EVALUATION OF CAPITAL STRUCTURE ON ORGANIZATIONAL PROFITABILITY
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EVALUATION OF CAPITAL STRUCTURE ON ORGANIZATIONAL PROFITABILITY
ABSTRACT
This study evaluated the impact of capital structure on organisational profitability. A case study of Bournvita Company, Asaba. The study’s entire population consists of 200 Bournvita firm employees in Asaba who were picked at random.
The researcher employed questionnaires to collect data. Descriptive A survey research design was used for this investigation. The survey used 133 respondents, including managers, administrative personnel, marketers, and junior staff. The acquired data were displayed in tables and analysed with simple percentages and frequencies.
CHAPTER ONE: Introduction
Background of the study.
The most crucial decision that all business managers must make is how their companies’ long-term capital requirements should be met financially. A firm’s capital structure is its permanent financing, which is mostly made up of stock and long-term liability, excluding all short-term credits.
Many elements must be considered while determining a company’s capital structure. These are the variables that financial managers assess first when determining an acceptable capital structure for their organisation. Some of the criteria include capital expenses, flotation costs, firm size, government rules, and market conditions.
The mix of debt and equity has some implications. The first is the debt-to-equity ratio, which is used to assess risk. According to Samuel et al. (1992:44), a high fixed interest commitment that must be met by the business organisation regardless of whether profits are generated or not.
Debt capacity, or a company’s ability to service its debt by making interest and principal payments, is typically quantified. One method of determining debt capacity is to increase the ratio of net cash inflow to interest charges.
According to Pandey (1998-656), the ratio reveals how many times the company’s next cash inflows satisfy its interest due. The higher the coverage, the smaller the risk from debt in the capital structure.
Conversely, the lower the coverage, the greater the risk associated with debt in the capital structure. Failure of a corporation to meet its interest obligations might lead to bankruptcy.
Furthermore, business owners will use more debt in their capital structures to increase profits. All other things being equal, they will benefit, and all they will have to pay is interest to offer debt capital. As a result, companies that use debt capital pay less in taxes.
When deciding whether to use more debt and less equity or more equity and less debt in its capital structure, the financial management of the enterprises in question should consider the business’s profit objectives.
They should analyse how their business’s capital structure will effect its profitability. The profitability of any corporate organisation determines whether or not it will continue to operate, particularly in the long run.
Profitability is typically quantified using the return on capital used, return on equity, earnings per share, return on assets, net profit margin, and gross profit margins.
STATEMENT OF PROBLEM
The owners of a firm do not want to lose control of their company by issuing more shares to the public in order to fund capital projects. Instead, they will borrow, which involves using a debt instrument such as debenture stock.
These business owners should be aware that whether or not a profit is made, the debentures’ interest should be settled. Nobody can anticipate the future precisely; there may be a company boom as well as a business slump. The issue therefore becomes how businesses might blend debt and equity funding to assure profitability.
OBJECTIVE OF THE STUDY
The study’s aims are:
To objectively assess the variances in capital structure adopted by different enterprises under consideration, Bournvita Asaba
To determine how the capital structure influences the profitability of the businesses involved.
To highlight some of the capital structure difficulties faced by these companies.
To offer remedies for these difficulties.
Research Hypotheses
To ensure the study’s success, the researcher developed the following research hypotheses:
H0: There are no changes in capital structure used by different enterprises under study, Bournvita Company Asaba.
H1: There are variances in capital structure used by different companies under consideration, Bournvita Company Asaba.
H02: Capital structure has no effect on the profitability of the commercial organisations in question.
H2: Capital structure influences the profitability of the commercial organisations involved.Significance of the Study
Business funding is an extremely significant business decision. Corporate finance managers must determine whether to use more debt or more equity; whichever measure is chosen has consequences.
Everyone should remember that the main goal of any firm is to create a profit, and this study work will achieve the following through its findings:
To persuade corporate managers of the relationship between capital structure and profitability of commercial organisations, allowing them to make appropriate decisions in that regard.
The statement will assist prospective investors in properly planning their capital structure in order to maximise profit.
This will benefit future scholars’ study efforts.
Scope and Limitations of the Study
The scope of the study includes an assessment of the impact of capital structure on organisational profitability. A case study of Bournvita Company, Asaba. The researcher faces various constraints that limit the scope of the investigation;
a) AVAILABILITY OF RESEARCH MATERIAL: The researcher has insufficient research material, which limits the investigation.
b) TIME: The study’s time frame does not allow for broader coverage because the researcher must balance other academic activities and examinations with the study.
Definition of Terms
FINANCIAL LEVERAGE: The use of fixed charges as a source of funding, such as debt and preference capital, in addition to the owner’s equity in the capital structure.
DEBENTURE STOCK: These are loans made by firms to the general public through the issuance of stock. A set interest rate is offered, as are the investors’ rights in the case of nonpayment of either interest or principal.
A mortgage debenture indicates that the deeds of title to property have been deposited with the trustee, and the property can be sold to repay the debenture holders if the company fails to pay.
PREFENCE STOCK: These are stocks that offer the holders the right to a stated rate of dividend, which must be paid from the company’s profits before any dividend is given to ordinary stockholders.
Preference stock holders are members of the corporation but do not often have voting rights. It is a hybrid security since it combines the characteristics of a debt and equity asset.
DEBT: Debt is a loan acquired from an outside source to fund a firm. It is repayable and receives a return in the form of interest on the outstanding loan. Holders of debt instruments are the borrowing company’s legal creditors.
Debentures are an example of debt.
EQUITY: A permanent investment in a corporation. Equity investment makes a person a part-owner of the company. This is also an option for long-term finance. It contains share capital, premiums, and reserves.
DIVIDENDS: These are cash payments to shareholders. When credited accounts are published, the firm may declare a dividend, which is subject to shareholder approval at the annual general meeting.
In a terrible year, a corporation may want to pay a higher dividend than overall earnings allow. The shortfall must be paid from reserves, which are profits collected over past years.
Capital Components: These are the elements on the left side of the balance sheet using the traditional way of calculating the balance sheet statement. The item includes several types of debt, preferred stock, and common equity.
According to J. F. Weston et al. (19977:695), any net growth in assets must be accompanied by an increase in one or more capital components.
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