ABSTRACT
The study
focuses on the determinant of corporate profitability in the Nigeria
manufacturing sector. To achieve the objective of this study, qualitative and
quantitative data was gotten from primary and secondary source, and simple
random sampling was utilized, to select a sample size of two manufacturing
sectors (Guinness Nigeria Plc and Nigeria Brewery), the rationale for adopting
this technique is to avoid bias. The chi-square was used in testing the various
hypotheses formulated. In the course of this study, it was observed that there
is a relationship between corporate profitability and its determinant in the
manufacturing sector which is in line with the researcher’s theoretical
expectations. It was also discovered that there are factors outside the manufacturing
sectors control that affects profitability such factors are cost of importation
of raw materials, taxes, inflation among others. It also revealed that a
relationship exist between corporate profitability and increase in production
of goods/stocks. As a result of the findings, recommendations were made and
some of them are, employment of experts in the field so as to ensure proper
management, reduction of tax and different government charges to the lowest
minimum, support from financial institutions in terms of lending loans, training
and retraining of staff to improve their knowledge and skills.
TABLE
OF CONTENTS
Title
Page i
Certification
ii
Dedication
iii
Acknowledgements
iv
Abstract
vi
Table
of Contents vii
Chapter
One: Introduction 1
1.1
Background to the Study 1
1.2
Statement of Problem 6
1.3
Research Questions 6
1.4
Objectives of the Study 7
1.5
Statement of Hypotheses 7
1.6
Significance of the Study 8
1.7
Scope of the Study 9
1.8
Limitations of the Study 9
1.9
Definition of Terms 10
Chapter
Two: Literature Review 12
2.1 Introduction
12
2.2
Capital Structure and Corporate
Profitability 13
2.3 Firm Size and Corporate Profitability 15
2.4 Liquidity and Corporate Profitability 17
2.5 Financial Leverage and Corporate
Profitability 18
2.6 Determinant of Corporate Profitability 19
2.7 Company-Level Determinant of Profitability
in Nigeria 27
Chapter
Three: Research Methodology 32
3.1 Introduction
32
3.2 Research Design 32
3.3
Description of Population of the Study 33
3.4
Sample Size 33
3.5
Sampling Techniques 33
3.6
Sources of Data Collection 34
3.7
Method of Data Presentation 34
3.8
Method of Data Analysis 35
Chapter
Four: Data Presentation, Analysis and
Interpretation
36
4.1
Introduction 36
4.2
Data Presentation 36
4.3
Data Analysis
4.4
Hypothesis Testing
Chapter
Five: Summary of Findings, Conclusion and Recommendations
5.1 Introduction
5.2 Summary
of Findings
5.3 Conclusion
5.4 Recommendations
References
Appendix
I
Appendix II
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Profits are one of the key elements in
the cyclical growth of economics because of the effect they have on investment
and saving behavior and therefore on capacity, productivity and
competitiveness. The evolution of profits and relative income shares gives
information about the cash flow positions of firms, which may affect business
environment. There is a close link between the profit shares which is defined
as the ratio of non-financial gross operating surplus to output and investment,
defined as the ratio of gross private investment to output. Most of the turning
points in the investment ratio coincide with or are proceeded by turning point
in the profit ratio. It is argued that this close link suggest that the decline
in the profit share may be important determinant of change in investment.
Current literature offers surprisingly
few studies of profit rates. A large body of literature is devoted to the study
of “pricing to market”, which encompasses price discrimination across
destination markets, the “pass through” effect, but does not address the
feedback to profit. Another approach is to analyze a related concept, the rate
of return, defined as the ratio of the gross operating surplus to the
replacement value of capital.
Although the concept of the rate of
return is more relevant for investment purpose, problems in measuring the stock
of capital across countries make international comparison difficult and
ambiguous. Moreover, in the short run, the capital output ratio typically does
not change significantly. Therefore, several analysis use the rti of profit to
GNP with validity in profitability measures defined as the ratio of gross
operating surplus to nominal profit.
Following Clarinda model of pricing-to-market
to analyze profit. However, the analysis explicitly models imported inputs and
alternative definition of relative prices, and test their significance in
determinant of profits. It turns out that the impact of these costs often
substantially higher than that of relative prices or exchange rate factors that
have attracted much attention in the past.
Profit, in effect, is a simple residual
concept but its level is determined by the complex interaction of a multitude
of factors, the typical form profit (denote by p)
in a simple competitive market model is defined by p = TR – W. N-P.K where:
TR = Is
the total revenue (or total sales of the firm). The firm’s costs are
represented by the wage will (wage rate, time; the work-force, N of the firm)
and the cost of capital (the rental cost of capital, p multiplied the capital
stock of the firm K0.
According to Sargent, the rental or user
cost of capital is equal to the interest rate on government bonds plus the
depreciation rate minus the expected rate of increase in the price of new
capital goods.
