EVALUATION OF CAPITAL STRUCTURE ON BUSINESS PROFITABILITY
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ABSTRACT
This study evaluated the impact of capital structure on the profitability of a business. A case study of the Asaba Bournvita firm. Asaba was randomly picked to represent the entire research sample of 200 Bournvita employees. The researcher utilized questionnaires as the data gathering instrument. Descriptive Utilizing a survey research design, this study was conducted. The survey included 133 respondents, including managers, administrative personnel, marketers, and junior workers. The acquired data were tabulated and evaluated using straightforward percentages and frequencies.
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Chapter One
Introduction
- Background of the study
The most crucial choice that all corporate managers must make is how to finance their companies’ long-term capital requirements. Capital structure refers to a company’s permanent financing, which consists mostly of stock and long-term liabilities and excludes all short-term credits. In order to identify the capital structure of a company organization, numerous criteria must emerge. Financial managers consider these issues first when determining an acceptable capital structure for their company. Cost of capital, flotation costs, company size, government policies, and market conditions are among the factors. The combination of equity and debt has implications. The first is the debt-to-equity ratio, which is considered a risk indicator. According to Samuel et al. (1992:44), business organizations are obligated to pay high fixed interest rates regardless of their profitability. Typically, debt capacity is assessed as a company’s ability to make interest and principal payments on its debt. One method of determining debt capacity is to increase the ratio of net cash inflow to interest expenses.
According to Pandey (1998-656), the ratio represents the number of times the interest due is met by the company’s upcoming cash inflows. The bigger the coverage, the smaller the debt-related risk in the capital structure. Inversely, the greater the risk coming from debt in capital structure, the lower the coverage. And a company’s failure to fulfill its interest due can result in bankruptcy. Moreover, if business owners are left to their own devices, they will raise the amount of debt in their capital structure in order to boost profits. Debt capital will accrue to them, and they will only be required to pay the interest rate. Consequently, companies with loan capital pay less in taxes.
When deciding whether to use more debt and less equity or more equity and less debt in their capital structure, corporations should consider their profit objectives. They should analyze how the capital structure may impact the organization’s profitability. Particularly over the long term, a company’s profitability will determine whether it will continue to operate or not. Return on capital employed, return on equity, earnings per share, return on assets, net profit margin, and gross profit margin are typical methods for measuring profitability.
STATEMENT OF PROBLEM
In order to finance their capital initiatives, the owners of a company will not want to lose control by issuing more shares to the general public. Instead, they are borrowing, which involves the use of debt instruments such as debenture stock. These business owners should be aware that whether or not there is a profit, the debentures should settle their interest. Nobody can foretell the future with absolute accuracy; business booms and busts are equally possible. How can businesses effectively blend loan and equity funding to secure profitability?
PURPOSE OF THE STUDY
The study’s aims are as follows:
To assess critically the differences in capital structure employed by the companies under consideration Bournvita corporation. Asaba
Determine how the capital structure impacts the profitability of the concerned business groups.
To identify some of the capital structure issues these companies face.
To provide solutions for these issues
RESEARCH HYPOTHESES
The researcher formulated the following research hypotheses for the successful completion of the study:
H0: There are no differences between the capital structures of the enterprises under consideration bournvita corporation Asaba
H1: There are differences between the capital structures of the enterprises under consideration bournvita corporation Asaba
H02: capital structure has no impact on the profitability of the companies in question.
H2: capital structure has an effect on the profitability of the businesses involved.
THE IMPORTANCE OF THE STUDY
The funding of a business is a crucial business choice. Managers of a company’s finances must determine whether to use more debt or more equity; whichever choice is made has consequences. Everyone should keep in mind that the primary purpose of every organization is to generate a profit, which this research will do through its findings:
To persuade corporate managers of the relationship between capital structure and the profitability of a company organization, and to equip them with the knowledge and tools necessary to make decisions in this regard.
The statement will aid potential investors in planning their capital structure in order to maximize profit.
This will be beneficial to the study endeavors of future scholars.
SCOPE AND BOUNDS OF THE STUDY
The scope of the study includes an evaluation of the effect of capital structure on the profitability of a company. A case study of the Asaba Bournvita firm. The researcher faces a constraint that restricts the study’s scope;
a) AVAILABILITY OF RESEARCH MATERIAL: The researcher has insufficient research material, consequently limiting the scope of the investigation.
b) TIME: The time allotted for the study does not allow for a broader scope because the researcher must mix it with other academic activities and examinations.
DEFINITION OF TERMS
Financial leverage is the use of fixed-cost sources of funding, such as debt and preference capital, in addition to the owner’s equity in the capital structure.
DEBENTURE STOCK: These are loans that corporations obtain by issuing shares to the general public. A fixed interest rate is offered, together with the investors’ rights in the event of nonpayment of either interest or principal. Mortgage debenture indicates that the property’s deeds have been lodged with the trustee, so that the property can be sold to repay the debenture holders if the firm defaults.
PREFENCE STOCK: These are stocks that entitle the bearer to a specified dividend rate, which must be paid out of the company’s profits before any dividends are given to the holders of common stock. Preference stockholders are corporate members, although they typically lack voting rights. It is a hybrid security since it combines debt and equity characteristics.
Debt is a loan obtained from an outside source to finance a firm. It is repayable and receives a return in the form of interest on the outstanding loan balance. Legally, the holders of debt instruments are the borrowing company’s creditors. Debt is exemplified by debenture.
It is a lasting investment in a business. A individual who invests in equity becomes a part-owner of the company. This is also a long-term financing option. It consists of the share capital, share premium, and reserves.
CASH PAYMENTS TO SHAREHOLDERS Upon the publication of credited accounts, the firm may distribute dividends, subject to shareholder approval at the annual general meeting. In a terrible year, a corporation could prefer to pay out a greater dividend than its earnings would allow. The difference must be covered by reserves, which are profits accumulated from prior years.
CAPITAL COMPONENTS: These items appeared on the left side of the balance sheet under the previous technique of balance sheet statement computation. Various types of debt, preferred stock, and common equity comprise the item in question. According to J. F. Weston et al.
EVALUATION OF CAPITAL STRUCTURE ON BUSINESS PROFITABILITY
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