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Essay: Centrica’s capital structure

Sample Essay

According to the Modgiliani and Miller model, the capital structure is irrelevant in perfect markets that are characterized by a lack of transaction costs, taxes and other assumptions. These are hard to apply in the energy sector and thus capital structure becomes relevant for Centrica.

There are definite and large transaction costs as well as costs of bankruptcy, given the large number of failures of new exploration ventures and companies as well as the prices in the gas sector not being determined by the market but by the influences from state owned enterprises under control of the former Soviet Unionand the Eastern European enterprises. Thus capital structure has an impact on the company.

Centrica makes heavy reliance on debt for its financing needs as compared to equity. This makes sense for the company as it is in the business of energy supply and utility provision.

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