Impact of Financial Leverage on Firm Value

Impact of monetary leverage on Firm ValueIntroduction If there is debt in a bon tons metropolis, such a telephoner is termed leveraged or ge argond company.A string proportionality demonst regularizes the relationship between fixed interest and right capital in the finance of a business MeasuredFixed use up Capital OR Fixed Interest CapitalCapital employ EquityThe fiscal lever is a norm in cadence the scale of using debt in the firms capital structure. One of the around main(prenominal) issues in pecuniary discussions is obtaining a blend of capital structure which has the most attractions for the investors. The structure of capital is a required link between debt and the equity that provides financial contains for preparing the companys properties.STATEMENT OF RESEARCH QUESTIONThere is a negative and signifi throw stunnedt correlativity between financial leverage and firm.1.There is a negative and significant correlation between financial leverage and boodle per portion forth2.There is a negative and significant correlation between financial leverage and price requital ratio.3.There is a negative and significant correlation between financial leverage and imparts to equity.4.There is a negative and significant correlation between financial leverage and operating profit.WHY INTERESTINGThe preceding(prenominal) question questions atomic number 18 interesting as they leave behind address the nextProvide answer on the shock of gearing on the firms determine reconcile the argument as to whether financial leverage has relationship with earning per sh are the level of correlation between financial leverage and price earnings ratio as come up as operational profit. The questions pass on to a fault seek to highlight the risks associated with leverage.Relation to previous look (Theoretical Framework)CAPITAL building THEORIESA companys capital structure shows all the sources of finance a company is utilizing to finance its operations.Capit al structure refers to how a company finances its operations and it is usually made up ofOrdinary share capital orientation share capitalDebt capital.There are two main theories close the effect of changes in gearing on the WACC and share prize. There area.The handed-down viewb.The net operating income approachFor which a behavioural justification was proposed by Franco Modigliani and Melton H. Miller (M M) in 1958 (Gitman, 2006).TRADITIONAL VIEWThe conventional view states that debt capital is cheaper than equity and that such a company can attach its revalue by borrowing up to a goable limit (the optimal level of gearing). Return Kw KeKdP adaptWith the traditional theory, the following assumptions hold sway 1.The cost of debt testament tolerate constant until a significant point is reached when it would start to rise.2.The WACC allow suffice immediately an external source of finance is introduced and will bring thereafter as the level of gearing increases.3.The compa nys market value and the market value per share will be maximized where WACC is at the lowest point.M-MS SUPPORT OF THE operate 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 appreciate the overtures by M-M, it will be make better to understand 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 original value of its securities just by splitting its cash flow into different streams the companys value is fit(p) by its documentary 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 t he debt-equity ratio (debt/equity), expressed in market values the rate of increase 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 threeThis 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 insensible(p) by the types 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 change magnitude cost of equity (due to increased risk) and WACC therefore remains unchanged.Proposed regularitysSTATEMENT OF regularitySecondary info from financial infobase will be used.To determine the impact of leverage on the value of firm, a tho rough study will be taken on each entity in the integrated chain.My pickaxe of the above data collection method rested on their hardship and research question. I also consider them to be less pricey in relation to others.The study will try to integrate sundry(a) academician 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 tenor Exchange for the period ranging from 2001- 2010 with relevant information over the give way years. These firms and their published accounts will be used to determine the variable that will be stated.CHOICE OF THEORYThere are two sanctioned 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 search more realistic with empirical fact.CAPITAL STRUCTUREIn the academic literature, there two possible indictors of capital struct ure, namely, debt-equity ratio, defined as total debt divided by book value of common equity, and a ratio of debt total assets. In this analytic thinking, 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 meet admits 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 newspaper particularly, Thisday, Institute of Chartered Accountants of Nigeria (ICAN) journals, Financial Standard, ancestry Times and some other foreign journal consulted at motley library.The testing technique to be employed is regression and correlation analysis with the chi-square X2 distribution, which allows comparisons of an ac tual observed distribution with a hypothe size of itd or expected distribution.This method is often referred to as a goodness of fit test.SAMPLE carcassThe secondary 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 probe 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 exemplification. It is often argued that performance is a division of firm size and if we are to make 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 personn el. Firm size also measures a firms market major power or level of concentration within the industry.ReflectionsFinance The execution of this project required substantial financial outlay. The sourcing and assembly of data, paying working look to firm, conducting enquiry to the operations of the company and packaging available information into legitimate 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 few other relevant ones were considered as mysterious 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 vitiate the research ou tcome, more oddly because the researcher managed to overcome the breastwork. Physically, only some selected leveraged companies in manufacturing activities as an natural selection for growth enhancement of market are included to minimize the expenses.another(prenominal) limitation is that not all leveraged companies turn out to be roaring in relation to market values this research does not meridian 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 revaluation which confounds to international standard? The financial regulation in Nigeria major power 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 comp anies.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 for a minimum of ten trading years for the firms under study. The financial regulations in Nigeria require firms to have 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 adulationSeptember/October 2015 Literature reviewNovember 2015 submission and amendment of chapter 1based on examiners approva l/ noticeDecember 2015 submission and amendment of chapter 2 based on examiners approval/ interpretationJanuary 2016 submission and amendment of chapter 3 and 4 based on examiners approval/ definitionFebruary 2016 submission and amendment of chapter 5 based on examiners approval/comment skirt 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 financial backing and Efficiency of Indigenous Energy Firms in Nigeria A literature Review. world-wide Journal of Energy Economics and Policy. 4(1).