Return On Capital, Financing Costs And Capital Structure

With the rapid development of China’s economy, a large number of promising enterprises which benefit well and have great potential have emerged. They are eager to integrate more funds to expand production and operation scale. However, when companies faced with such as bank loans, financing bonds, equity capital or retained earnings to supplement funds, how it should make a reasonable financing decision, to form the optimal capital structure? Nearly half a century, research on capital structure issues has been an important topic for domestic and foreign scholars. The capital structure theory thus formed is the key theory for companies to make develop financing plans and for investors and creditors to make invest decisions. As the main factors affecting corporate financing decisions, return on capital is not only an important financial indicator of listed companies, but also a very key macroeconomic variable for a region and the country. It determines the earnings of the company’s own capital, but also largely guides the flow of funds, and has a significant impact on capital decisions for companies, investors and creditors, thereby affecting the economic development of a country or region. Therefore, research scholars at home and abroad has more emphasis on return on capital. In a market economy, the return on capital is not only an important basis for corporate investors and creditors to make investment decisions, but also reflects the company’s own financing capacity, are closely related with businesses, investors and creditors.As we all know, whether the company as an economic entity or corporate investors and creditors have profit-driven. Creditors want the money which was invested not only safe, but also be able to generate enough interest; Investors want companies to have good prospects for development, and bring huge dividends in return; Business as an independent economy, but also want to minimize the cost to create greater value. Because of capital gains directly reflects the company’s profitability. Therefore, investors and creditors often make investment decisions based on this indicator. At the same time companies have to weigh the cost of the capital which creditors and investors invest in, to select the most favorable financing and reduce financing costs, and maximize economic benefits. Therefore, the return on capital by influencing investment activities of investors and creditors to affect the company’s financing decisions, to improve financing efficiency and reduce financing costs, thus affect the capital structure.In this paper,2010-2013 Shanghai and Shenzhen A-share listed companies is the research object, and collect relevant data from the huge influx of information network and GTA (CSMAR) database. Then make empirical study on the relationship between return on capital and financing costs, financing costs and capital structure, financing costs that under the influence of capital gains and capital structure, to reveal the factors that affect the capital structure of listed companies in China, so according to the index of return on capital businesses can make reasonable financial decision, reduce financing costs, and improve the corporate financing efficiency and operational efficiency.This paper takes the return on capital as an explanatory variable, uses the capital asset pricing model method (CAMP) to calculate the cost of equity financing, and uses the cost of interest payments/the average value of the long and short-term borrowings to calculate the cost of debt financing. Make the main business revenue growth, operating risk and company size as control variable of model, and introduce the cross-term of financing costs and ROC as explanatory variables, from the cost of equity financing and debt financing costs angles construct different models to test the hypothesis. The study finds that the return on capital and equity financing costs has a positive correlation, it shows that the higher of the return on capital, the higher of the rate of return required by shareholders; it has negative correlation with debt financing costs, that shows improving return on capital, creditors are willing to borrow more money, and companies reduce the cost accordingly. Capital Structure has positively correlated with the cross-term of return on capital and the costs of equity financing, it shows that the return on capital has no effect on the correlation between equity financing costs and capital structure, and by the action of the cost of equity financing to impact the capital structure; capital Structure has negatively correlated with the cross-term of return on capital and the costs of debt financing, it shows that creditors pay emphasis on the indicators of return on capital and make it as a basis for investment decisions, while the enterprise through the role of the index for debt financing to make the choice of capital structure.