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VETTED CAPITAL STRUCTURE AND THE PERFORMANCE OF FIRMS

  • Type:Project
  • Chapters:5
  • Pages:86
  • Methodology:Regression Analysis
  • Reference:YES
  • Format:Microsoft Word
(Marketing Project Topics & Materials)
VETTED CAPITAL STRUCTURE AND THE PERFORMANCE OF FIRMS
CHAPTER ONE
    INTRODUCTION
1.1   PREAMBLE    
Every firm, private or public at one stage or the other is faced with long-term investment decisions which automatically lead to long-term capital requirement. Financing the firm’s investment may either be by increasing owners’ claim (Equity), increasing creditors’ claims or through a combination of debt and equity. The various means of financing represent the financial structure of an enterprise (Pandey: 2005). It is an important factor in every firm’s managerial decision, as it influences the equity holders’ returns and risk which in turn affect the cost of capital and market price of the stock. These various means of financing and their respective cost of capital and benefit necessitated the need for financing decision which centers on the issue of determining the appropriate proportion of debt and equity.
    Traditionally, short-term borrowings are excluded from the list of methods of financing the firm’s capital expenditure, as such long-term claims are said to form the capital structure of the enterprise (Pandey, 2005:289). Firms that are in need of finances exchange their financial securities (shares, Debenture etc) for funds provided by (Individual and Institutional) investors. These, the firms invest with the aim of maximizing returns, from which shareholder and debt holders are compensated in the form of earnings and interest respectively for the varying levels of risk undertaken. Capital structure is therefore the combination of Debt and Equity to finance the assets of the firm.
Capital structure decision is concerned with the ratio of debt to equity that will maximize the returns of the firm. Debt as a source of finance has several advantages. First interest paid on it is tax deductable, which lowers the effective cost of debt. Secondly, debt holders get a fixed return, so stockholders do not have to share their profits if business is extremely successful. Debt also has disadvantages. First the higher a company’s debt ratio the higher its interest rate will be. Secondly, if a company falls on hard times, and operating income is not sufficient to cover interest charges, stockholders will have to cover the shortfall, and if they cannot, bankruptcy will result (Eugene, 1995).
    The modern theory of capital structure began with the celebrated paper of Modigliani and Miller (1958). They pointed the direction that such theory must take by showing under what conditions capital structure is irrelevant (Milton and Arthur 1991). In their article, they showed that in a frictionless world the level of Debt in the capital structure is unrelated to the value of the firm, but in the real world, where interest on debt are tax deductable, Debt level is positively related to the value of the firm. Also arguments have ensued between those who believe that there is an optimum capital structure and those who do not believe; and there is yet no resolution of the conflict, while traditional approach asserts the existence of optimum capital structure, the supporters of MM approach (named after their initial proponent) believe there is no such structure.
1.2    STATEMENT OF THE RESEARCH PROBLEM
    One of the central issues in both the theory and practice of financial management is the problem of determining the relationship between capital structure and the value of the firm. There have been different and conflicting theories on the relationship between capital structure and the value of the firm. This issue has been a contentious area in the study of finance. Thus different schools of thoughts have emerged with their theoretical underpinnings and appeals.
    In Nigeria, the Capital market development, Banking sector reforms and the array of investment opportunities among listed firms have encouraged, facilitated and made frequent loan acquisition and the issue of financial securities as sources of finance to companies. These developments attracted the attention of both Nigerian and foreign investors into the new windows of investment, cumulating into oversubscription of issues and refunds to investors.
    Within the period of capital market development it was noticed that share prices exhibited noticeable fluctuation in prices and earnings per share, while some increased, some remain relatively stable and even others decreased in prices. There were even cases of negative Earnings per share. Firms have always looked forward to increase in their wealth, which is represented by earnings per share of the firm. The returns on their investment, they expect to exceed the cost of capital or their required rate of return. With this development in the Nigerian capital market, some firms capitalized on the opportunity to raise fund of varying forms. Considering the risk nature of these securities on the part of firms, there is need to weigh the impact of capital structure on the performance of the firm when deciding on their choice of financing. Filling this knowledge gap of the importance of the capital structure, in evaluating the firm’s performance will no doubt assist firms in their choice of investment and capital structure decision respectively.
