AN EVALUATION OF CAPITAL STRUCTURE AND PROFITABILITY OF BUSINESS ORGANIZATION A CASE STUDY OF SELECTED QUOTED COMPANIES

ABSTRACT

Capital structure is the proportion or each type of capital debt and equity used by a business organisation. Many organizations employ debt in their capital structure because of its benefits. One of the benefits is that interest on debt is tax deductible and reduces tax liability of the organizations concerned. Furthermore, failure to pay interest commitment can result to financial backwardness. The financial managers consider so many factors in their capital structure decisions because of the implications in the use of debt. The factors are cost of capital, debt capacity cash flow. Etc. The primary aim of business organisation is to make maximum profit if possible. The researcher made a study of selected quoted manufacturing and oil servicing companies to see how capital structure related to profitability of business organizations.Five companies were selected and their financial statements for four years extracted and analyzed. The analysis showed that there is a strong relationship between capital structure and profitability between debt equity ration and shareholders’ return. It means that the cost of debt in the companies put together is less than their return on investment. A company having return on investment greater than cost of debt will have an increasing shareholders’ return.

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND OF STUDY

The most important decision all corporate managers should take into consideration is the way in which the long-term capital requirements of their companies should be financial. Capital structure is the permanent financing of a firm represented primarily by equity and long-term liability without including all short-term credits. Many factors have to surface in order to determine the capital structure of a business organisation.  These factors are what the financial managers consider first in order to determine appropriate capital structure suitable to his firm. Some of the factors are: cost of capital, floation costs, size of the company, government policies and market condition. The combination of debt and equity has some implication. The first is that debt-equity ratio, which is regarded as an indicators of risk.

According to Samuel etal (1992:44) high fixed interest commitment which must be paid by the business organisation irrespective of whether profits are made or not.