Full Project-CAPITAL STRUCTURE AND DIVIDEND POLICY DECISION ON FIRMS

Full Project-CAPITAL STRUCTURE AND DIVIDEND POLICY DECISION ON FIRMS PERFORMANCE ON THE NIGERIAN STOCK EXCHANGE

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CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The survival of the long run objective of any business organization depends to a large extent on the decision it takes toward its capital structure and dividend policies. The overall objective of any business organization is to maximize the shareholder wealth. The firm has to invest in some of its profitable venture which promise the highest returns with the shareholders fund and other fixed interest debt finance. The decision of the firm to employ debt finance came with certain element of risk toward the shareholders. The proportion of debt to owners equity employed (gearing) will have some eect on their earnings either positively or negatively depending on the shareholder decision towards risk. The impact of capital structure and dividend policy on corporate performance has been unsettled one. M & M argued that the way and manner in which the operation of a firm is financed does not aect the value of the firm while some believe that the use of debt in the financing mix will magnify the value of the firm if the financial manager will be indierent to the source of finance that appropriate capital structure is a critical decision for any business organization. The decision is important not only because of the need to maximize return to various organizational constituencies but also because of the impact such a decision has on the organization’s ability to survive in its competitive environment. The prevailing argument originally developed by Modigilani and Miller (1989) is that an optimal capital structure exist which balance the risk of bankruptcy with the tax saving of debt. It is important to note that dividend is not a contractual obligation of the firm to its shareholder or debt providers. The amount of the dividend, if any, is rested on management’s best options to use the income. The board of directors who are ultimately responsible for setting dividend policy can chose not to pay any dividend using the firm’s earnings to acquire additional asset instead. Dividend policy is the principle use in determining what portion of earning should be paid out as dividend during the period, the divided policy may be expressed in the follow objectives such as target payout ratio; a divided policy table give the tax earning on the firm available to it legal constraint and the need to satisfy the shareholders must be decided whether or not to pay divided.
If yes, what proportion of its total earning should be paid out and what form of divided payout will be in the best interest of the firm? In every business, capital structure is of primary importance. It is to show how a company finances its operations through some combination of equity; debt etc. A firm’s capital structure is the composition of its liabilities. The capital structure indicate how the company finances its entire operations and expansion by utilizing different financial resources whether it is from equity capital, debt capital, or other forms of capital such as vendor financing. Vendor financing is a process of selling goods or products before paying the bill to the vendor. It doesn’t cost anything to the company; instead it gives more return on investments. It should be noted that capital structure includes equity capital which is the money invested into a company in exchange for an ownership interest in that company. Usually, equity capital has two kinds, first is the contributed capital. This is the money which the shareholder invested in the business. Secondly, are the retained earnings which represent the profit or earning of the company that is being kept by the company to use as additional fund for growth, acquisitions and expansions? Another form of capital in the business is the debt capital through long term debt and specific short term debt. This money which is a part of company’s capital structure is borrowed or lent from the other banks or financial institutions to finance the order requirement of the business. Pandy (1985), entrepreneurs usually start their companies with other stockholders in the business in order to contribute to the increase of the business capital. In this connection, the management of the company is authorized to use the collected money capital to invest in the factories or plant and to purchase equipments and supplies. The stockholders use their money to purchase share stock in the company. In this way, each stockholder owns a share or percentage of the company through investing their money as part of the capital of the company.
Nevertheless, dividend policy refers to the company’s regulation and guidelines on dividend payments to the shareholders of the organization. Having a dividend policy is very essentials for both the company and the shareholders, it is easier to monitor and figure out the impact of the dividend policy in the entire operation of the business. Therefore, dividends are payments made by the corporation to its shareholder when a company earns a profit or surplus and such money can be used as retained earnings. Many corporations retain a portion of the shareholders profit and whatever money le will be paid to the share holders as dividends. Equally important, there are various kinds of dividend payouts. Firstly is the cash dividend, this is product of cash avail ability and cash planning. The cash account and the reserves account of a company will be reduced be when the cash dividend is paid. Second is the stock or scrip dividend it involves the payment of a dividend in the form of extra shares rather than cash as an alternative to pay out cash dividends during a year, a company may choose to pay a stock dividend. Thirdly, Scrip issue bonus issue this is the capitalization of the reserves of a company by the issue of additional shares to existing shareholders in proportion to their holding, usually at no cost.
