- Background to the study
Cost of capital has always been regarded by expert as one of the critical issues in corporate management and one of the effective variables in the decision making models of a firm. (Pouraghan et al 2012). According to Mohammad (2012), the most important aim of corporate financial management is shareholders’ fund maximization through the maximizing of the value of the firm. This maximization objective is affected by the funding mix used by the firm, given the costs of the various element of the mix. Accordingly, for this to be achieved the financial manager needs to make the best capital structure decision and this may mostly be based on the cost of capital.
An investor incurs an opportunity cost by investing in a particular firm, since the return on other investments that provide the same risk level are forgone from the lot of alternative investments in the financial market (Mohammad 2012). This benchmark opportunity cost is what is known as cost of capital
There exist extensive literature on the topic of the determinants of the cost of capital in the developed market but less attention is directed to financial market in Africa including Nigeria. This research work is aimed at investigating the factors that determine the cost of capital among quoted conglomerates in Nigeria.
- Statement of the Problem
A lot has been done on the subject of cost of capital in the developed markets, but commensurate attention has not been paid to the factors that determine it in the emerging markets like Nigeria. This problem has become pronounced due to the promotion of financial and capital markets receiving a much great attention in recent years in an effort to increase domestic resource mobilization, improve the supply of long-term capital and encourage efficient allocation of existing resources. However, the knowledge that capital market can play key roles in lowering the cost of equity and, thus, stimulating investment and growth by spreading the risk of long-term investment has brought to the fore the need for empirical study if this phenomenon. In this vein, a number of corporate features including, but not limited to; size, growth, risk profile, economic condition, market condition, etc, have been indicated as general influences of cost of capital. However, in the face of this, is the obvious gap that these variables have not been empirically isolated as critical determinant of the cost capital of quoted conglomerates in Nigeria.
It is in the light of the above, that this present study intends to examine the key determinant of this cost of capital of quoted conglomerate in Nigeria as way of bridging this knowledge gap.