may cause a shift in the balance of thecapital structure, especially if it is substantial [ CITATION Abo05 l 1033 ].In one instance, in spiteof the increased revenue from the money injected in the firm throughdebt, the shareholder may not observe an increase in the numberproceeds through dividends since revenues and profits are channeledtowards paying off the debt [CITATION Mic05 p &quot56 – 59&quot l 1033 ].In the short run, therefore, the shareholder may suffer from reducedincome as the company pays off debt.


It is essential for any going concernto ensure that they have a healthy mix of their capital structure. Inessence, the business should strike a balance between various capitalsources such as debt and shareholder equity. The balance and choiceof sources is, however, dependent on the business type, the firm’sobjectives, and the management strategy. For the most part, however,there are statistical, financial and mathematical models that areused to determine the optimum level of capital structure. In usingthese tools various theories such as the Modigliani Miller LeverageTheorem and the Capital Structure Irrelevance Theorem may be used toexplain the reasons for divergence from the optimum value of thecapital structure

Works Cited

Abor, Joshua. &quotThe effect of capital structure on profitability: an empirical analysis of listed firms in Ghana.&quot The Journal of Risk Finance (2005): 435 – 455. Document.

AuthorLastName, FirstName. Title of the Book Being Referenced. City Name of Publisher, Year. Type of Medium (e.g. Print).

China Construction Bank. &quotChina Construction Bank Annals.&quot 13 May 2016. China Construction Bank. Document. 22 June 2016. &lt

Faulkender, Michael and Mitchell A. Petersen. &quotDoes the Source of Capital Affect Capital Structure?&quot The Oxford Journal Review of Financia Studies (2005): 45 – 79. Document.

Glazer, Emily. Wells Fargo &amp Co. Is the Earth’s Most Valuable Bank. 22 July 2015. Online. 22 June 2016.

HUANG, Guihai and Frank M. SONG. &quotThe determinants of capital structure: Evidence from China.&quot China Economic Review 17.1 (2006): 14 – 36. Document. 22 June 2016.

Industrial and Commercial Bank of China. &quot2015 Annual Results Announcement and Discussion.&quot 22 April 2016. 2015 Annual Results Announcement. 22 June 2016. &lt

Industrial and Commercial Bank of China. &quot2015 Report.&quot 28 April 2016. The Industrial and Commercial Bank of China. Document. 22 June 2016. &lt

Jong, Abe de, Marno Verbeek and Patrick Verwijmeren. &quotFirms’ debt–equity decisions when the static trade-off theory and the pecking order theory disagree.&quot Journal of Banking &amp Finance 35.5 (2011): 1303 – 1314. Document. 22 June 2016.

LastName, First, Middle. &quotArticle Title.&quot Journal Title (Year): Pages From – To. Print.

Lemmon, Michael L., Michael R. Roberts, and Jaime F. Zender. &quotBack to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure.&quot The Journal of Finance 63.5 (2008). Document. 22 June 2016.

Lorenzetti, Laura. This is the most valuable bank in the world. 23 July 2015. Online. 22 June 2016.

Your city Adresss,


18 June 2016

MrAntonio Calcado,


Rutgers University,

1000 Kimathi Avenue,

Kinshasa city km 07351.


Dear Patron,

Number of individuals who do not participate invoting has been on the increase, which has led me to write thisletter. The common effect of the student in the university failure tovote include distance covered to the polling station and lack of timeto participate in the event. Therefore, this has an effect on theoverall result after the polling process. Research has provedexistence of some situation that hinder participation of the studentin the polling process. Some of the situation include corruption andfavour cases to some running individuals. Therefore, people should beeducated on the important and precautionary measures to manage thesituation. However, precautionary measures do not apply in thecurrent university environments. The number of individuals who donotparticipate continues to increase significantly. According tostatistics taken by the protective agencies, America compose of manystudents in the university but only a few who participate in apolling process. Existence of increased industrialization hascontributed to indulgence in many activities that requires apple timeand concentration. To enable them curb the situation, the need tomake a decision becomes a calling factor. The university mustinitiate measures that will enable easier access of the pollingcentres. This will facilitate maintenance of the average participant.Increased number of participant should entail proper utilization ofavailable resources. For instance, installation of the pollingstation in accessible points. Installation of the polling station inthe university would have a great effect to the environmental changesand leadership. Determination of the reader wouldbe a fair processamong the student in the university. Existence of the distancepolling led to poor choice of the leaders since only a few peopleparticipate in the elections. Members in the power are able toinfluence the result according to their will. Emergence of fewnumbers of people for the election purpose would led deviation of theopinion.Therefore, insufficient polling stations can be termed as aproblematic instance in the Rutgers University


