ABSTRACT
The study investigates the impact of
working capital structure on growth and sustainability of business entity.
Specifically, it assesses the relationship between profit after tax and debt,
equity and retained earnings. A sample of ten selected quoted companies on the Nigeria
stock exchange was used.
The study used the multiple regression
model to look at The impact of working capital structure on growth and
sustainability of business entity on the profit after tax of the sampled
companies spanning a period of ten years (2001 -2010).
The finding of the study showed that there
is a significant relationship between capital structure and corporate
performance of selected companies measured in terms of profit after tax. The
regression showed that retained earning showed more relationship with profit
after tax than equity and debt.
The study thus recommended that companies
should make a proper appraisal of the various source of capital required for
better performance and emphasized the importance of efficient management of
capital structure of a firm.
TABLE
OF CONTENT
Title i
Certification ii
Dedication iii
Acknowledgement iv
Abstract vii
Table of Content ix
CHAPTER
ONE 1
Background to the Study 1
Statement of the Problem 5
Objective of the Study 7
Research Question 8
The Research Hypothesis 9
Significance of the Study 10
Scope and Limitation of the Study 11
Organization of the Study 12
CHAPTER
TWO 15
2.1 Introduction 15
2.2 The
Concept of Capital Structure 17
2.2.1 Basic
Assumption of Capital Structure 20
2.3 Concept
of Performance Measure in a Capital 21 Structured
Firm
2.3.1 The
Theoretical Explanation to Capital 23
Structure
Performance Relationship 23
2.3.2 Determinants
of Corporate Performance 27
2.4 Survey
of Relevant Literatures 28
2.4.1 Net
Income Approach 29
2.4.2 The
Net Operating Income Approach 32
2.4.3 The
Traditional View of intermediate 35
Approach
2.4.4 The
Modigliani and Miller 38
Approach
(Theory)
2.4.5 The
criticism of NI, NOI and Traditional 41
Model
2.5 Other
Theories of Capital Structure 44
2.5.1 The
Trade-off Theory 44
2.5.2 The
pecking Order Theory 46
2.6 Optimal
Capital Structure of a Firm 48
2.7 Other
Peripheral Studies 52
2.7.1 Equity
Capital and Firm’s Performance 52
2.7.2 Retained
Earning and Firm’s Performance 53
2.8 Capital
Structure Planning 54
2.8.1 Features
of an Appropriate Capital Structure 55
2.8.2 Potential
Determination of Capital Structure 57
CHAPTER
THREE 67
3.1 Introduction 67
3.2 Re-statement
of Hypothesis 68
3.3 Model
Specification 68
3.4 Model
Estimation Technique 69
3.5 Variable
Description and Data Sources 70
3.6 Scope
and Limitation 71
3.7 Expected
Result 72
3.8 Apropri
Expectation 73
CHAPTER
FOUR 74
4.1 Introduction 74
4.2 Interpretation
of Result 75
4.3 Standard
Error test 77
4.4 T-test
Result analysis 80
4.5 Test
for Overall Significance (F-test) 85
4.6 Summary
of Major Findings 87
CHAPTER
FIVE 91
5.1 Summary 91
5.2 Conclusion 93
5.3 Recommendation 94
Bibliography 97
List of Table
Appendix
LIST OF TABLE
Table 4.2. Regression
Result Summary
Table 4.4. Summary
of Test Obtained from the Analysis
Table 4.5 Test
overall Significant ( F-test)
CHAPTER
ONE: INTRODUCTION
1.1 BACKGROUNDS
TO THE STUDY
Capital structure remains one of the
popular topics among the scholars in finance field. It refers to the financial
framework of a firm which comprises of debt and equity used to finance the
firm. Capital structure in financial term means a way a firm finances its
assets through the combination of equity, debt or hybrid security(Saad, 2010).
According to Pandey (1995), capital
structure is define as the proportionate relationship between the various
long-term forms of financing such as debenture, long- term debt, preference
capital and common/ share capital including reserves and retained earnings.
