CHAPTER ONE
1.1 GENERAL INTRODUCTION
A Corporation, Private or Public need capital to enable it achieves its objectives. Capital structure implies the nature and proportion of elements, which go to make up the capital invested in a business corporations that are in need of funds exchange their financial instruments for the money provided by the intermediaries or direct from savers. This money the corporations convert to tangible assets as building, land, plant and machinery, motor vehicles etc. Basically, a corporation uses three main sources of long term and permanent financing viz: common stock, preferred stock and debt financing (bond). It is the combination of these finances to particular firm that is termed capital structure. There is need for reasonable balance of different types of securities comprising the capital structure of a firm otherwise the firm will deplete its financing ability or finance at sub optimal cost. In achieving this, the cost of capital is important for it has a major impact on the investment decision and the financing structure of the firm of which aect the riskiness and size of the firm. Specifically, the issue has been on whether or not financial leverage effects the firm’s cost of capital, its value and profitability, hence its corporate performance. Two major schools of thought (the Traditionalist and Modigliani Miller) extreme views on the issues in question have been among those involved in the arguments.
According to Modigliani and Miller, in their proposition which states that “the market value of any firm is independent of its capital structure and is obtained by discounting its expected return at a rate appropriate to its risk class”1 in their proposition 2 however, it states that the cost of equity is equal to the cost of capital of an unlevered firm plus the after-tax difference between the cost of an unlevered firm and the cost of debt weighted by the leverage ratio. Their long standing and unresolved opposite views have become so controversial that it has led many into concluding that the literature is marked by serious confusion and contradictions. This particular notion is manifested in the words of LINTER “the decision rule which have been proposed for determining the optimal capital structure and reliance on different sources of financing are mutually in-consistent, in the sense that they have led t o often substantially different decision under given sets of circumstance”. We are concerned with whether the way in which investment proposals are financed matters; and if it does matter, what is the optimal capital structure. If we finance with one mix of securities rather than another is the value of the firm affected? This study will be guide by the definition, which sees capital structure as the interrelationships among long term dept, preference share and net worth (ordinary share capital plus reserves and surplus). Finally, this study will ask some staff or selected companies in Onitsha, Anambra State how effective and they think their capital structure have been and what has been the effects on the corporate performance.
SOURCES OF CAPITAL
This concern on how company or companies can raise the capital they need for their operations. These ways can be broadly classified into internal and external sources.
A. INTERNAL SOURCE OF CAPITAL ‘
An existing business can raise its capital asset by withholding some part of the revenue it has generated. Such internally generated capital can take one of several forms. i. Depreciation Capital Depreciation capital can be created that means keeping some of the earnings aside as provision for capital consumption during the process of production. This amount can rightly be regarded as a cost item since it compensation for the part of the fixed equipment that is being lost during use. The inability to make allowance for this depreciation has led to the failure of businesses aer take o. Once a damaged key component of the capital equipment cannot be replaced, the production process is stopped.