Thus, answers will be sought for the following pertinent questions:-
1.    does capital structure have any effect on the return on equity of a capitalized manufacturing firm?
2.    does capital structure have any effect on the return on asset of a capitalized manufacturing firm?
3. what then is the appropriate response of management in optimizing capital to ensure improved  firm performance?                   
1.3    OBJECTIVES OF THE STUDY
    The study seeks to achieve the following objectives:
1.    to verify the relationship between capital structure and return on equity of a capitalized manufacturing firm?
 2.    to examine the relationship between financial structure and returns on assets of a capitalized manufacturing firm?
1.4    SCOPE OF THE STUDY
    Agbonifoh & Yomere (2001), posit that “Knowledge possibilities are expansive. In order to ensure that a research investigation is directed and focused, every study has its own boundaries. Otherwise the study may require eternity to complete”. Base on this fact, this study is delimited to a sample of ten manufacturing firms listed on the Nigerian stock exchange. The study covers a period of 11 years (2000 – 2010).
1.5    RELEVANCE OF THE STUDY
    The study of finance has shown debt as one of the main sources of financial risk to equity holders. This is because higher debt increases the cost of financial distress, especially in the period of economic recession. Empirical studies have also suggests that the choice of capital structure may help to mitigate agency cost (agency theory) and increase firm value.  Under this hypothesis, greater financial leverage is believed to help check the financial discipline of management through the threat of liquidation which causes managers personal losses
    This research study will assist firms and managers of firms in formulating profitable financing policy. To the potential debt holders and trade creditors, it will provide useful insight to the interpretation of capital structure of firms where they are stakeholders. Future researchers shall not be left out, as far as the relevance of this study is concerned. Potential equity holders will also benefit from this research, as they would be informed on the implications of different level of leverage, on expected returns. This study, would serve also as a reference point for future researchers who wish to carry out further study on the topic.
1.6    STATEMENT OF HYPOTHESES
Based on the aforementioned objectives of the study, the following hypothesis will be tested.
Hypothesis 1
Capital structure has significant relationship with returns on equity.
Hypothesis 2
There is a significant relationship between return on assets and capital structure
1.7    ORGANIZATION OF STUDY
    The research study is organized into five chapters. Following the introductory chapter is chapter two which X-rays the existing literatures (theoretical and empirical) on the subject matt er, while the methodology is described in chapter three. Chapter four presents the empirical analysis while chapter five provides the summary, policy recommendation and conclusion.
1.8    LIMITATIONS OF STUDY
          Like most research, some constraints may be inevitable. These include:-
1.    Empirical analysis of the capital structure and the performance of the firm in Nigerian have received inadequate attention of researchers. As such reference studies are relatively few.
2.    Accessing Data on the true borrowing profile of the firms in Nigerian seems to be difficult as some firms may intend to present a sound annual financial statement.
3.    There is also the problem of the use of secondary data which in some cases are not accurate.
1.9    DEFINITION OF TERMS.
Capital Structure
Pandey (2005) represent capital structure as the various means of financing. It has also been referred to as the amount of total current liabilities, long-term debt, preferred stock and common equity used to finance a firm. (Moyer, Mcguigan & Kretlow, 2002). It can be seen as the overall composition of a firm’s source of finance.
Financial Leverage
    The use of the fixed-charges sources of funds, such as debt and preference capital along with the owners’ equity in the capital structure, is described as financial leverage or gearing or trading on equity (Pandey 2005:290). Eugene (1995) sees it as the extent to which fixed-income securities (debt and preferred stocks) are used in a firm’s capital structure.
Firm Performance
    A firm’s performance measure prescribed indicators of effectiveness, efficiency and productivity.
Return on assets
It is the ratio of net income to total assets.
Return on equity
Return on equity is the rate of return to common shareholders. It is the net profit after taxes divided by shareholders’ equity which is given by net worth. (Pandey, 2005:531)
ROE = Profit after taxes     =    PAT
      Net worth (Equity)          NW



VETTED CAPITAL STRUCTURE AND THE PERFORMANCE OF FIRMS

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Details

Type Project
Department Marketing
Project ID MKT0967
Price ₦3,000 ($9)
Chapters 5 Chapters
No of Pages 86 Pages
Methodology Regression Analysis
Reference YES
Format Microsoft Word

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    Details

    Type Project
    Department Marketing
    Project ID MKT0967
    Price ₦3,000 ($9)
    Chapters 5 Chapters
    No of Pages 86 Pages
    Methodology Regression Analysis
    Reference YES
    Format Microsoft Word

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