DEBT AND EQUITY FINANCING IN SINGAPORE

Abstract

The study of the theory of corporate financing is an unresolved and controversial area of Economics. In spite of the vast amount of effort and resources put into the study and research of corporation financing, there still does not exist a unified and conclusive theoretical model of corporation finance able to withstand empirical scrutiny. This Academic Exercise seeks to examine the debt and dividend policies of the corporate sector in Singapore, the effect that taxes have on corporate decisions, and the theoretical rationalisation behind each action. In Chapter I, the field of corporate financial management is introduced, giving its scope, theoretical background, and the various management decisions that the management faces. The next chapter presents the income tax system in Singapore, emphasising the tax on corporate income, the items which enjoy deductibility from the above, and the tax treatment of the income from dividends and interest payments (from debentures). A proper understanding of the workings of the tax system is essential for the analysis of the corporate sector found in Chapter IV. In Chapter III, some of the past literature written on the theory of corporation finance is reviewed. Here, the various models each paper proposes, and the forecasts made by each model, are examined. The conflicts and disagreements that exist among the various papers are also explored. The more complex and mathematical models presented here have been simplified to ensure readability, and may, therefore, not be the exact replication of the original works. In Chapter IV, an attempt is made to predict the financial structure of firms within the corporate sector in Singapore, utilising the theoretical foundation that has been laid in the preceding chapter. The emphasis here is on the effects of taxes on the debt-equity ratio and the dividend payout ratio. In the final chapter, an empirical analysis is carried out to determine the ratios that exist in the actual corporate sector and to verify, or invalidate, the predictions made in the previous chapter. However , in view of the various conceptual, empirical and research-related difficulties encountered, the reader is cautioned that the empirical work and subsequent results found in this chapter may not be taken as a true reflection of the actual corporate sector in Singapore, but rather should be taken as an exercise in the practical application in the theory of Economics.