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Azam-Khan

Adaptation of optimal capital structure can help firm proceed and progress

Interview with Mr Muhammad Azam Khan – CEO, Sunrise Capital

Profile

Mr Muhammad Azam Khan is a well reputed and recognized name in capital markets of Pakistan. His vision and leadership always proved to be exceptional. He has constantly proved his expertise and intelligence. Sunrise Capital, under his guideline, is contributing finest administrative, operational, research, sales & marketing objectives in the financial world. He started his professional career with international exposure at Mashreq Bank Dubai in a highly professional environment with dedication and commitment. Subsequently, he contributed his skills in the growth and development of Atlas Capital professionally. Furthermore, he enjoyed rendering his abilities as Chief Operating Officer at Standard Capital Securities and brought in structural reforms in the institutions and succeeded comfortably with effective exit strategy before the financial crunch of capital market in 2008. Under the guidelines and far-sighted vision of Mr. Azam developed Sunrise, a complete brand equipped with diversified expertise of human resource working passionately in his group of companies. Harvard recognized his financial services in 2014 and Mr. Azam Khan received third FPCCI award from President of Pakistan in 2015.

PAGE: YOUR VIEWS ON CORPORATE FINANCE:

MUHAMMAD AZAM KHAN: Corporate finance is the area of finance dealing with the sources of funding and the capital structure of corporations, the actions that take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources.

The primary goal of corporate finance is to maximize or increase shareholder value. Maximizing shareholder value requires balancing capital funding between investments in projects that increase the firm’s long term profitability and sustainability, along with paying excess cash in the form of dividends to shareholders. The Companies with growth strategy (i.e. firms that earn high rates of return on invested capital) will use most of the firm’s capital resources and surplus cash on investments and projects so the company can continue to expand its business operations into the future. While the companies that earn approximately average or lower returns on invested capital will use surplus cash to payout dividends to shareholders. So making capital investments is perhaps the most important corporate finance task and can have serious business implications.

Poor capital budgeting that causes over-investing or under-investing could put a company in weaker financial condition, either because of increased financing costs or having an inadequate operating capacity.

The financing choice of a firm is depends on the stock market development, it is being observed that in the under developed stock market firms prefer to borrow more instead of issuing new equity. While the relation changes for developed stock market, firms not only prefer to issue the equity but also substitute equity for debt. It is clearly witnessed in the increasing number of IPO’s at Pakistan stock exchange and number of Companies registered with SECP in recent years.

PAGE: HOW WOULD YOU COMMENT ON THE SOURCES OF FUNDING AND THE CAPITAL STRUCTURE OF CORPORATIONS IN PAKISTAN?

MUHAMMAD AZAM KHAN: Capital structure refers to combination of assets financing from different available sources. The companies have two choices, either to finance the assets from internal sources i.e. retained earnings or through external sources like debt or equity.

In a developing country like Pakistan debt market is small and under developed that’s why organization are dependents largely on the banking sector in obtaining debt to finance their operations. A large portion of the banking sector in Pakistan is privatized and they don’t offer debt finance on easy term. Moreover the organizations which involve in risky operations are also restricted to borrow less. So the firms need to find the right balance between alternative sources of funds in order to optimize the capital structure (i.e. the structure that would maximize the value of equity) and minimize its cost of financing, and the relative weights of debt and equity. Moreover improvements in macroeconomic conditions, stringent investor protection laws, revival of law and justice system affecting the Capital structure of Pakistan.

PAGE: WHAT ACTIONS SHOULD MANAGERS TAKE TO INCREASE THE VALUE OF THE FIRM TO THE SHAREHOLDERS?

MUHAMMAD AZAM KHAN: The basic goal of every organization is to set optimal capital structure that increase the firms value in terms of performance, increasing the share price and having the minimum cost of capital that we have to pay to our borrowers from which we gave our debt and return back that should gave to our equity holders.

The best possible choice of debt and equity share that will increase the shareholder’s wealth is referred to as capital structure of the firm. The firm’s capital structure which increases the shareholder’s wealth and decreases the firm’s cost of capital is referred to optimal capital structure of the firm. It is very debatable issue; there is no any specific formula or theory still designed to conclusively define the optimal structure of the firm that increase the firm’s overall value.

The relationship between the firm’s capital structure and the firms overall performance, profitability and shareholders wealth is present. The firms should look for the optimal capital structure that minimize the cost of capital and maximize the firm’s value and their share price to maximize shareholders wealth.

To measure the financial performance of the firm we can calculate the financial ratio related to the income statement and balance sheet of the firms and try to analyze the impact of capital structure of the firm on these financial ratios that adversely or positively impact the firm’s performance.

PAGE: WHAT IS YOUR TAKE ON INVESTMENT BANKING IN PAKISTAN?

MUHAMMAD AZAM KHAN: Investment banking is a traditional aspect of investments banks which involves helping customers, raise funds in the capital market (IPO) and advising on merger & acquisition.

Investment bank is responsible for preparing all the materials necessary for transaction as well as the execution of the deal which may involve subscribing investors to a security issuance, coordinating with bidders or negotiating with merger deals.

Essentially, investment banks serve as middlemen between a company and investors when the company wants to issue stock or bonds. The investment bank assists with pricing financial instruments so as to maximize revenue and with navigating regulatory requirements. Often, when a company holds its initial public offering (IPO), an investment bank will buy all or much of that company’s shares directly from the company.

Subsequently, as a proxy for the company holding the IPO, the investment bank will sell the shares on the market. This makes things much easier for the company itself, as they effectively contract out the IPO to the investment bank. Moreover, the investment bank stands to make a profit, as it will generally price its shares at a markup from the price it initially paid. Yet, in doing so the investment bank also takes on a substantial amount of risk. Though experienced analysts at the investment bank use their expertise to accurately price the stock as best they can, the investment bank can lose money on the deal if it turns out they have overvalued the stock, as in this case they will often have to sell the stock for less than they initially paid for it.

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