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1.1 Background of the Problem
Capital structure has a crucial role to play on determining company’s financial performance and fulfills the expectations of stakeholders who always demand the increase of their company’s value. Goyal (2013) argued that, “capital structure decision is critical for any firm for maximizing return to the various stakeholders and also enhance firm’s ability to operate in a competitive environment”. Moreover, Awunyo and Badu (2012) stated that “even though generally firms have a choice on how to combine debt and equity, managers attempt to ascertain a particular combination that will maximize profitability and firm’s market value”. Ross (2002) also showed the importance of capital structure decision to finance managers by stating that, “finance managers try to find the capital structure that maximizes the value of the firm”. His argument shows that capital structure decision is one of the crucial decisions that help to maximize company value.
The idea of relating company’s capital structure and its value started since the establishment of irrelevancy theory of capital structure by Modigliani and Miller in 1958. This theory was cited by Toraman (2013) which stated that, “firm value is independent of its capital structure”. In recent years, researchers come up with different perspectives of their studies; some revealed the positive relationship between capital structure and company profit while others revealed the negative relationship between the variables. Safiuddin (2015) and Adesina (2015) in their study results, they found that capital structure was strongly associated with firm’s performance. Narayanasary
(2015) and Mwangi (2013) concluded a negative relationship between capital structure and company profitability. Because of the controversial results revealed by previous researchers, that situation provided an opportunity for a researcher to add the knowledge by analyzing the effect of capital on profitability of listed manufacturing companies in Nigeria. The results obtained were compared with the trade off theory of capital structure. Researcher revealed mixed results; positive relationship between the variables which was consistent with the trade off theory and negative relationship which was not consistent with the trade off theory
Since most of researchers in Nigeria managed to the relationship between capital structure and commercial bank performance, this study based on measuring the relationship between capital structure and profitability of listed manufacturing companies. Kipesha (2014) and Kaaya (2013) conducted the study on the relationship between commercial bank performance and capital structure in Nigeria. There are several researchers who analyzed the effect of capital structure on firm performance in developed countries. However, empirical studies on the impact of capital structure on firm performance in developing countries especially in Nigeria are very little. This study filled the gap and adds the new knowledge by analyzing such kind of relationship here in Nigeria.
This study used Nigeria Brewery,food and breverages as a data collection point. It is an organisation where investors can buy and sell financial securities such as shares and bonds
1.2 Statement of the Problem
Companies usually need resources for them to grow and develop their operating activities however; there are constraints in financing company resources. For that case, company resources should be applied with care so as to create enough shareholders value and for users of company resources. This study was intend to assist finance managers and company managements to have guidance on attaining optimal financing decisions of using debt and equity in order to improve their company’s financial performance. This argument was supported by Kibet (2011) cited by Mwangi (2014) who argued that company managers lack adequate guidance for attaining optimal financing decisions.
The study about capital structure is a crucial tool used in maximizing company financial performance which is the best interest of shareholders who expects dividends and capital gains from the company. Mansoon (2014) stated that “the decision of capital structure choices is of paramount importance for firms and optimal capital structure is such a mix of debt and equity that maximizes the firm’s value and reduces the weighted average cost of capital”. Capital structure decision also helps managers to accomplish their financial strategies like investment and daily operational activities. The argument supported by Toraman (2013) who stated that the selection of capital structure components and uses play an important role during the determination of financial
strategies of the company. Mireku (2014) also argued that capital structure is strongly linked to the capability of organization to fulfill the expectations of their stakeholders.
Researcher got an opportunity to add the knowledge by analyzing such relationship in Nigeria because for many years, the link between capital structure and company profitability of the firm has been the subject of global debate and yet there is insufficient evidence to support this argument.
1.3 General Research Objective
The main objective of this study was to analyze the effect of capital structure on profitability of manufacturing companies listed in Nigeria Brewery.
1.4 Specific Research Objectives
(i) To analyze profitability of manufacturing companies listed in Nigeria Brewery, Food and breverages.
(ii) To analyze capital structure ratios of manufacturing companies listed in Nigeria Brewery, Food and breverages.
(iii) To determine the relationship between capital structure and profitability of
manufacturing companies listed in Nigeria Brewery, Food and breverages
1.5 Research Hypothesis
The researcher tested the truthiness of the statement by either accept or reject the hypothesis statement at 5% significance level. There was only one hypothesis statement
which was divided into null and alternative hypothesis. The null hypothesis (H0) and alternative hypothesis (H1) was as follows,
Ho: there is no significant relationship between leverage and firm‟s performance
H1: there is significant relationship between leverage and firm‟s performance
Ho :there is no significant relationship between macroeconomic variables and firms performance
H1:there is significant relationship between macroeconomic variables and firms performance
1.6 Significant of the Study
The results of this study will provide financial guidance to managers, business consultants and investors with the necessary techniques of combining debt and equity and being able to maximize company performance. This study will assist decision makers especially finance managers and policy planners of both public and private companies to formulate better policy decisions in respect of the mix of debt and equity capital and therefore increase shareholders value and reduce bankruptcy costs. This study will be used by investors and other people with the intention of investing to analyze the companies and see what kind of capital structure mix generates more profit for the company. This study will assist other academicians to write further studies concerning financial issues and add the knowledge to the community. Academicians who intend to write dissertations for Bachelor and Masters Degree programs provided in Nigeria and in other parts of the world may use the study results as the reference to support their studies.
This study will assist finance managers and other finance officers in public listed companies to advice on their management about the best source of finance which contribute more profitability of the company. Investors and other company stakeholders after reading this study will be in a position to know the profitability and capital structure indicators of the companies in which they would like to invest and acquire returns in terms of dividends or capital gains.
1.7 Organization of the Study
The second chapter of this study consisted of literature review which clarified definition of key study concepts, theoretical literature of the study where theories related to the study were elaborated. In that section, empirical literature was also reviewed. Moreover, research gap and conceptual framework were part of that section. Chapter three of this study clarified about the methods of data collection, research methodology, data processing and analysis of the study.
Moreover, the study talked about chapter four which talked about study findings and discussion. In that chapter, empirical results of the study were discovered and compared with previous studies and theories of capital structure. Then chapter five of this study talked about the conclusion and recommendation of the study. Finally, this study consisted of final pages which were references and appendices of company data or information used for data analysis purpose. Appendices also consisted of statistical results already analyzed by regression, correlations, and descriptive statistics with the help of STATA computer software program.
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