EFFECT OF FINANCIAL LEVERAGE ON COMPANY PERFORMANCE
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EFFECT OF FINANCIAL LEVERAGE ON COMPANY PERFORMANCE
INTRODUCTION TO CHAPTER ONE: THE IMPACT OF FINANCIAL LEVERAGE ON COMPANY PERFORMANCE
1.1 BACKGROUND OF THE RESEARCH
Firms must identify solutions at each stage of their growth and development, from conception to maturity, to ensure their survival. Every enterprise endeavours to optimise the financial gains and well-being of its proprietors.
Without financial resources, it is impossible for a business to achieve its objective. This financing is akin to the lifeblood of an organisation, without which its survival is impossible.
Financing refers to the process of obtaining cash or other assets by means of activities such as selling securities, retaining net profit, or increasing debt. The capitalization of a firm comprises funds generated internally.
In the event that a company is unable to raise the entire amount of funds internally, it may be compelled to seek additional external financing.
Hence, the firm’s capitalization would encompass both internally generated funds and external funds, including both short-term and long-term loans as well as bonds.
The focus of this study is financial leverage, which pertains to the utilisation of external funds to generate profits for a company, with the principal objective of maximising the wealth and welfare of its shareholders.
The utilisation of leverage renders unnecessary the application of external financing to achieve a greater QA than would be possible without its application.
Typically, diverse financing structures are present. A basic common stock structure is characterised by its lack of utility; such a structure is incapable of capitalising on the benefits associated with financing leverage.
The utilisation of financing leverage simplifies a company’s financial structure and increases the proprietors’ influence through the issuance of common stock, while creditors’ claim increases through the use of borrowed funds.
Hence, investors give considerable consideration to leverage when making investment decisions. For this reason, investors favour less leveraged firms over highly leveraged ones.
Nevertheless, the degree of activity that can occur within an organisation is contingent upon the overall level of economic activity. The economy significantly impacts the operations of businesses, including those that rely on debt financing.
1.2 STATEMENT OF THE PROBLEM
Organisations that rely on debt and equity financing are inevitably susceptible to fluctuations in performance. Nigeria Bottling PLC is frequently confronted with:
i) In the event that indiscriminate common share offerings are made available to the general public at some juncture, corporate control is diluted. Generally, this holds true in the absence of preemptive rights that are firmly established within the company’s regulatory framework.
ii) The utilisation of order department instruments and common stock grants newly acquired common stockholders the same entitlement to profit as the organization’s longstanding common stockholders. This is inconsiderate towards the current proprietors, who have laboured with the company for years.
iii) The payment of dividends to equity proprietors does not qualify as a tax deductible expense. In order to facilitate the financing of (Nigeria Bottling Company), interest payments on such instruments ought to be eligible for tax deduction.
iv) Excessive utilisation of debt and equity may lead to an overclassification of the company, consequently causing a decrease in future earnings.
v) The disadvantages of trading on equity are nullified by the indiscriminate use of debt and equity as financing sources.
vi) Floating new issues frequently incurs exorbitant expenses; the funds utilised for investigation and underwriting of stocks and debt instruments are utilised to gain access to the costs associated with issuing debt instruments.
1.3 PURPOSE OF THE RESEARCH
Among the objectives of the research are the following:
1. To conduct an analysis of the potential impacts that financing leverage may have on the company’s performance.
2. Determine the correlation between the degree of debt borne by the organisation
3. Additionally, with respect to the prevailing economic conditions, ascertain their impact on the cost of capital for the company.
4. Evaluate the debt and equity that could potentially lead to the firm being overcapitalized.
5. Conduct research and underwrite debt and equities in excess of the cost incurred in the issuance of debt instruments.
6. Ultimately, the sector of the economy in which the organisation operates would undergo a comprehensive analysis to determine its impact on the firm’s operations within that region.
1.4 RESEARCH QUESTION
To obtain information from the participants, the subsequent research inquiries were formulated:
1. What are the potential implications of financial leverage for a company’s performance that warrant analysis?
2. What are the correlations among the various levels of departments that the organisation operates?
3. The manner in which the prevailing economic conditions can impact the cost capital of the company can be determined.
4. When conducting an analysis of the debt and equity performance of The Nigeria Bottling Company with regard to capitalization, what are the probable outcomes?
5. What methods are employed to examine the stock and the debt in relation to the cost of issuing debt instruments?
6. What are the ramifications of the initial economic operations conducted within the organisation?
1.5 GROUND HYPOTHESIS
(1) HYPOTHESIS
Hypothesis: The level of debt financing by the firms under investigation is not influenced by the economic environment during the period of study.
The financing level of the firms under examination, such as the Nigeria Bottling Company, is influenced by the economic climate during the period of analysis.
(2) HYPOTHESIS
Hypothesis: The performance of the companies being examined is not influenced by the degree of debt financing utilised.
The degree of debt financing utilised has an impact on the operational outcomes of the companies being examined.
(3) HYPOTHESIS
Nigeria Bottling Company PLC’s performance is not impacted by the condition of the economy as measured by the grass-roots domestic project.
HI: The condition of the economy as measured by gross domestic product and the performance of the investigated firm.
NOTE:
HO: Null Hypothesis Implies
H2: Alternative Hypothesis Implied.
1.6 The Importance of the Research
The study holds significance as it allows for the assessment of the impact of the economy on the operations of Nigeria Bottling Company PLC.
As a result, this research will contribute to the comprehension of how financial leverage can be said to flourish in a nascent economy, given that as more funds are utilised for investment and profit purposes, department heads are employed more.
The research will be of near-essential value to the school library, management students, and future project writers and researchers who may wish to cite it in their own investigations.
1.7 EXPANDION AND LIMITATIONS OF THE RESEARCH
The focus of this research pertains to the organisation operating in the manufacturing industry of Nigeria. (“NIGERIA BOTTLING COMPANY PLC”). A review of the organisation. More precisely, historically. Both structurally and operationally. Additionally, a rationale analysis would be conducted to arrive at an ultimate objective conclusion.
Data is a limitation of the study, as only information from published financial analysis reports was utilised. The firm ensured the confidentiality of said data for its own use only. The economic trend, specifically the inflationary effects, has an impact on the activity level of the firm, including those that rely on debt financing.
1.8 DEFINITION OF TERMS
1. FINENCING
This is the mechanism through which a corporation generates and manages its revenue. It addresses methods for financing the acquisition, development, and operation of real property.
2. Investing Capital
This pertains to the acquisition of stable stock or fixed assets, as opposed to actual investments in capital assets like real estate or machinery.
3. LOANING FINANCIAL POWER
This is the practise of utilising external financing to increase the profit margin of the utilising company. When substantial amounts of money are required to be paid for bound interest or preferred stock dividends on both, prior to the common stock being established to participate in earnings, it impacts the per share earnings of the company’s common stock.
Financial leverage can be beneficial for common stock when earnings are satisfactory, but it can also be detrimental when earnings decrease.
4. DEPARTMENT FINANCING (4)
This refers to the extended leasing of funds by a business, typically in return for debt securities, in order to acquire working capital or other essential resources required for operational purposes.
5. Securing equity financing
This refers to the procurement of funds for operational or capital expenditures in return for ownership interests in the enterprise that is receiving the financing.
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