CAPITAL STRUCTURE AND SHAREHOLDERS VALUE

Corporate finance:Corporate finance encompasses all the undertakings of a business. It looks into how businesses finance their transactions and business events, invest their resources and finally, evaluate the results. Corporate finance is relevant to both large and small businesses. Three fundamental principles that underline corporate finance include investment, financing and the relevant dividend principles (Castle, 2008). Incorporating corporate finance principle into business model, the companies aim to achieve their objectives and value maximization.Corporate finance deals with the businesses investing in assets and projects. Choosing investment assets and projects, the company aims at yielding investment returns over and above the minimum hurdle rate. The investment decisions are based on the hurdle rates, the evaluation of advantages and disadvantages of the projects and finally, the cash flows, which are generated in the result of project implementation. The cash flows are also necessary for calculating the net present value of the project (NPV), which is one of most important indicators for investment decision – making. In addition, the financing mix (debt and equity) also requires informed choosing. The chosen financing mix aims at maximizing the value of the investments made (Jones, 2011; Castle 2008).The financed assets should match the financing mix.This applies if there are not enough investments that merit hurdle rate, the cash goes back to owners of the business in the form of dividends. Some stockholders, however, prefer stock buybacks.Consideration of the capital structure, the combination of equity and debt, is important for the smooth management of the firm. Evaluating capital structure is the most basic step for the valuation of assets and identification of risks. The firm has to consider its capital structure before any major decision; this includes valuation of inventories, debt to equity ratio and debt to value ratio. The essence of corporate finance is its internal consistency. Therefore, corporate finance has to be considered an integrated whole instead of a collection of choices and decisions.Hypothesis:In this paper we will test the hypothesis: No relationship exist between companies' capital structure and the shareholders' value maximization. Petrochemical Industries:Petrochemical industries primarily include manufacturing companies that produces chemicals using oil and natural gas as the major raw materials (Petrochemical Industry, 2012). Considering that the oil is one of the major resources in Saudi Arabia, the petrochemical industries count 45% of total GDP of the country (The World Factbook. Middle East: Saudi Arabia, 2012). In addition, approximately 6 million foreign workers are employed by petrochemical companies. Therefore, considering the importance of petrochemical industry in the Kingdom of Saudi Arabia, it is reasonable to study the petrochemical companies. Companies selected:SABIC:SABIC was founded in September 1976 with the initial goal to expert the production of by-products of oil extraction. The company produces value added commodities, such as chemicals, polymers and fertilizers. Today, SABIC is ranked as the world largest petrochemicals manufacturer, and it is part of the listed public companies based in Riyadh, Saudi Arabia with 70% of its shares owned by the Saudi Government and the rest are held by private investors from …