In this presentation we learn the Factors Determining Capital Structure of Service Industry

1. FACTORS DETERMINING
CAPITAL STRUCTURE OF
SERVICE INDUSTRY
FURQAN JAVEED SYED
PES1PG21MB405
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2. What is Capital
Structure?
Capital structure is the combination of debt and
equity used by a company to finance its overall operations
and growth.
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3. Goal of
Companies
It is the goal of company
management to find the ideal
mix of debt and equity, also
referred to as the optimal
capital structure, to finance
operations.
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4. Why Do
Different
Industries
Have
Different
Capital
Structure?
Best suited for their type of Industry.
Examples
i. Automobile Industry – Capital
Intensive – Requires more Debt.
ii. Service Industry – Labor Intensive –
Prioritize equity.
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5. What is
Service
Industry?
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It creates services rather
than tangible objects.
It completes tasks that are useful
to customers, clients, businesses
or the general public.

6. Examples of
Service
Industry
Finance – Banks that offers bank accounts, loans and
investments.
Hospitality – Hotel, restaurant .
Travel – Flights or tour
Transportation – Cabs, train
Media – Newspaper, blog.
Entertainment - Video game, theme park or movie.
Sports - gyms and spectator sports such as professional football.

7. Factors
Determining
Capital
Structure
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Collateralized
Assets
Profitability
Income Tax
Non-Debt
Tax Shield
Firm Size
Firm’s
Growth

8. Collateralized
Assets
Assets which can be used as collateral to
secure loan.
Service Industries do not have high level of
assets like manufacturing firms.
The costs associated with agency problem
would be higher for the service firms because
of the lower level of collateralized assets.
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9. Profitability
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Measure of an organization’s
profit relative to its expenses.
Prefer short term debts.
Profits are used to pay-off
debt or is reinvested.

10. Income Tax
A type of tax that governments
impose on income generated by
businesses and individuals within
its jurisdiction.
Firms that face higher marginal tax
rates use more debt to take
advantage of tax shield.
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11. Non-Debt Tax Shield
A tax shield is a reduction in taxable income for an
individual or corporation.
It is done through claiming allowable deductions
such as mortgage interest, medical expenses,
charitable donations, amortization, and depreciation.
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12. Firm Size
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It consists of total assets, total sales,
and market value of equity.
Large size firms choose long term debt.
Small size firms choose short term debt.

13. Firm’s
Growth
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Increase their size,
usually measured in
terms of sales,
employment, profits or
value added.
High-growth firms find
it too costly to rely on
debt to finance growth.

14. Example
• WAL-MART CAPITAL
STRUCTURE
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15. References 15
• Britannica, T. Editors of Encyclopaedia (2018, May 28). service industry.
Encyclopedia Britannica. https://www.britannica.com/topic/service-industry
• Gill, A., Biger, N., Pai, C., & Bhutani, S. (2009). The Determinants of
Capital Structure in the Service Industry: Evidence from United States.
The Open Business Journal, 2(1), 48–53.
https://doi.org/10.2174/1874915100902010048
• https://simplicable.com/new/service-industry
• https://www.investopedia.com/

16. THANK YOU
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