CAPITAL STRUCTURE AND MARKET VALUES OF COMPANIES
        TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background of Study                         
Statement of the Problem                     
Objectives of the Study                         
Scope of Study                             
Research Hypothesis                         
Significance of the Study             
Limitation of Study                     
References                     
CHAPTER TWO: LITERATURE REVIEW
Versions of Capital Structure                     
Market Valuation of Companies             
Cost of Capital                             
Cost of Equity                            
The Weighted Average Cost of Capital             
Theories of Capital Structure                     
Capital Structure and its Effects on Market Valuation/
Share Prices                            
The Relationship Between the Use of Financial Leverage and
Share Prices                             
Financial Innovation for Improving Capital Structure         
The Role of the Capital Market in Share Prices Valuation    
Factors that Influence Share Prices                
References                                
CHAPTER THREE: METHODOLOGY
Introduction                             
Research Design                             
Populations and Sample Size                     
Sources of Data                            
Research Instrument                         
Opertionalization of Variables                     
Model Specification and Data Analysis            
References                             
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
Introduction                         
Presentation of Results                     
Test of Hypothesis                         
Discussion of Findings                     
CHAPTER FIVE: SUMMARY, RECOMMENDATION AND CONCLUSION
Introduction                        
Summary of Findings                        
Conclusion                                
Recommendation                        
Bibliography                             
Appendix                                 
CHAPTER ONE
INTRODUCTION
BACKGROUND OF STUDY
One of the major issue of the modern corporate finance theory is the capital structure irrelevancy proposition (Modigliani and Miller, 1958). They asserted that the market value of any firm is independent of its capital structure. It is observed that the optimal capital structure closely related to the growth potential of the firms (Mc Connel and Servaes 1995, Jung, Kim and Stulz 1995) and some other variables such as the size and industry characteristics.
Debt policy and equity ownership structure matter, and the way in which they matter differs between firms (Mc Connel and Servaes 1995). Leland and Pyle (2007), propose that managers will take debt/equity ratio as a signal, by the fact that high leverage implies higher bankruptcy risk (and cost) for low quality firms since managers always have information advantage over the outsiders, the debt structure may be as a signal to the market. Rose model suggests that the value of firms will rise with the leverage since increasing leverage increases the market perception of value.
Suppose there is no agency problem i.e. management acts, in the interest of all shareholders. The manager will maximize the company’s firm value by choosing the optimal capital structure, highest possible debt ratio, high quality firms need to signal their quality to market, while the low quality firms try to imitate.
According to this argument, the debt level should be positively related to the value of the firm. Assuming information asymmetry, the pecking order theory (Myers and Majurh 1984) predict firm will follow the pecking order as optimal financial strategy, the reason behind this theory is that if the manager act on behalf of the owners, they will issue securities at a higher price than they are truly worth.
The more sensitive of the security, the higher the cost of equity capital, since the action of the manager is giving a signal to the market that the securities are overpriced. Stulz (1990) urge that it can have both positive and negative effect on the value of the firm (even in the absence of corporate taxes and bankruptcy costs). He develops a model in which debt financing can both alleviate the over investment problem. Stulz (1990) assumes that managers have no equity ownership in the firm and receive utility by managing a larger firm. The “power of manager” may motivate the self interest managers to undertake negative present value projects. To solve this problem, shareholders force firms to issue debt, but if firms are forced to pay out funds, they may have to forgo positive present value projects. Therefore, the optimal debt structure is determined by balancing the optimal agency cost of debt and the agency cost of managerial discretion.
According to Stulz (1990), McConnell and Servaes (1995), Jung, Kim, (1996), the influence of the debt on the firms value depending on the presence of growth opportunities for firms facing low growth opportunities, the debt ratios are negatively related to the firm value.
Capital structure is the mixture of permanent sources of funds a firm uses in financing its operation, primarily represented by long term debt, preference stock common equity, debenture which excludes all short term credit i.e. overdraft. The amount of debt that a firm uses to finance its asset is called leverage. A firm with a lot of debt in its capital structure is said to be highly leveraged while a firm with no debt is said to be unleveraged.
