1.1 Introduction
Capital structure is the proportion or each type of capital debt and equity used by a business organization. Many organizations employ debt in their capital structure because of its benefits. One of the benefits is that interest on debt is tax deductible and reduces tax liability of the organizations concerned. Investors, governments and other external consumers of financial information also need to assess the efficiency of an entity. Performance assessment is carried out in order to assess the success of the business, to recognize any flaws in the business, to compare current and past performance and to compare current performance with industry norm. Capital structure represents a firm's financial framework which consists of the debt and equity used to finance the firm. Firms’ ability to carry out their stakeholders’ requirements is closely related to capital structure (Saad, 2010).
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitation of the study and Definition of technical terms.
1.2 Background of Study
A firm’s leverage refers to the mix of its financial liabilities. As financial capital is an uncertain but critical resource for all firms, suppliers of finance are able to exert control over firms. Debt and equity are the two major classes of liabilities, with debt holders and equity holders representing the two types of investors in the firm. Each of these is associated with different levels of risk, benefits, and control. The most important decision all corporate managers should take into consideration is the way in which the long-term capital requirements of their companies should be financial.
Capital structure is the permanent financing of a firm represented primarily by equity and long-term liability without including all short-term credits. Many factors have to surface in order to determine the capital structure of a business organization. These factors are what the financial managers consider first in order to determine appropriate capital structure suitable to his firm.
In determining whether to employ more of debt and less of equity or more of equally and less of debt in its capital structure, the financial managers of the firms concerned should take into account, the profit objectives of that business. They should consider how the capital structure will affect the profitability of their business organization. The profitability of any business organization will determine whether it will remain in business or not especially in the long run. Profitability is normally measured using return on capital employed return on equity, earning per share, return on assets, net profit margin and gross profit margin.
Miller (2007) added personal taxes to his analysis and demonstrated that optimal debt usage occurs on a macro-level but does not exist at the firm level and that interest deductibility at firm level is offset at the investor level. Other researchers have added imperfections such as bankruptcy cost, agency costs and gains from leverage-induced tax shields to M&M analysis and have maintained that an optimal capital structure may exist but yet, this academic literature has not been very helpful to provide clear guidance on practical issues. Most important, with only few exceptions, most existing empirical evidence from capital structure studies to date, are based on data from developed countries with only few studies proving evidence from developing countries. Though, debt ratios in developing countries seem to be affected in the same way and by the same types of variables that are significant in developed countries. However, there are systematic differences in the way these ratios are affected by country factors, such as GDP growth rates, inflation rates, and development of capital markets.
The manufacturing sector consists of establishments that use mechanical or chemical processes to transform material or substances into new products. An establishment is usually at a single physical location and is often called a plant, factory, or mill. It ordinarily uses power-driven machines and equipment for handling materials. Its products may be final products that consumers will purchase, such as an automobile or a chair, or they may be goods for use by other manufacturers, such as parts for automobile engines or rolls of upholstery fabric. A manufacturing establishment may also assemble parts or perform blending operations. Manufacturers are in the business of producing physical units of output for consumption by end users or other manufacturers. One goal of production is to consume as few inputs as possible to produce a quality output.
Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Capital Structure and Performance of Manufacturing Firms.
1.3 Statement of Problems
Investigation revealed that the owners of a company will not like to loose the control they have in their company by issuing more shares to the public in order to finance their capital projects. Instead, they to borrowing, this means using debt instrument like debenture stock. These owners of the business should not fail to know that whether there is profit or not that the debentures should be settle their interest. Nobody can perfectly predict the future, there can be business boom and there can equally be stump in business.
In reality, optimal capital structure of a firm is difficult to determine. Financial managers have difficulty in determining the optimal capital structure. A firm has to issue various securities in a countless mixture to come across particular combinations that can maximize its overall value which means optimal capital structure.
In Nigeria investors and stake holders do not looks in details the effect of capital structure in measuring their firms performance as they may assume that attribution of capital structure is not related or dose not contribute to the performance of a firm, but not knowing that it plays an imperative role in the performance of any firm.
1.4 Aim and Objectives of Study
The aim of the study is to examine the Impact of Capital Structure on the Performance of Nigeria Manufacturing Firms. In achieving this aim, the following specific objectives were laid out as follows:
- To identify some of capital structure problems encountered by these companies;
- To find out the capital structure affects the profitability of the business organizations concerned;
- To critically evaluate the variations in capital structure used by different companies under study; and
- To recommend solutions to the problems affecting the Capital Structure on the Performance of Nigeria Manufacturing Firm.
1.5 Research Questions
The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- What are the variations in capital structure used by different companies under study?
- What is the capital structure affects the profitability of the business organizations concerned?
- What are the capital structure problems encountered by these companies?
- What are the problems affecting the Capital Structure on the Performance of Nigeria Manufacturing Firm?
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