To curb with polling issue in the university, thefirst solution should entail creation of awareness among the peoplein the society. Most of the American people do not recognize the needof numerous existence of the polling stations. This is due to lack ofadequate knowledge concerning the situation and the negative effects.Further integration should be encouraged through introduction ofeducation system that covers and create awareness among members.Introduction of the system will eradicate students’negativemind-set in relation to the current governance. I compiled thisletter to you since you are the patronof this school. As the patronof this school, you are mostly involved in university activities thatoccur. You are mandated with the responsibility of ensuring studentsmaintain high level of morality and behaviour. Your decision is finaland every stakeholder has the responsibility to adhere to yourcommands and directions(Schorr 131).Not only for your school awareness benefit but also as it will leadto reduction of occurrence of harmful effects such as violence. Forinstance, you school is far away from the polling station. This mayresult to a great damage in case of occurrence of a disagreement. Itis always a wise idea to prevent the occurrence of some situationsrather than try to cure the effects. In the past, there has beenoccurrence of such situations such as those that occurred in the eastof Atlantic. The result caused a devastating effect which lead todestruction of properties. Moreover, the school was closed for aperiod and their education was affected. The situation lead to lossof quality education and money used for the payment of the lecturers.This raised an alarm to educate the students in the currentgeneration on how to prevent occurrence of the same in the future. Toenable fulfilment of the purpose, introduction of a programme thatcreates awareness of the importance of multiple polling stationsshould be introduced in the University to facilitate accessibility.During my interaction with the school environment, I have realizedthat the school have no polling station that serve the comrades. Itook an initiative to talk to Mr Antonio Calcadowho clearly defined that the school had never had any programmerelated to proper governance. Therefore, they are not aware of theimportance of having polling station in the institution. Theprogramme will enable them to understand dangers of poor governancein the university that contributed to poor choice of the leader. Theprogramme will cover proper resource management and integratedpolicies applicable to facilitate budge control. The budget for theprogramme ranges from forty five dollars to fifty five dollars. Theprogramme does not sorely depend on the provision of the school butalso the success of it relies on the contribution from student,parents, yourself and the faculty.

There are controversial issues in relation toinstallation of polling station. Scientist are conducting a consensusto evaluate whether sustainability of the proper governance is in anyway related to human activities. In their research, they have notedsome negative influences and they are in the progress of finding thecause. According to the research and some article definition, it isclear that numerous polling station make the election processeffective. According to the finding from the scientist, it is clearthat there is a great relation between the environmental conditionand the governance (Diamantep36-38).Industrialization continues to increase significantly and recorddifferentiated changes have resulted. Therefore, the effect of thepolling station installation to the university will occur after along duration of time.

Efforts concerning sustainability of the pollingstation should be emphasized. Students need to know various aspectssuch as differentiated readership among others. Proper management ofuniversity facilities minimises chances of violence occurrences. Ithas come to my realization that installation programmes should beintroduced in the school. The programme would entail stages andshould involve combined efforts. A general presentation of the ideashould be introduced to the students and view their comment andproposals. The main objective of the project include creation ofawareness among the university students and their personal influencetoward polling. A survey should be conducted before the initialcommencement of the programme. This will enable establishment of theschedule that will favour the progression. The programme will haveminimal or no interference with normal running of the schoolactivities. The second stage will involve creation of awareness amongthe staff and building a foundation of healthy living. This willencourage indulgence in activities that will influence positivealtitude in our lives. The last stage will involve implementation ofthe installation process. Rewards will emerge as a token for thosewho will effectively participant to make the programme effective.

