CAPITAL STRUCTURE DECISIONS:

Determining optimal capital structure: Every corporate seeks to maximize its shareholders
wealth and for that the organization is required to maximize its share price and minimize its
weighted average cost of capital, hence to achieve this objective it needs to decide the optimal
capital structure. The decision of the capital structure of the company under study that Is
SIEMENS Pakistan are made at the head quarters that is Siemens AG in Germany and Siemens
Pakistan is obliged to follow these policies as stated by Mr. Faisal Mushtaq in the interview.
Debt: Siemens Pakistan does not have any long term debts in order to avoid the risk of
bankruptcy; moreover the credibility of the firm is high stated by Mr. Mushtaq, banks are willing
to lend money to Siemens at lower interest rates. However its liability or the debt structure
primarily consists of the short-term running finances that are required to carry out the companys
day to day operation. These current liabilities include payables and the firms creditors are
allowed 30 days credit period as the company is cash-based firm.
Equity: Siemens Pakistan is a purely equity financed firm with 8.2 million share capital. Its 66%
shares are held by the Siemens AG since Siemens is a foreign based company. 12% by the
national investment trust 14% by the banks and the rest by the insurance companies and
individuals. Siemens Pakistan does not trade its shares frequently on the stock exchange, to
retain the ownership. It is a profitable company and thus is dependent mainly on its internal
equity; it believes in maximizing the return of its investors and therefore gives out a large
percentage as dividends.
Business risk: Siemens Pakistan, being a technology based company has a high fixed cost and
therefore it faces a higher business risk for instance if the company faces a decline in its sales it
then even this cost has to be borne by the company and this increases however higher the risk
higher will be the return. While conducting the interview Mr. Mushtaq the deputy general
manager (finance) indicated that due to the economic downturn in Pakistan Siemens has suffered
greatly and its revenues have declined dramatically. Moreover once the economy prospers and
the market would start developing as it was in few years back company would be able to remain
profitable and offer its shareholder a higher dividend.
Target capital structure: As mentioned earlier the optimal capital structure decision is taken by
Siemens AG and it is the responsibility of Siemens Pakistan to implement it effectively. The
company relies mainly on its internal equity and it is a cash-based firm. Siemens is a 100%
equity financed company hence it does not opt for debt as an effective source of funding.
Trade-off theory: Although as studies show that debt is a cheaper source of funding than equity
when asked to the deputy general manager finance, he highlighted that company considers debt
as a riskier source of financing its operation, as the companys financial performance was not
good it decided to cut off the dividends however if it would have been debt financed company
would have been obliged to pay the interest on its loan. It was argued that debt financing results

in tax benefit also but the bankruptcy cost might outweigh the tax benefit as indicated by the
trade-off theory.
Sales stability and Profitability: Two main factors that help in determining the optimal capital
structure are the stability of sales and the companys profitability. If a company has a more stable
sales it has the ability to take more debt and incur higher fixed charges than a company with
unstable sales. As Siemens Pakistan is operating in a market that is unpredictable due to
economical and political conditions of the country it sales are relatively unstable and also it has
been observed that companies that have high rates of returns on investments use relatively less
debt. And hence Siemens Pakistan has been profitable in the past five years as shown pointed out
by the deputy G.M (finance) thus this high rates of return enable them to do most of their
financing with internally generated funds.

MEGERS AND ACQUISITIONS: Siemens Pakistan is a multi-dimensional business including

transformers for the government, motors and generators for the large companies like multinationals, and does not frequently involves itself in mergers and acquisitions activities. In year
2005 Mr. Junaid Khan CEO Pakistan Telecommunication Company Limited (PTCL) and Sheikh
Tahir Javed Divisional Director of Siemens Pakistan Engineering Company signed on behalf of
the respective parties for the sale of 53 % shares held by Pakistan Telecommunication Company
Limited (PTCL) in Carrier Telephone Industries (CTI). The capital structure of PTCL comprises
of 8,016 ordinary shares of Rs. 1,000 each and Siemens AG, Germany 7,251, 5% cumulative
preference shares of Rs.1,000 each the final offer of Rs. 62,375 per share was made by the
Siemens and a total of Rs. 500 million for 8016 shares of PTCL in CTI. CTI was then privatized.
Share purchase agreement was signed between Siemens and Privatization commission.CTI
produces transmission equipment for telecommunication services which would help Siemens in
expanding its operation by integrating horizontally and benefiting with the increased profits. The
Siemens joint venture TIP (Telephone Industries of Pakistan) is continuing to produce state-ofthe-art equipment for the expansion and modernization of various telecom networks in Pakistan.