An Evaluation of Capital Structure on Organisational Profitability (Case Study of Bonvita Company Asaba)
CHAPTER ONE
OBJECTIVE OF THE STUDY
The objectives of the study are;
- To critically evaluate the variations in capital structure used by different companies under study bournvita company Asaba
- To see how the capital structure affects the profitability of the business organizations concerned.
- To identify some of capital structure problems encountered by these companies
- To recommend solutions to these problems
CHAPTER TWO
REVIEW OF RELATED LITERATURE
Introduction
Modigliani and Miller (1958) have a theory of “capital structure irrelevance” where argue that financial leverage does not affect the firm’s market value with assumptions related to homogenous expectations, perfect capital markets and no taxes. Sarkar and Zapatero (2003) find a positive relationship between leverage and profitability. Myers and Majluf (1984) find firms that are profitable and generate high earnings are expected to use less debt capital comparing with equity than those that do not generate high earnings. Sheel (1994) showed that all leverage determinants factors studied, excepting firm size, are significant to explain debt behavior variations. Gleason, et al., (2000) Using data from retailers in 14 European countries, which are grouped into 4 cultural clusters, it is shown that capital structures for retailers vary by cultural clusters. This result holds in the presence of control variables. Using both financial and operational measures of performance, it is shown that capital structure influences financial performance, although not exclusively. A negative relationship between capital structure and performance suggests that agency issues may lead to use of higher than appropriate levels of debt in the capital structure, thereby producing lower performance. Graham (2000) integrates under firmspecific benefit functions to estimate that the capitalized tax benefit of debt equals 9.7% of firm value. The typical firm could double tax benefits by issuing debt until the marginal tax benefit begins to decline. It is inferred how aggressively a firm uses debt by observing the shape of its tax benefit function. Paradoxically, large, liquid, profitable firms with low expected distress costs use debt conservatively. Product market factors, growth options, low asset collateral, and planning for future expenditures lead to conservative debt usage. Conservative debt policy is persistent. Hennessy and Whited (2005) develop a dynamic trade-off model with endogenous choice of leverage, distributions, and real investment in the presence of a graduated corporate income tax, individual taxes on interest and corporate distributions, financial distress costs, and equity flotation costs.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought to an evaluation of capital structure on organizational profitability. case study of bournvita company Asaba.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain an evaluation of capital structure on organizational profitability
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of capital structure on organizational profitability
Summary
This study was on an evaluation of capital structure on organizational profitability. Four objectives were raised which included; To critically evaluate the variations in capital structure used by different companies under study bournvita company Asaba, to see how the capital structure affects the profitability of the business organizations concerned, to identify some of capital structure problems encountered by these companies and to recommend solutions to these problems. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staffs of bournvita company, Asaba was selected randomly. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made up managers, administrative staff, marketers and junior staff were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies
Conclusion
The profitability, and assets (firm-size) have been found to be negatively influencing the capital structure of the listed firms. These findings generally concur with the predictions of the pecking order theory and the signaling effects of capital structure decisions of firms. The relative participation of the equity in the capital structure of the company, represented by the index equity divided by the total liability, was significant at the level of 56% and its sign indicates positive relationship with profitability. This fact is in unison with the above mentioned works and shows to main financing option chosen by the Nigerian companies. The theoretical models on capital structure don’t indicate to be an optimum composition, one that would be the ideal for the company to adopt as seeking to maximize the value of its shares. However several studies relate high return rates with low debt level, contradicting the works of Modigliani and Miller (1958 and 1963), which affirm that the value of the company does not depend on the capital composition, also indicating the existence of taxes benefits of the debt.
Recommendation
It is important that listed bournvita company intensify their efforts to rely on internally generated funds to finance their operational activities. Even where external debt would be used, the banks should search for low interest-bearing loans so that the tax shield benefit of the loan will exceed the financial distress associated with it.
Bournvita company must not be only interested in mobilizing deposits but must also be concerned with utilizing these deposits effectively and efficiently. To achieve this, banks must set competitive lending rates that would not deter customers from accessing loans.
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