The location where people from this university can vote from isusually a long distance to cover. This becomes a main challenge tothe individual and the number of the casted votes. Research haveproved that the number of votes lost due to this factor issignificantly large. Some of the university have stated to emulatethe change and I would emphasize the change to have an effect to inthis institution. Some of the students have some challenge that wouldhinder them from casting their votes. Some students have disabilitiesand they are unable to travel for long distances (Poll). Thesestudents feel denied their right to vote for their appropriateleader. In some case, student may be exposed to unconduciveenvironment and feel insecure to interact with the environment. Thisrefrains an individual from participating in most of the eveninvolving the public.

Installation of the polling station at the institution willfacilitate involvement of student in government matters. Forinstance, more people will be engaged in politics and matterconcerning the nation as a whole(Redlawsk). The polling station willfacilitate mobilization of the student by the politician in order togather more votes. Their worries will be solved since the institutionwill be considered as source of power. It will enable more people tosecure employment in the course of the motion. It will enable them tounderstand the government better. The institution will be consideredmore useful and gain more favors from the government. Students willbe able to trust government function and responsibilities. Memberswill be able to access the government officials easily.

It is my hope that you find it enjoyable readingthe entire letter. It is my sincere hope that the letter has animpact in your life and your view towards the governance. I trustthat you will allow running of the programme in you school. I believethat unity is strength and working together as a team, will lead usto perfection. If for any instance you have a question, do nothesitate to contact me. I hope to hear from you soon.

The coverage of the topic

There are no polling stations for students at Rutgers that willenable them to place their presidential votes within campus. Theuniversity needs to consider setting at least one polling stationwithin campus to help students who are unfamiliar with places outsidecampus[ CITATION Pre15 l 1033 ].


The Rutgers administration, Antonio Calcadowould want to fund thisproject and working together the government to establish the pollingstation within the university.


This problem affects all the students within Rutgers University whohave the right and the ability to vote for the president. Researchthat has been done shows that the population affected is large withinthe university. This will have a greater impact as many students wholive within the university will be able to exercise their rights tovote.


The problem is that most of the students, who have the rights tovote their president, have always been left out. Although there arepolling stations outside the university, there are students who arenot familiar with the outskirts of the university hence making themmiss out in the voting process, which is crucial for all citizens.


With the help of the electoral management body of the country, manyinstitutions of higher learning such as Rutgers University haveestablished polling station within the universities to enable thestudent to take part in elections (Diamante). The Election managementbody has already made consultations with the university management toset up the polling station in the most convenient place within theuniversity. A number of Universities, including Oxford`s RothermereAmerican Institute (RAI) have developed a polling station, and theyhave already experienced the positive impacts of the station. Rutgerswill have to do a benchmark on what worked in the developmentprocess.


The polling station has been planned to be set up within theuniversity in the shortest time possible. The plan has developed in amanner that will not inconvenience the operations of the universitylectures and other programs[ CITATION Bre13 l 1033 ].


The Election management body in conjunction with the universityadministration will meet the price of establishing the pollingstation.


Installation of the Polling Station For the Students at RutgersUniversity

Crespi, Irving. &quotPolls as journalism.&quotPublic Opinion Quarterly(1980): 462-476.

This article explores the state of the University of Rutger. Theuniversity have few individuals participating in polling. The articleexplain that installation of numerous polling station in theuniversity will increase the number of individual participating in anelectoral process. A good number of the university student illustratethat they are not familiar with the surrounding environment.Therefore, they are unable to participate in the electral process infear of the outside environment. The article facilitate thatinstallation of the polling station would not only increase thenumber of participant during electoral process but also increase themorale to vote.

Zukin, Cliff. &quotSources of variation inpublished election polling: A primer.&quot ideas.2004.