The capital structure choice has long been
an issue of great debate in the corporate finance literature. For sometime now,
there has been argument whether the way a firm is financed matters. That is,
whether exist an optimum capital structure which a firm must adhere to in order
to achieve its objective of shares holder’s wealth maximization. Another area
of argument is the probable effect of changes in a firm financing mix on its
market value and its cost of capital.
Determination of an appropriate capital
structure for a firm is a critical decision. This is not as a result of the
importance of such decision to maximize return but because of the importance of
such decision to maximize return but because of the impact such decision has on
the firm ability to deal with its competitive environment. Capital structure
can be used to finance investment which is other wise refers to as financing
decision. This financing decision can affect the debt–equity mix of a firm and
this debt-equity mix has an overall implication on 9/the shareholders earning
and corporate performance firms in Nigeria.
Generally, there are basic two source of
capital. The internally generated source of capital and the externally generated
source of capital (Oyejide, 1987). The internally generated source of capital
comprises of mainly equity capital and retained earnings. These two forms of
capital under internally sources of finance are referred to as the
shareholder’s funds.
The other source of finance is the
externally generated source of capital. This is loan capital or debt finance.
Thus, investment projects of a capital can be financed either by increasing the
owners claims or the creditors claims. The owners’ claims increase when the
firm raises funds by issuing common shares or by retaining earnings; The
creditors claims increase by borrowings.
The financing or capital structure decision
is a significant managerial decision as it influences the shareholders returns
and risks. Consequently, the market value of the firm is determined by the
capital structure decision. The company will have to plan its capital structure
initially at the end of its promotion and subsequently. Whenever, funds have to
be raised to finance investment projects, capital structure decision is
involved.
Generally, the capital structure of a firm
presumed any of the following patterns (10% equity, 0% debt), 0% equity, 100%
debt, (X% equity, Y% debt). Option one is that of unlevered firms where the
firm ignores advantages (if any) of leverage. Option two is quite unrealistic
in real life situation as no investors would want to invest his money in a firm
without equity capital. This partially explains the term “trading on equity”.
That is, it is the equity element that is present in the firm’s capital
structure that encourage the debt provides to give their sources resources to
the business option three is the most realistic one in that it contained both a
certain percentage of equity and debt in the capital structure and thus, the
advantage of leverage (if any) is exploited.
1.2 STATEMENT OF THE PROBLEM
Capital imposed different obligations and
costs on the firm. Managers when deciding on the optimal capital structure for
the firm, take into consideration the cost of capital and the risks.
The actual effects of capital structure on
corporate performance in Nigeria
has been a major problem among researchers that as not been resolved. Zeitum
and Tian (2007) find out that capital structure has a significant and negative
effect on the forms performance measure in both accounting and market measures.
However, the proportion in which debt and equity are combined would influence
both the firm’s value and the overall cost of capital (K0). At this
point, the management has to divide from the outset whether or nor to employ
debt in its financing mix. If ‘yes’ what proportion of debt-equity will
maximize the total value of the firm or minimize the overall weighted average
cost of capital (WACC).
Moreover, the capital structure and corporate
performance in Nigeria which
sought to find the actual financing behaviour of firms in Nigeria and the factors that
influence the financing decision had not been stable overtime. However, a great
number of these empirical studies carried out in Nigeria have not been given
attention as it is in developed countries.
In light of the above, it was necessary to
evaluate The impact of working capital structure on growth and sustainability
of business entity or corporate performance in Nigeria.
1.3
OBJECTIVE OF THE STUDY
The broad objective of this research is to
evaluate the impact of working capital structure on growth and sustainability
of business entity on corporate performance in Nigeria. The specific are:
i.
To
determine whether the capital structure of a firm has effect on the corporate
performance or firm’s value.
ii.
To
determine the effect of leverage on the growth in earning of a firm.
iii.
To
know the particular proportionate combination of debt and equity that provides
the best expected trade off
iv.
To
test the validities of capital structure theories on the experience of quoted
companies in Nigeria and thereby providing up-to date evidence to validate existing
studies and thereby serving as guiding post for the future conduct of capital
structure in Nigeria.