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Wednesday, 28 October 2020





1.1 Background to the Study

All forms of business organisation whether large or small need money to start and to meet their daily and long-time obligations if they want to maintain a going concern status. These businesses exist to achieve various goals which include profit maximization, shareholder value maximization, sale volume and sale revenue maximization, increased market share, survival, ethical goal, and satisficing. Achieving these goals translates into meeting harmonized expectations of stakeholders. Focal to this sought-after accomplishment is informed consideration of financing channels available to the firm. The financing options available to a firm are debt or equity which forms its capital structure. According to Chechet, Garba and Odudu (2013), a perfect combination of debt and equity is very important to the growth and future of a firm if properly utilized. Thus, the importance of capital structure decisions in the achievement of a firm’s goals cannot be over emphasized. The theory of capital structure was first introduced by Modigliani and Miller (1958) in their seminal paper on the relevance of capital structure to the value of a firm under perfect market based on some assumptions (where there are no transaction costs, no corporate and personal taxes, symmetric information, amongst others). Thus, the irrelevancy theory arguably forms the basis of modern thinking on capital structure in finance. For the past decades following the work of Modigliani and Miller, intensive research has been conducted to empirically test the validity of their theory. Capital structure research has focused on whether financial decisions become relevant if these assumptions are relaxed. As noted by Bevan and Danbolt (2002), under market imperfections, firms will determine and attempt to select level of debt-equity mix that will make an optimal capital structure. Therefore, determining optimal capital mix has been the focus of corporate finance literature. Capital structure according to Martina (2015) is the way a corporation finances its assets through the mixture of debt and equity. Whether a firm is financed by debt or equity or a combination of both has some implications. As both involve costs to the company, there is need for the company to choose the right option that minimizes its cost and in most cases companies tend to choose the most probable least-cost combination. Thus, the debt and equity proportions are the measurement tools for capital structure. Determining debt and equity is an important decision faced by companies. Consequently, studies indicate that companies without borrowings (unlevered firms) show less fluctuations in their earnings, whereas companies with borrowings (levered companies) show greater fluctuations in their earnings when there are changes in their financial performance (Ojo, 2012; Akhtar, Javed, Maryam, & Sadia, 2012and Hasanzadeh, Torabynia, Esgandari & Kordbacheh, 2013). Some specific implications of borrowing on levered firms are outlined as follows: borrowings require interest payments that in effect, slash firms‟ net incomes, interest expenses are costs that increase the volatility of net incomes and thus, affect EPS and borrowings also relatively reduce the proportion of the equity in a company’s capital structure and thus, reduce the number of shares outstanding. Therefore, companies have to carefully structure their capital mix so that the best result can be achieved. Chechet etal (2013) opined that an optimal combination of capital structure is one that not only maintains the stability but also enhances the firm’s wealth. However, many factors are considered when making this important financial decision, because a wrong turn may lead the firm to financial instability or distress which is not the aim of a going concern.

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

NB: The Complete Thesis is well written and ready to use. 

Price: 10,000 NGN
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Masters Project Topics in Accounting and Finance

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