Abstract:
The researcher set out to "[consider] the factors relevant to the capital structure decision of large South African civil engineering and building construction companies, and [to establish guidelines for determining their optimal capital structure". This optimistic goal is sought via an examination of the theories of Ezra Solomon, Gordon Donaldson, and Modigliani and Miller. The role of inflation, the relevance of cash flow, and the application of the EBIT-EPS (Earnings before Interest and Taxes, and Earnings per Share) approach are also considered. Five companies, viz. Murray & Roberts, LTA, Grinaker, Group Five and Fowler are investigated, as are the criteria employed by life insurance companies and merchant banks in extending credit. Ratio analyses, share price fluctuations and balance sheet profiles are also provided. Yet in conclusion the report can only "recommend that construction companies should employ the maximum judicious proportion of debt in their capital structures... The report concludes by emphasising that timing and flexibility are overriding factors in a capital structure decision. Based on all the information at its disposal, it is left to management to exercise its judgement".