The article addresses the survey issue. The article describe thatsurvey taken prior the Election Day may give a wrong result andimpression. This is due to influence expected and facilitated by thestudents. Individuals may be attracted toward someone in favor ofgain reward. This will not reflect in the electoral day since eachparticipate has personal drive toward the most influential candidate.Therefore, personal drive prays a crucial rule during the process.Mostly, voters hide their decision toward the most influentialaspirant to avoid opposition from others. The deviation may sometimeresult to violence among the opposition parties. Due to this, studenttend to take advantage of the situation and benefit from all side ofavailable opportunities.

Rose, Christopher, and Roy Yates. &quotEnsemblepolling strategies for increased paging capacity in mobilecommunication networks.&quot Wirelessnetworks 3.2 (1997): 159-167.

This article concentrates on the effect of distant polling and theaccessible polling. It state that Installation ofthe polling station in the university would have a great effect tothe environmental changes and leadership. Determination of the readerwould be a fair process among the student in the university.Existence of the distance polling led to poor choice of the leaderssince only a few people participate in the elections. Members in thepower are able to influence the result according to their will.Emergence of few numbers of people for the election purpose leddeviation of the opinion.Therefore, insufficient polling stations canbe termed as a problematic instance in the Rutgers University

Rose, Christopher, and Roy Yates. &quotEnsemblepolling strategies for increased paging capacity in mobilecommunication networks.&quot Wirelessnetworks 3.2 (1997): 159-167.

This journal articulate the controversial issuesin relation to installation of polling station. Scientist areconducting a consensus to evaluate whether sustainability of theproper governance is in any way related to human activities. In theirresearch, they have noted some negative influences and they are inthe progress of finding the cause. According to the research and somearticle definition, it is clear that numerous polling station makethe election process effective. According to the finding, it is clearthat there is a great relation between the environmental conditionand the governance. Therefore, polling strategies prays a significantrole to ensure paging capacity.

The article state that number of campusesexperience a positive result after establishment of a polling stationin the school environment. The amount used for the establishment ofthe poll is minimal compared to the attribution of the structure. Thepolling station will solve most some the problem experienced in theinstitution. Efficiency of the process will be achieved in a shorttime.

Rosenstiel, Tom. &quotPolitical polling and thenew media culture: A case of more being less.&quot PublicOpinion Quarterly 69.5 (2005): 698-715.

This article cite that the cost of installation ofthe polling station depend with the technology and the technicalityapplicable. Use of the current technology involve huge amount ofmoney for the installation while application of the old technologyinvolve small amount of money. The institution and the governmentneed to agree on the best price to emulate. The intention of theinstallation include massive participation and promotion of thedemocracy.


Schorr, Roberta Y., and Gerald A. Goldin.&quotStudents’ expression of affect in an inner-city SimCalcclassroom.&quot Educational Studies inMathematics 68.2 (2008): 131-148.

Poll, Ryan. Main Street and Empire: The Fictional Small Town inthe Age of Globalization. New Brunswick, N.J: Rutgers UniversityPress, 2012. Internet resource.

Cantril, Hadley. The Human Dimension: Experiences in PolicyResearch. New Brunswick, N.J: Rutgers University Press, 1967.Print.

Historic Sites in New Jersey: An Assessment of Public Opinion.Trenton, N.J.: Task Force on New Jersey History, 1997. Print.

mages Iii: A Report on the Quality of Life in New Jersey. NewBrunswick, N.J: The Institute, 1985. Print.

Redlawsk, David P. The the American Governor: Power, Constraint,and Leadership in the States. , 2015. Internet resource.

Blais, André. Anatomyof a liberal victory: Making sense of the vote in the 2000 Canadianelection. Broadview Press, 2002.

Breneman, David W. Earningsfrom learning: The rise of for-profit universities.SUNY Press, 2012.

Bregman, Z. &quot&quotDebate team finishes year with record ninth rank&quot.&quot Daily Targum (2013): 34-38. :

Diamante, R. &quot&quotCampaign spends year encouraging civility on campus&quot.&quot Daily Targum (2011): 26-28.

Prewett, Thom. The Issues that Matter at Rutgers University. 03 April 2015. 06 June 2006.

SEGERS, MARY. Experts from Rutgers University in Newark Can Comment on Issues Facing the Obama Administration. 19 February 2009. 06 June 2016.