Effect Of Capital Structures On the Cost Of Capital Of Companies Listed In the Nairobi Securities Exchange

Abstract

This study was undertaken to investigate the effect of capital structure on the cost of capital of the companies listed in the Nairobi Securities Exchange. There has been a contradiction where debt is referred as being cheaper than equity yet practically many firms avoid debt All firms normally want to reduce on cost in their operations hence the need to study the effect of capital structure on the cost of capital. There are various theories explaining the capital structure and also some researchers have pointed that there is a relationship between capital structure and the cost of capital while others have argued that there is no relationship between capital structure and cost of capital. The study employed descriptive survey design study where this involved collection of information by looking at the financial statements of the forty sampled firms quoted in the Nairobi Securities Exchange. The specific objectives of this study we,to establish the level of capital mix in the companies listed in the NSE,to establish whether cost of debt is cheaper than cost of equity in the companies listed in the NSE as per the capital structure theory and to investigate the relationship between capital structure and cost of capital. From the analysis of the forty companies listed in the Nairobi Securities Exchange, they were grouped in terms of market category and trend of debt/equity ratio and WACC for each sector were established where the Alternative Investment market sector recorded the highest debt/equity ratio and also the lowest vVACC. The relationship between the capital structure and the cost of capital was established where a correlation of -0.151 was established indicating that there was negative relationship between the capital structure and cost of capital where an increase in debt there was a decrease on the cost of capital (WACC). From the findings, it was recommended that fmancial managers should go for more debt for their companies and reduce on the equity fmancing so as to reduce the company's cost of capital.