1.2 Statement of the Problem
The fundamental objective of the firm is to maximize shareholder wealth, in the pursuit of this; many companies are faced with different question and thereby encounter several problems which are aggravated by this question in the past. The following problems are stated;
• How do firm raise capital?
• What proportion is said to be the best?
• What is the trend of finance mix?
• What is the determinant of the capital mix in Nigeria? The objective of any corporation existence is to maximize the value of their investment which maximizes their wealth through dividend and capital gain. The impact of dividend policy/capital structure on micro-economics performance cannot be under estimated, since the amount of shareholder’s earning directly influence the amount of fund available for savings which automatically affect the availability of loanable funds in the financial institutions and which invariably affect the level of investment and productivity. The study seek to address the identified problem faced by corporate entities in Nigeria. Hence the study seek to examine the effect of dividend policy/capital structure decision on firms performance.
1.3 Research Questions
The following questions are asked to guide the objective of the study.
• How does the firm generate capital?
• What is the trend of finance mix of companies?
• What are determinants of capital mix of firms in Nigeria?
• How does the dividend policy impact on shareholders wealth?
• To what extent is the use of debt impact on the value of a firm?
Is there any relationship between the financial mix of a firm and the market price/earnings per share?
1.4 Objectives of the Study
In order to answer the research question asked the following objectives are stated:
1. To find out how Nigerian firms generate their capital.
2. To know the trend of finance mix of companies.
3. To find out the determinants of capital mix of firms in Nigeria.
4. To find out how the dividend policy impact on shareholders wealth.
5. To know the extent of which the use of debt impact on the value of a firm.
6. To know if there is any relationship between the financial mix of a firm and the market price/earning per share.
1.5 Statement of Hypotheses
As regard this study, the hypotheses stipulations are;
Hypothesis One
Ho: There is no relationship between the retained earnings and firms listed in Nigeria stock exchange
HI: There is a relationship between the retained earnings and firms listed in Nigeria stock exchange. Hypothesis Two
Ho: There is no relationship on the impact of earning per share and capital structure in Nigeria stock exchange.
HI: There is a relationship on the impact of earning per share and capital structure in Nigeria stock exchange. Hypothesis Three
Ho: There is no significant relationship between the equity capital of firms listed in the Nigeria stock exchange and earnings per share.
HI: There is a significant relationship between the equity capital of firms listed in the Nigeria stock exchange and earnings per share.
1.5 Significance of the Study
The findings of this study will be very useful to many people and units in Nigeria such as the NSE, government regulators and investing public. The NSE will find the results useful because the findings will reveal the flows financial statements and the methods used in covering up such inadequacies. The findings will show to government regulators the need to be more proactive in engaging the accountant and institutions by further regulations to ensure that financial statements represents what they portray to present. The investing public will benefit from the finding because they will serve as a caveat to them on how they rely on financial statements when making investment decision based on financial statement prepared by accountants. Scope of the Study This study is restricted to the capital structure and dividend policy decision on the Nigerian stock exchange. The study is designed to appraise the relationship between dividend policy decision and firms performance on the Nigerian stock exchange. The study covers Lagos State because this is the principal area where the Nigerian stock exchange conducts its activities and the sample of companies use for the purpose of this study are all in Lagos.
1.6 Limitation of the Study
In the course of this research, some problems were encountered which include the following:
1. Biasness on the respondents.
2. Lack of available information to be obtained from the sample firms.
3. Some selected firms were used as case study hence if the result is generalized, it may not reflect the true position of other firms due to environmental difference.
1.7 Definition of Terms
Capital: This can be defined as something owned which provides ongoing services. It also refers to as money, property and other valuables which collectively represent the wealth of an individual or business.
Capital Structure: This refers to the balance between the assets and liabilities of a company, the nature of its assets and the composition of its borrowings. Assets may be fixed or current while borrowing may be long term or short term.
Corporate Performance: this is the area of business intelligence involved with monitoring and managing an organization’s performance according to key performance indicators such as revenue, return on investment, overhead and operational costs.
Dividend: this is the sum of money paid regularly by a company to its shareholders out of its profits.
Dividend Policy: this is the regulations and guidelines that companies develop and implement as the means of arranging to make dividend payments to the shareholders.
Equity Capital: the part of the share capital of a company owned by ordinary shareholders.
Retained Earnings: this refers to the portion of net income, which is retained by the corporation rather than distributed to its owners as dividends.

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