Impact of Financial Leverage on Firm Value

Impact of financial Leverage on Firm ValueIntroduction If there is debt in a alliances neat, such a company is termed leveraged or adapt company.A gearing dimension demonst deems the relationship between fixed interest and legality large(p) in the finance of a business measuredFixed Interest neat OR Fixed Interest CapitalCapital Employed EquityThe financial lever is a norm in measuring the scale of using debt in the firms capital structure. One of the to the highest degree important issues in financial discussions is obtaining a blend of capital structure which has the most attractions for the investors. The structure of capital is a need link between debt and the truth that provides financial needs for preparing the companys properties.STATEMENT OF RESEARCH QUESTIONThere is a ostracise and significant correlation between financial leverage and firm.1.There is a negative and significant correlation between financial leverage and earnings per allot2.There is a negative a nd significant correlation between financial leverage and price earnings proportionality.3.There is a negative and significant correlation between financial leverage and returns to equity.4.There is a negative and significant correlation between financial leverage and operating profit.WHY INTERESTINGThe above research questions are interesting as they leave behind address the followingProvide answer on the impact of gearing on the firms encourage reconcile the argument as to whether financial leverage has relationship with earning per share the level of correlation between financial leverage and price earnings ratio as well as operational profit. The questions will also seek to highlight the risks associated with leverage.Relation to previous research (Theoretical Framework)CAPITAL STRUCTURE THEORIESA companys capital structure shows all the sources of finance a company is utilizing to finance its operations.Capital structure refers to how a company finances its operations and it is usually made up ofOrdinary share capitalPreference share capitalDebt capital.There are deuce main theories ab stunned the effect of forms in gearing on the WACC and share value. There area.The traditional overtakeb.The net operating income approachFor which a behavioral justification was proposed by Franco Modigliani and Melton H. Miller (M M) in 1958 (Gitman, 2006).TRADITIONAL VIEWThe traditional view states that debt capital is cheaper than equity and that such a company can increase its value by borrowing up to a reasonable limit (the optimal level of gearing). invert Kw KeKdP GEARINGWith the traditional possibility, the following assumptions hold sway 1.The cost of debt will remain constant until a significant point is reached when it would startle to rise.2.The WACC will fill immediately an external source of finance is introduced and will bring thereafter as the level of gearing increases.3.The companys food market value and the market value per share will be maximiz ed where WACC is at the lowest point.M-MS SUPPORT OF THE OPERATING INCOME APPROACHThe original normative theory of company valuation and capital structure was put forward in form of a behavioral justification of the Net Operating Income Approach by Franco Modigliani and Melton H. Miller (M-M) in 1958 (Gitman, 2006).To respect the propositions by M-M, it will be better to infrastand the M-M assumptions which are stated below.From these assumptions, M-M set out their three propositions.PROPOSITION IThis states that a company cannot change the total value of its securities just by splitting its cash flow into different streams the companys value is determined by its real assets, not by the securities it issues. Thus, capital structure is irrelevant if the companys investment decisions are taken as given.PROPOSITION IIThe expected rate of return on the equity of a geared company increases in proposition to the debt-equity ratio (debt/equity), expressed in market values the rate of inc rease depends on the spread between the expected rate of return on a portfolio of all the companys securities, and the expected return on the debt.PROPOSITION IIIThis provides a rule for optimal investment policy by the company The cut off point for investment in the company will in all cases be the WACC and will be completely unswayed by the causas of security used to finance the investment.Consequently, if the first two propositions hold, the cut-off rate used to evaluate investments will not be affected by the type of funding used to finance them, whatever may be the capital structure. The gain from using debt (at lower cost) is offset by the increased cost of equity (due to increased risk) and WACC therefore remains unchanged.Proposed ordersSTATEMENT OF METHODSecondary info from financial infobase will be used.To determine the impact of leverage on the value of firm, a thorough study will be taken on each entity in the integrated chain.My choice of the above data collectio n method rested on their validity and research question. I also consider them to be less costly in relation to others.The study will extend to integrate various academic literatures and examine the impact of financial leverage on the value of firms. Therefore, I shall obtain unbalanced panel comprising 25 companies listed on the Nigerian Stock Exchange for the period ranging from 2001- 2010 with relevant information over the last years. These firms and their published accounts will be used to determine the variable that will be stated.CHOICE OF THEORYThere are two basic theories about the impact of financial leverage on firms value the traditional theory and the Modigliani Millers theory. I shall base my study on the theory which seem more