Pandey (2005) stated that the mix of debt and equity is known as a firm capital structure. The manager should rigorously strive to obtain the optimum capital structure for the organizational well being. It should be noted that the firm’s capital structure is seen as optimal when its market value of shares is maximized. An appropriate capital structure is a critical decision for any business organization and this decision is very important not just because of its need to maximize shareholders wealth or increase the market value of companies, but also because of the impact such decision has on the company ability to deal with the competitive environment.
In other developing countries of the world and Nigeria in particular not much has been written on the conceptual linkage between market value of companies and capital structure, therefore the financial manager should seek that capital structure which maximizes the value of the firm. The firm optimal capital structure should represent a balance between debt and equity such advantage that comes from using cheaper debt is just matched by the increase in the financial risk that comes from debt.
STATEMENT OF THE PROBLEM
The capital structure mix that a company decides will definitely have an effect on its value. A cursory look will be taken on the extent to which capital structure relate to the market value, there is need to seek answers to the followings;
What is the relationship between capital structure and market value of companies?
Does optimal capital structure improve on market value for existing and potential shareholders?
Does the shareholders fund have any impact on the market value of the firm?
What are the factors that influence the decisions of management as regards capital structure?
OBJECTIVES OF THE STUDY
The hallmark of business enterprises are probity and accountability which enable the organization to gain public confidence on which organization strives. This research work seeks to achieve the following objectives:
To establish the relationship between capital structure and market values of companies.
To determine the factors that influence the decision of management as regards capital structure.
To determine if shareholders fund have a significant impact on the market value of the firm.
To ascertain the optimal capital structure that improves on market value for existing and potential shareholders.
SCOPE OF STUDY
This research work encompasses a comprehensive survey of companies in Nigeria. The fundamental aim to this study is to analyze the relationship that subsist between capital structure and market value or share price. The data is obtained by using a cross section of quoted companies in the Nigeria Stock Exchange for the period of 2011.
RESEARCH HYPOTHESIS
Null Hypothesis (Ho): Capital Structure does not have impact on the market value of the firm.
Alternative Hypothesis (H1): Capital Structure has a significant impact on the market value of the firm.
 Hull Hypothesis (Ho): Shareholders fund does not have significant impact on the market value of the firm.
Alternative Hypothesis (H1): Shareholders fund have a significant impact on the market value of the firm
SIGNIFICANCE OF THE STUDY
This study attempts to produce information to bridge the information needs of the potential and actual investors as well as for management of companies. Therefore the following categories will benefit from the findings of this research work:
Potential Investors: It could serve as a guide to determine the value of the company that would finally have an influence on their investment decision.
Management: It could expose them to improve practices as well as help to control share prices.
Shareholders: It could help them to estimate and evaluate the returns suitable from their investment.
Government: It would be beneficial to government in the area of policy formulation and implementation towards sustaining the capital structure policies already in place.
The public: It would enlighten the public in the area of providing relevant information for the future researchers own research work.
Customers: It will expose them to knowing the company better, thereby making the demand for the company’s product increase. It would also make them evaluate the returns suitable from investment.
LIMITATION OF STUDY
The research study is associated with problems of data collection base on the difficulty in obtaining information required for the study.
The smalless of sample size is also a constraints to this research work or project.
It is also possible that wrong information has been given intentionally or otherwise during the data collection process.
Some of the data analyzed were based on fact and figures reported by journals, magazines, newspaper, textbooks etc. There is the likelihood that historical errors reported by them might be included.
REFERENCES
Pandy, I. M. (2005), Financial Management (8th edition), Vikas Publishing House.
Leland, H. E. and Pyle D. H. (2007), Informational Asymmetries, Financial Structure and Financial Intermediation, Journals of Finance.
Modiagliani, F. and Miller M. H. (1958), “The Cost of Capital Corporation Finance and the Theory of Investment”, American Economic Reviews.
Arthur, J. K.; David, F. S., John, D. M. and William, P. J. (2001), Basic Financial Management (7th edition), London: McGraw Hill Irwin.

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