THE EFFECT OF CAPITAL STRUCTURE ON CORPORATE PERFORMANCES (A CASE STUDY OF SELECTED COMPANIES IN UGHELLI)
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Capital Structure
CHAPTER FIVE
5.1 SUMMARY, RECOMMENDATION AND CONCLUSION
SUMMARY OF FINDINGS
The researcher undertook a survey on the “effect of capital structure on corporate performance” with regards to selected companies in Onitsha. A close examination of the result of this study as presented in chapter four reveals that corporations performance depends to a large extent on how the different types of securities comprising the capital structure is being combined. In fact, it points out that the balance in the combination will rate the corporation a better performance.
FROM THE RESEARCH CARRIED OUT, IT WAS FOUND THAT:
1. Capital structures have significant effect on corporate performance. (in terms of profitability).
2. There is a relationship between capital structure and cost of capital.
3. There is high cost of capital, which hinders the companies borrowing ability.
5.2 RECOMMENDATION
Based on the above findings. I therefore make the following recommendations:
1. Having examined the benefits derivable from use of debt capital, the company is advised to increase their efficiency in the use of debt capital.
2. Since the cost borrowing is so high, if a firm should be able to service fixed charges associated with senior securities and leasing, it can borrow
3. The debt capacity of a firm could be determined by evaluating the probability of cash insolvency. It is also the amount which a firm can service easily even under adverse conditions.
4. The financial manager should consult the investment analysts, investment bankers and lenders to learn more about a comparison of capital structure ratios.
5. For improved performance mostly on profitability, the optimum combination of funds from varying sources which is superior to any alternative combination is necessary.
5.3 CONCLUSION
The researcher then concludes the followings:
1. That inability of many companies to adopt optimal capital structure has been increasing their cost of capital.
2. -That due to increase in the cost of capital for many firms, they were unable to borrow in order to meet up their capital investments hence the decrease in the corporate performance mostly on their profitability.
3. That the optimal capital structure is one of which the marginal real cost (the sum of both the explicit and the implicit costs) of each available method of financing is the same.
5.4 DEFINITION OF TERMS
1. Cost of capital:
It is the overall, or average, required rate of return on the aggregate of the investment project.
2. Profitability:
The capital structure of the company should be advantageous.
3. Capital Structure:
It refer to the mix of long-term sources of funds, such as debentures, long-term debt, preference share capital and equity share capital including reserves and surpluses (i.e. retained earnings). It is also used to represent the proportionate relationship between debt and equity.
4. Debt Capital:
It is amount which must be paid, but has not yet been paid to the owner or to the company.
5. Debt Capacity:
The debt capacity of a company depends on its ability to generate future cash flow. It should have enough cash to pay creditors fixed charges and principal sum.
6. Cash Insolvency:
It is the inability of the company to pay their debt. They should have enough cash to settle their creditor’s fixed charge.
7. Financial Manager:
Is a person who is responsible in a significant way to carryout the financial functions.
