Effect of Leverage on Corporate Performance in Nigeria

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  • Topic: Finance, Capital structure, Modigliani-Miller theorem
  • Pages : 20 (6488 words )
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  • Published : July 15, 2010
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EFFECT OF LEVERAGE ON CORPORATE PERFORMANCE IN NIGERIA

A PAPER PRESENTED TO THE DEPARTMENT OF MANAGEMENT SCIENCE OF LADOKE AKINTOLA UNIVERSITY OF TECHNOLOGY OGBOMOSO, OYO STATE.

ABSTRACT
In contemporary business organization, profit maximization is seen as the primary objective of establishing a firm; therefore the success of a firm is measured on how well it can increase earnings to its shareholders. This study has therefore made an attempt to establish issues regarding the use of fixed cost financing to improve the overall profitability of the firm through empirical analysis, which is a response to conflicting opinion on the effectiveness of fixed cost financing on a firm’s value.

TABLE OF CONTENT
TITTLE PAGE
ABSTRACTii
CHAPTER ONE: INTRODUCTION
BACKGROUND OF STUDY1
STATEMENT OF PROBLEM2
OBJECTIVE OF STUDY3
SIGNIFICANCE OF STUDY3
SCOPE/ LIMITATION OF STUDY3
CHAPTER TWO: LITERATURE REVIEW
INTRODUCTION4
CAPITAL STRUCTURE THEORY4-7
CHAPTER THREE:RESERCH METHODOLOGY
INTRODUCTION8
METHOD OF ANALYSIS8
MODEL SPECIFICATION8
STATEMENT OF HYPOTHESIS9
MEASURE OF LEVERAGE9
MEASURE OF PERFOMANCE9
CHAPTER FOUR: PRESENTATION AND DATA ANALYSIS
INTRODUCTION10
DATA PRESENTATION10-12
INTERPRETATION OF RESULTS13-15
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION
SUMMARY16
CONCLUSION17
RECOMMENDATION18

CHAPTER ONE
INTRODUCTION
BACKGROUND OF STUDY
Every time the firm makes an investment decision, it is at the same time making a financing decision. The assets of a company can be financed either by increasing the owners claim or the creditors’ claims. The owner’s claims increase when the firm raises funds by issuing ordinary shares or by retaining the earnings while the creditors’ claims increase through borrowings from hem. The various means of financing represents the financial structure of the organization.

The financing or capital structure decision is a significant managerial decision. It influences the shareholders return and risk; and consequently, the market value of the share may also be affected by the capital structure decision. The company will then have to plan its capital structure initially at the time of its promotion in which the value of the firm depends upon its expected earnings stream and the rate used to discount this stream. Thus leverage cannot change the total expected earnings of the firm, but it can affect the residue earnings of the shareholders. If leverage affects the cost of capital and the value of the firm, an optimum capital structure would be obtained at that combination of debt and equity that maximizes the total value of the firm or minimizes the weighted average cost of capital. The effect of leverage on the firm’s value is not very clear, conflicting opinions have been expressed on this issue. In fact, this issue is one of the most contentious areas in the theory of finance and perhaps more theoretical work and empirical study has been done on this subject than any other. There has been a major source of controversy among scholars due to the diverse nature of their results. The result of this study will not only validate the finding of existing studies, but also serve as a reference for future financial decision making, designed to achieving optimum capital structure that would optimize the returns to the shareholders. This research intends to examine the following questions being faced by company’s management while making the financing decision.

* How should the investment be financed?
* Does it really matter the way in which the investment project is financed? * How does financing affect the shareholders risk return and value? * Does there exist, an optimum financing mix in terms of the maximum value to shareholders of a company? * Can the optimum financing mix be determined in practice for a company? * What factors in practice should a company...
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