TABLE OF CONTENTS
CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND
TO THE STUDY
1.2 STATEMENT
OF THE PROBLEM
1.3 OBJECTIVE
OF THE STUDY
1.4 SCOPE
OF THE STUDY
1.5 SIGNIFICANCE
OF THE STUDY
1.6 PLAN
OF THE STUDY
CHAPTER
2
LITERATURE
REVIEW
2.1
Introduction
2.2
Theoretical Review
2.2.1
Modigliani and Miller Theory
2.2.2
The Tradeoff Theory
2.2.3
The Pecking Order Theory
2.2.4
The Agency Theory
2.3 Methodological
Literature
2.3.1 Return on Equity (ROE)
2.3.2 Earnings per Share (EPS)
2.3.3 Net
Asset per Share
CHAPTER 3
RESEARCH METHODOLOGY
3.1 INTRODUCTION
3.2 THEORETICAL
FRAMEWORK
3.3 MODEL FORMULATION
3.4 SOURCE OF DATA
3.5 METHOD OF DATA COLLECTION
3.6 ESTIMATION TECHNIQUES
Chapter Four
DATA
PRESENTATION, ANALYSIS AND INTERPRETATION
4.1
INTRODUCTION
4.2 DISCUSSION OF THE STATISTICAL PARAMETERS
AND
FINDINGS
4.2.1 TEST FOR STATIONARITY
4.2.2
ANALYSIS OF THE UNIT ROOT TEST USING AUGMENTED
DICKEY FULLER (ADF)
4.2.3 REGRESSION RESULT
4.2.4 THE F-STATISTICS
4.2.5 THE R-SQUARED AND THE DURBIN-WATSON
STATISTICS FOR
THE
THREE MODELS
CHAPTER
5
5.1 INTRODUCTION
5.2 Summary of Findings
5.3 Conclusion
5.3 Recommendations
REFERENCES
APPENDIX
CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND
TO THE STUDY
The
general problem all business entity face in Nigeria is the choice of finance.
Firms at every stage of growth and development, from commencement to maturity
need fund in order to survive. The aim of every business is to maximize the
wealth and welfare of its owners. Without finance, the aim of all business
cannot be met. As such, finance can be said to be the life wire of any firm
without which there can be no survival. Financing is the acquisition of cash or
other assets through means such as the sale of stocks, retaining net profit and
increasing of debt. A firm’s capitalization consists of internally generated
funds and due to the fact that a company may not be able to raise all the funds
which it requires internally, it may depend on additional external financing,
this bringing about leverage. The capitalization of the firm would therefore
incorporate both internally generated funds and external funds. Due to the
composition of these two sources of fund for the firm, there is a need to
strike a balance between them. This balance is called the optimal capital
structure. This is the
appropriate use of debt and equity that minimizes the firm's cost of capital
and maximizes firms’ value. It should however be borne in mind that a
non-optimal capital structure or lack of optimal debt and equity mix may lead
to higher financing costs and the firm may reject some capital budgeting
projects that would have increased shareholders' wealth with an optimal
financing.
The need for optimal capital structure will be
for the firm to enjoy tax shield and reduce bankruptcy cost. In their seminal
article, Modigliani and Miller (1958 and 1963) demonstrate that, in a
frictionless world, financial leverage is unrelated to value, but in a world
with tax-deductible interest payments, firm value and capital structure are
positively related since interest payment from debt help to reduce corporate
tax.
Leverage therefore is greatly
considered when investment is being undertaken by investors. By this, investors
prefer a firm that is less levered than one that is highly levered. However,
the level of activity that can take place in a firm depends on the level of
activity that goes on in the sector in which the firm operates as well as the
financial strength of the firm. Leverage has a direct effect on the activity of
the firm and as such will be greatly considered during the planning of the
financial policy of the organization.
1.2 STATEMENT
OF THE PROBLEM
Empirical studies tends
to be less interested on how leverage determines shareholders value per se, and
more on how changes in the capital structure of a company affects value (Hitt,
Hoskisson, and Harrison, 1991), and thus its overall performance (Jensen,
1986).
Shareholders
values vary with different level of debt usages. Shareholder values increase
with increase of debt until the marginal benefits from leverage equal to the
marginal bankruptcy costs, at this point, the Shareholders value reaches its
maximum level, if we further increase the level of debt usages, Shareholders’
values not only increases but also decrease as per the trade-off theory as said
by Jensen and Meckling (1976). As such, there is need to study the relationship
that exists between these two phenomenons which are financial leverage and
shareholders’ value. In the case of Nigeria, scanty of research has been done
to investigate the relationship between financial leverage and shareholders’
value. The question of whether or not financial leverage has any impact on the
value of shareholders of construction companies listed on the Nigerian stock
exchange remains unanswered. This study is intended to provide answer to this
question.
1.3 OBJECTIVE
OF THE STUDY
This
research aims at studying the impact leverage has on shareholders’ value of
listed construction companies in Nigeria. Specifically, the objectives
of the research are:
i.
To assess the relationship between debt
ratio and net asset per share.
ii.
To assess the relationship between debt
ratio and Return on Equity.
iii.
To assess the relationship between debt
ratio and earnings per share.
1.4 SCOPE
OF THE STUDY
This
research focus on the construction companies listed on the Nigerian Stock
Exchange (NSE). There are nine construction companies listed on NSE. However
the research did not cover all the listed construction firms, this was due to
insufficiency in terms of data of those companies for the period covered. From
the survey carried out in obtaining data at the time of this study, five
construction firms had data which were sufficient enough for the study. The
period covered in the study runs from 2010 to 2014. All data used for the study
were extracted from the financial statement of the selected firms and those
financial statements were obtained directly from the NSE library.
1.5 SIGNIFICANCE
OF THE STUDY
In
a bid to make policies relating to capital structure through knowledge of the
effect of financial leverage on the shareholders’ value of firms, this research
will be useful to the government in making policies on finance that aim at
protecting potential and existing investors.
In order to maintain competitive
positions and add value to their companies, today’s financial managers need to
make critical business, financial and investment decisions which lead to the
long-run maximization of the shareholders’ wealth. This study is foreseen to
respond to the need of management to know the impact financial leverage has on
shareholders’ value and also help financial analyst when giving financial advices
on issue pertaining to capital structure.
The
scholars and Academicians; as new challenges and opportunities emerge in the
business environment, change is inevitable. This calls for continuous research
to ascertain the actual situations rather than living on assumptions. As such,
this study will be useful for further research on this subject matter.
1.6 PLAN
OF THE STUDY
This
research is organized into five chapters.
Chapter
one provides a brief background on the overall research, statement of the
problem, research questions, Objective, scope and the significance of this
study. Chapter two reviews the
theoretical, methodological, and empirical literatures on leverage and capital
structure. For the purpose of clarity, the empirical literature was presented
on a table. Chapter three discusses the method and data used for this research.
The focus of this chapter is on how the research was conducted in order to
derive the findings and conclusions. The research process focuses on sources of
data; method of data collection and method of data analysis. In chapter four, the findings of the research
are discussed. This is a very essential part of the research as it explains the
findings according to the objectives stated in chapter one.
Chapter
five concludes the research and gives a summary of the study as well as some
recommendations for future research.
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