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Wednesday, 28 October 2020





1.1 Background to the Study

The drive towards the achievement of set objectives; principal of which includes maximisation of shareholders’ wealth, influences choices as to source of long term funds and its efficient utilisation through investment in assets for productive activities. The selection of a particular form of long-term finance or a mix of choices, constitute what is commonly referred to as the ‘capital structure’ of corporate entities (Pratheepkanth, 2011). Discourse and research on this conceptusually has at its fore, debt and equity studied as a whole; equity being finance sourced through investment inshares of a company. Debt in this regard, refers to interest based funds inclusive of those raised through the issue of debt securities on the capital market and the contracting of long or short term loans from the money market financial institutions such as banks. A less discussed but important component of capital structure is finance lease which is a peculiar asset-based form of debt financing resulting in the acquisition of a physical noncurrent asset instead of liquid cash(Kraemer-Eis & Lang, 2012). Consequently, a representation of a lease liability as well as the corresponding leased asset is made on the statement of financial position of firms. Besides the use of equity (shareholders’ investments), debt instruments or facilities and hire purchase agreements, leasing is another finance avenue resorted to in asset acquisition where substantial capital outlay is involved. As noted by Feldman (2002), an industry, for instance aviation, which employs expensive high technology equipment, rather than make an outright purchase from available resources or secure procurement through regular debt, can opt for lease. 12 Leasing is an arrangement whereby a party, lessee obtains the ri ght to use an asset for a defined period of time in exchange for a consideration of regular lease payments to another, a lessor (Yan, 2006). It makes for an attractive source of finance due to its characteristic advantages. According to Adebisi (2003) as cited in Oko and Essien (2014), there are opportunities for cash conservation as the terms of payment for leased assets can be designed to match the cash flow patterns of lessee entities. Akinsulire (2011) stated the ease with which leasing agreements can be arranged especially for companies with liquidity problems, poor collateral availability and payment track record which constitutethe basis for credit worthiness assessments when other forms of finance are being sought such as loans. Subsequent to this ease is the flexibility with which lease terms, periodic payments and options to purchase could be adjusted in contrast to conventional debt financing (Malik, Saeed, Ahmed & Javed, 2012). The suitability of leasing by corporate bodies can be seen in that it presents with less threat of loss of company control through bankruptcy, or the dilution of shareholding associated with the use of either debt or equity methods of financing (Owoeye, 2004).The Federal Inland Revenue Service of Nigeria (FIRS) Circular (2010) highlighted the growing popularity of leasing due to the domestic high costs of non-current assets, the shortage of foreign exchange raising costs of its imports and the accessibility through leasing, of a hundred percent (100%) credit financing. This is in contrast to financial institutions providing a percentage of asset value in loans to be augmented by the borrower. Wyslocka and Szczepaniak (2012) buttressed the point of significant lease patronisation as it tends to be evident amongst firms of varying scales and forms. Leasing has become a customised financing mechanism employed by many sectors of an economy(Amembal, 2005). Oko and Anyanwu (2012) noted the growth of lease industries to be above 10% annually in developed countries such as the United States, United Kingdom and Japan. In Africa, Wright (2004) pointed out the countries- Malawi, Uganda, Tanzania and Ghana as having gained from international lease cooperation. Though the lease industry of the continent is generally still gaining ground compared to what obtains in the advanced economies, Nigeria, in addition to Morocco, Egypt and South Africa, was placed among the top 50 countries in 2013 and 2014 by volume of lease transactions valued at 0.68 and 0.50 billion dollars respectively (White Clarke Group, 2015& 2016).Oko and Essien (2014) describedthe Nigerian lease sectoras heterogeneous in size as well as form (small, medium and target ticket markets) anddependent on the operations, buying capacity and management orientation of firms. The Equipment Leasing Association of Nigeria (ELAN, 2015) highlighted the relevance of this finance alternative to the Nigerian economy given its contribution to capital formation in excess of 1.6 trillion nairawithinthe years, 2000-2014. The lease industry in 2015 recorded a growth rate of 27.39% with an outstanding volume of transactions valued at 1.1trillion naira. Out of this, finance leases accounted for a significant 75%with serviced industries including the oil and gas, transportation, manufacturing, telecommunications and agriculture (ELAN, 2016).Collectively, these industriescan also be discerned to have contributed to a consistent positive growth rate in leasing between the periods 2007-2015 with only a stunt in progression recorded from 2009-2012. In the literature of finance, the impetus for leasing is well supported by the capital structure theories considering certain attributes of firms.Modigliani-Miller Theorem(1958) initially proposed the existence of perfectcapital markets devoid of taxes, transactioncosts, bankruptcy costs, information asymmetries and agency costs facilitating fluid access to finance by entities. The assumption of this state correspondingly implied that it was irrelevant which method of financing an organisation used to conduct its operations as it was presumed to have no varying effect on the value of firms. With Fisseha (2010) noting the reality of the practical world being that markets are in fact imperfect, it brings to light the constraints associated with financial contracting and thus, capital structure, based on the frictions that apply to respective organisations. Later deliberations on the Modigliani-Miller Theorem gave rise to other theories of firm capital structure that attempted to explain finance contracting in consonance with the identified market imperfections that subsist. Theories such as the agency cost, pecking order and bankruptcy costs consider these imperfections that are by extension, either characteristics in themselves discernible of firms (information asymmetry and agency costs) or a function of some (bankruptcy costs in the case of financially distressed firms which in turn is a consequence of leverage positions). The theories equally provide for firm attributes which are not market imperfections but could explain choices of finance by firms (profitability and growth opportunities). In the context of the pecking order theory (Myers, 1984; Myers & Majluf, 1984), where information asymmetry abounds, higher costs of capital may prevail due to the consideration of risk (Cortez & Susanto, 2012).

Format: MS Word
Chapters: 1 - 5, Preliminary Pages, Abstract, References
Delivery: Email
No. of Pages: 115

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Masters Project Topics in Accounting and Finance

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