CHAPTER ONE

INTRODUCTION

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