Impact of capital structure on cost of capital and value of firm: An empirical study of power industry in India

The liberal foreign investment policy adopted by Indian government under economic reforms has facilitated raising of capital and debt funds from overseas markets. Investment opportunities have expanded and financing options have widened for Indian corporate units. Now no corporate unit will like to depend just upon the domestic sources of funds. The composition of capital structure varies from industry to industry, from trade to trade and even within the same industry from company to company. Power industry has undergone significant change since economic reforms. For the purpose of analyzing financing pattern of power companies we have undertaken this research work. This study intends to analyse the impact of capital structure on cost of capital and value of firm in Power Industry. In the sample units, no significant relation is found between debt equity ratio and cost of equity over the period under study. The increase in the level of debt is not resulting in increase in cost of equity in the sample units, so it can be concluded that the sample units are using debt within the safe limits. The foregoing analysis in the sample units does not provide empirical evidence regarding positive relationship between debt equity ratio and value of firm.