This study examined the effect of capital structure on corporate performance with reference to Selected Companies in Onitsha. Questionnaires and interviews will be used to collect information from selected companies in Onitsha, Anambra State. The problem is whether the value of the firm would have been affected by using different types of securities, analysis and observation will be made which gives rise to validity of the conclusion at the end of the analysis.
Since there is no project without limitations the researcher will encounter the problem of finance. The money needed for transportation, photocopying of material and questionnaires and also time constraint. The time given to carry out the project is too small, although the research will put all her effort to see that this does not affect the project.
The recommendations for the study among others will be that:
CONCLUSION: Due to the inability of many companies to adopt optimum capital structure, coupled with their inability to source funds through borrowing as a result of increase in the cost of capital, have been identified as the major constraint militating against optimum performance especially on profitability.
This study examined the effect of capital structure on corporate performance with reference to selected companies in Onitsha, Questionnaires and interviews were used to collect information from the selected companies in Onitsha, Anambra State. Analysis and observations were made which gave rise to the validity of the conclusion at the end of the analysis, the major finding were:
The recommendations for the study among others were:
The researchers then concludes that:
General introduction
Statement of the problem
Purpose of the study
Research hypothesis
Significance of the study
Scope and limitations
Definition of terms
References
CHAPTER TWO
Literature review
The concept of capital structure
Security valuation
Review of previous studies
Theoretical foundation
References
CHAPTER THREE
Research design and methodology
Primary data
Secondary data
Scope and limitations
Population size
Data treatment and analysis
References
CHAPTER FOUR
Data presentation and analysis
Data analysis and presentation
Test and prove of hypothesis
CHAPTER FIVE
Summary, recommendation and conclusion
Recommendations
Conclusion
Definitions of terms
BIBLIOGRAPHY
APPENDIX.
A Corporation, Private or Public need capital to enable it achieves its objectives. Capital structure implies the nature and proportion of elements, which go to make up the capital invested in a business corporations that are in need of funds exchange their financial instruments for the money provided by the intermediaries or direct from savers. This money the corporations convert to tangible assets as building, land, plant and machinery, motor vehicles etc. Basically, a corporation uses three main sources of long term and permanent financing viz: common stock, preferred stock and debt financing (bond). It is the combination of these finances to particular firm that is termed capital structure.
There is need for reasonable balance of different types of securities comprising the capital structure of a firm otherwise the firm will deplete its financing ability or finance at sub optimal cost. In achieving this, the cost of capital is important for it has a major impact on the investment decision and the financing structure of the firm of which affect the riskiness and size of the firm. Specifically, the issue has been on whether or not financial leverage effects the firm’s cost of capital, its value and profitability, hence its corporate performance.
Two major schools of thought (the Traditionalist and Modigliani Miller) extreme views on the issues in question have been among those involved in the arguments. According to Modigliani and Miller, in their proposition which states that “the market value of any firm is independent of its capital structure and is obtained by discounting its expected return at a rate appropriate to its risk class”1 in their proposition 2 however, it states that the cost of equity is equal to the cost of capital of an unlevered firm plus the after-tax difference between the cost of an unlevered firm and the cost of debt weighted by the leverage ratio2. Their long standing and unresolved opposite views have become so controversial that it has led many into concluding that the literature is marked by serious confusion and contradictions. This particular notion is manifested in the words of LINTER “the decision rule which have been proposed for determining the optimal capital structure and reliance on different sources of financing are mutually in-consistent, in the sense that they have led to often substantially different decision under given sets of circumstance”3.
We are concerned with whether the way in which investment proposals are financed matters; and if it does matter, what is the optimal capital structure. If we finance with one mix of securities rather than another is the value of the firm affected? This study will be guide by the definition, which sees capital structure as the interrelationships among long term dept, preference share and net worth (ordinary share capital plus reserves and surplus).
Finally, this study will ask some staff or selected companies in Onitsha, Anambra State how effective and they think their capital structure have been and what has been the effects on the corporate performance.
This concern on how company or companies can raise the capital they need for their operations. These ways can be broadly classified into internal and external sources.
A. INTERNAL SOURCE OF CAPITAL
An existing business can raise its capital asset by withholding some part of the revenue it has generated. Such internally generated capital can take one of several forms.
i. Depreciation Capital
Depreciation capital can be created that means keeping some of the earnings aside as provision for capital consumption during the process of production. This amount can rightly be regarded as a cost item since it compensation for the part of the fixed equipment that is being lost during use.
The inability to make allowance for this depreciation has led to the failure of businesses after take off. Once a damaged key component of the capital equipment cannot be replaced, the production process is stopped.
ii. Ploughing Back Profit
Some part of the profit made by the businesses is kept back in the business instead of sharing it out as dividend or personal income to the owners. Such ploughed back funds are alternatively called retained earnings or undistributed corporate profits in the case of corporate bodies. When this is done, it means that the operation of the business can be expanded without involving it in any debt. The risk of liquidating the enterprise is reduced.
B. EXTERNAL SOURCES OF CAPITAL
Funds are raised from external bodies and can be done in one of several ways again. These bodies may not have any ownership relationship with the business before. Alternatively, those that were part owners may add more to their original combination. Examples of such external sources are discussed below.
i. Bonds and Debentures
Bonds like debenture and mortgages can be sold to those external agencies that care to buy. Interest on those bunds are calculated as cost for the purpose of taxation. Therefore before profits can be declared for tax to be imposed, the amount of interest paid must have been deducted.
These bond holders lay claim on the assets of the business first before the shareholders in case of liquidation.
ii. Issuance and Sale of Preferred Stocks
This class of shares can be sold to new persons that were never part of the previous ownership. Such shares might as well be bought more by previous part owners who merely wish to increase their shareholding. Holders of preferred stocks are paid dividends before the common stock holders. But they cannot be served until the creditors have been settled.
iii. Issuance of New Common Stocks
New shares of common stocks or ordinary shares or equity shares can be declared and sold to either existing shareholders or new ones. This is the last group to benefit from the earnings of the business.
iv. Direct Loans
Direct Loans can be syndicated from various types of financial institutions or individual moneylenders. They earn interest on the amount lent out and do not qualify to have a share of the profit.
These creditors can force the business to liquidation when the loans cannot be settled as agreed. A court of law will declare the business are new exposed to public auction in an attempt to settle the debts owed.
v. Grants and Aids
Governments and non-governmental organizations can asset businesses with nominal or real capital in support of the production efforts. This source of capital is the only one that does not involve the firms concerned in direct costs. The donor agency bears the full cost of such assistance. It is not a debt on the recipient.
1.2 STATEMENT OF THE PROBLEM
The use of debt as part of the capital of a business could either help or worsen the situation of a firm depending on how well the debt was used. Generally, long-term borrowing is required for purchase of new fixed assets or expansion of production capacity. Equally, a firm may use its retained earnings, which is shareholders money or raise more money within the organization through the issue of new shares. If loan credit is more than equity capital (owner’s fund) it is wrong and risky because this will increase the probability of bankruptcy. On the other hand, corporations need to borrow for its expansion and growth. But as usual, the choice of capital structure of a firm in the financing of capital projects determines to a large extent the value, profitability and risk of a firm to its shareholders.
Therefore, the study wants to seek answers to the following questions.
1.3 PURPOSE OF THE STUDY
1.4 RESEARCH HYPOTHESIS
In evaluating this research work, we postulate the following hypothesis in determining the effect of capital structure on corporate performance. The hypothesis are formulated in both:
Null Hypothesis (H0) and Alternative Hypothesis (H1)
1. H0:
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