According to corporate finance theory
that in order for investment in fixed capital to be profitable, the rate of
return should at least be equal to the cost of borrowing fund to finance the
investment plus a charge for depreciation. In other words, if the initial cost
of the investment undertaking is greater than the present value of expected
future returns on the investment (i.e. the net present value is negative), then
the firm should not proceed with the investment. If the net present value of
available investment project is positive, then in a world without capital
rationing, the firms should continue to invest in project until, at the margin,
the firms is indifferent between the investment and the purchase of a government
bond. Ultimately, the rate of accumulation of new capital (i.e. level of investment
depends on the gap between the rate of return on capital and the cost of
capital.
Tobin the ratio of the stock market
valuation of the firm to the net of tax replacement cost of the firm existing
capital. A low value of q suggest that corporate profitability is insufficient
to stimulate capital investment, firm tend to prefer the acquisition of
existing form rather than expand fixed investment. A high q value implied an
incentive for firms to accumulate new capital goods, for shareholder to invest
in the shares of the company and earn a profit when investment is financed
through equity issues Sargent Tobin’s q for Nigeria manufacturing industry
using this measure will be discussed, the relationship between profit and
investment the level for Nigeria.
According to Pecking order theory, firm
having high profit tend to attain low debt profile because when firms are more
profitable, the first priority is to generate financing through returned
earnings because they can maximize the value of the existing shareholder if
retain earnings is preferred because it almost has no cost, but if the external
resources are used for financing like very high cost. The packing order theory
is as a result of information asymmetric existing between insider of the firm
and the outsider. The firm being a service industry has no other option but to
mobilize both short term and long term funds to run both its lending and
investment activities.
1.2 Statement of the Problem
The prime objective of every business
organization is profit maximization. A major problem facing companies in Nigeria
is the growing trend of input cost and high rate of taxes which erodes business
profit and leads to constant shut down of factory.
As the problem confronting the
manufacturing sector of Nigeria still lingers, it might not be surprising that
global economic crisis has compounded the problems.
The study carried out an assessment of
the profit of manufacturing firms in Nigeria. With regards to this, Guinness
Nigeria Plc and Nigeria Brewery is used as the case study to ascertain the
impact and expansion of manufacturing firms.
1.3 Research Questions
1.
Is there relationship between corporate
profitability and its determinant in the Nigeria manufacturing sector?
2.
Does profitability have great impact in
the Nigeria manufacturing sector?
3.
How does corporate profitability affect
the increase in production of goods/stocks?
1.4 Objectives of the Study
1.
To determine the level of corporate
profitability and its determinant in the Nigeria manufacturing sector.
2.
To determine the factors (i.e. exchange
rate and the degree of monopoly power) which influence movement of
profitability.
3.
To determine the relationship between
profit/retention with investment which motivate an increase in production of
goods/stock.
1.5 Statement of Hypotheses
Hypothesis is tentative statement which
can either be provided right or wrong in a statistical test. However, it is
divided as null hypothesis (H0) and alternative hypothesis (H1).
Therefore in order to solve this
research problem, the following hypotheses shall be tested.
1.
H0: There is no relationship
between corporate profitability and its determinant in Nigeria manufacturing
sector.
H1: There is a
positive relationship between corporate profitability and its determinant in
Nigeria manufacturing sector.
2.
H0: There is no great
impact of profitability in the Nigeria manufacturing sector.
H1: There is a great
impact of profitability in the Nigeria manufacturing sector.
3.
H0: There is no
relationship between corporate profitability and the increase in production of goods/stock.
H1: There is a
relationship between corporate profitability and the increase in production of
goods/stock.
1.6 Significance of the Study
This study is an attempt to establish
the relationship between corporate profitability and its determinant in the
manufacturing sector of Nigeria and to ascertain what direction the impact has
been on the manufacturing sector profit within the period under study.
Also to assist manufacturing firms that
are facing challenges in profit maximization. A guide to stakeholders, infact
industries, entrepreneurs as well as students studying business courses.
1.7 Scope of the Study
Due to time and data constraint that are
anticipated, I limit this study to Guinness Nigeria Plc and Nigeria Brewery
between the period 2009 – 2014.
1.8 Limitations of the Study
Any social research is inherently
hindered and this is more so when such research is outside experimental
studies. In the course of undertaking this research work, the researcher
encounters a number of constraints.
First was the problem of non-cooperation
from some officials of Guinness Nigeria Brewery and Nigeria Breweries in Benin
City. Some of the personnel contacted for interview did not cooperate while
some did reluctantly. The difficulty in getting access to official and
up-to-date records and documents was also encountered.
Time was another great constraint as
lecturers, course work and examination preparation were alongside with the
writing of this research work.
1.9 Definition of Terms
Manufacturing: The
process of converting raw materials component, or parts into finished goods
that meets a customer’s expectations or specification. It involves the use of
machines and manpower.
Profitability:
The state or condition of yielding profit or gain. It is often measured by price
to earnings ratio.
Profit:
The surplus remaining after the total cost are deducted from total revenue and
the basis on which tax is computed and dividend is paid.
Funds:
A sum of money or other resources set aside for specific purpose.
Investment:
The purchase of a financial product or other items of value with an expectation
of favourable future returns. In general investment means the use of money in
the hope of making more money.
Shareholder:
In an individual or institution (including a corporation) that legally owns a
share of stock in a public or private corporation.
Interest:
A fee paid for the use of another party’s money. To the borrower, it is cost of
rendering money.
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