realistic with empirical fact.CAPITAL STRUCTUREIn the academic literature, there two possible indictors of capital structure, namely, debt-equity ratio, defined as total debt divided by book value of common equity, and a ratio of debt total asse ts. In this compendium, the ratio of debt to common equity will be used. This will be more useful to explain the choice of a capital structure as compared to the ratio of debt to total assets. This variable shall be denoted as CS in our analysis.DATA COLLECTIONThe collection tools for the research leap out includes Financial times statistical data from Nigerian Stock Exchange, Augusto rating on debt Equity Companies, Financial Index Journal.Others tool include the companys annual reports and account, the internet, financial news subject particularly, Thisday, Institute of Chartered Accountants of Nigeria (ICAN) journals, Financial Standard, Business Times and some other foreign journal consulted at various library.The testing technique to be absorbed is regression and correlation analysis with the chi-square X2 distribution, which allows comparisons of an actual observed distribution with a hypothesized or expected distribution.This method is often referred to as a goodness of f it test.SAMPLE FRAMEThe supplemental data above will be used in addition to the financial statement and Accounts of selected companies Nigerian Breweries Plc, Pharma Deko Plc and Evans Medicals Plc. The result of the investigation will be analyzed and tested.The firm size shall be determined by its log of sales as published in their financial statements. Firms turnover as a percentage of capital employed will be used in our model. It is often argued that performance is a function of firm size and if we are to guide a regression model with performance as response variable, it is important to incorporate firm size in our model. Firm size may be positively or negatively related to leverage. Odeleye (2014) come forward with the idea that large firms may exercise economies of scale, have better knowledge of markets and can employ better management personnel. Firm size also measures a firms market power or level of concentration within the industry.ReflectionsFinance The execution of t his project required substantial financial outlay. The sourcing and gathering of data, paying working visit to firm, conducting enquiry to the operations of the company and packaging available information into coherent project, required funding.Time It takes time to conduct inquiry, investigation as well as gather, compile analysis and interprets data and then organizes them into a research work. The researcher worked under severe constraints of time as there was a deadline for the submission of the project.Attitude of the Practitioner Although some information was readily provided by staff of the organization, a hardly a(prenominal) other relevant ones were considered as confidential and strenuous efforts had to be made to collect some of the information that were regarded as confidential.Altogether, the limitations were so severe as to profane the research outcome, more especially because the researcher managed to overcome the obstacle. Physically, only some selected leveraged c ompanies in manufacturing activities as an option for growth enhancement of market are include to minimize the expenses.Another limitation is that not all leveraged companies turn out to be successful in relation to market values this research does not cover those companies.I obtained all the necessary information I needed for empirical analysis considering the advanced nature of the financial reporting of the firms under study which con makes to international standard? The financial regulation in Nigeria might not be up to date with respect to submission of financial statement.The gathering of data from some of the companys department required some payment. This expenses which was budgeted for constituted a challenge, yet there was a possibility of missing some data which is not found on the financial statement of the companies.This study was carried out with a sample of firms listed on the Nigeria Stock Exchange. The first empirical obstacle will be the approachability of data f or a minimum of ten trading years for the firms under study. The financial regulations in Nigeria require firms to submit their audited financial statements as well as certain information regarding their firms value. However, the data submitted by firms are in hard copy format and they are thus stored at the companys department in paper format. Given that availability is limited to hard copies, I feel that I will need to bear into mind the time factor involved in the manual gathering of relevant data. Moreover, data regarding a single company might be in different volumes and this might involve delay out of proportion in this assignment.Timetable July 2015 Proposal SubmissionAugust 2015 Proposal ApprovalSeptember/October 2015 Literature reviewNovember 2015 submission and amendment of chapter 1based on examiners approval/comment declination 2015 submission and amendment of chapter 2 based on examiners approval/commentJanuary 2016 submission and amendment of chapter 3 and 4 base d on examiners approval/commentFebruary 2016 submission and amendment of chapter 5 based on examiners approval/commentMarch 2016 Proof reading, final editing, printing/binding and project submissionReferencesAkinsulire, O. (2002), Financial Management 2002. COEMOL Nig. LtdGitman, L. (2006). Leverage and Capital Structure (4TH Ed). Boston Pearson Anderson Wiley.Odeleye, A. (2014) Corporate Financing and Efficiency of Indigenous Energy Firms in Nigeria A literature Review. International Journal of Energy Economics and Policy. 4(1).