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THE IMPACT OF WORKING CAPITAL STRUCTURE ON GROWTH AND SUSTAINABILITY OF BUSINESS ENTITY ON CORPORATE PERFORMANCE IN NIGERIA



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THE IMPACT OF WORKING CAPITAL STRUCTURE ON GROWTH AND SUSTAINABILITY OF BUSINESS ENTITY ON CORPORATE PERFORMANCE IN NIGERIA



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.    

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All Project Materials Inc. (2020). THE IMPACT OF WORKING CAPITAL STRUCTURE ON GROWTH AND SUSTAINABILITY OF BUSINESS ENTITY ON CORPORATE PERFORMANCE IN NIGERIA. Available at: https://researchcub.info/department/paper-8957.html. [Accessed: ].

THE IMPACT OF WORKING CAPITAL STRUCTURE ON GROWTH AND SUSTAINABILITY OF BUSINESS ENTITY ON CORPORATE PERFORMANCE IN NIGERIA


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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... Click here for more

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