Effect Of Capital Structure On Earnings Per Share Of Conglomerate Firms

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EFFECT OF CAPITAL STRUCTURE ON EARNINGS PER SHARE OF CONGLOMERATE FIRMS

Abstract

 

The topic of study is the Effect of capital structure on earnings per share of conglomerate firms in Nigeria. The researcher applied the expo facto research design. The researcher used the correlation and regression. Above methods in the analysis of the data. The findings of the study shows that:  Debt equity influences the earnings per share of conglomerate firms in Nigeria. That time interest earned has significant effect on the earnings per share of conglomerate firms in Nigeria, and that long term debt has significant effect on the earnings per share of conglomerate firms in Nigeria. Based on these findings the researcher recommended the following; the researcher recommends that management of conglomerate should work very hard to optimize the capital structure in order to increase the returns on equity, assets and investment. They can do that through ensuring that their capital structure is optimal. The management of Nigerian quoted firms should increase their commitment into capital structure in order to improve earnings from their business transaction. The management of Nigerian quoted conglomerate firms must caution against the apparent benefits of greater leverage simply as a device for controlling managerial opportunistic behavior. First, debt and equity represent different constituencies with their own competing, and often mutually exclusive, goals. Secondly, as the level of debt increase, the capital structure can change from one of internal control to of external control.    

 

SECTION ONE

1.0 Introduction

1.1 Background of the study

The research topic-effect of capital structure on earning, per share of conglomerate firm in Nigeria is a topic of interest to many people and many experts have given some definitions to the element in the topic such definitions to the element in the topic such as capital structure, earning per share etc. Zakari (2008) defined capital structure as "the firms mix of different source of finance" that is to say that capital structure is the mixture or collection of both owner's capital (equity capital) and boned funds (debts) used in running a business .As Emekekwue (1997) pointed out capital structure is made up of long term fund, medium term fund and short term fund.

On the other hand, earning per share is an indicator used widely by investor. Earning per share represent the amount of profit the company has earned during the year for each ordinary share, David Alexander and Ann Britton (1998).

According to Ikpe (2008) earnings per share is computed by dividing net profit after taxes by the number of common shares outstanding. It is stated mathematically this;

Earning per share (EPS) =       Net profit after tax

No of common shares outstanding

Earning per share is a measure of financial performance of a firm. It is a measure of financial viability or unviability of that business .To measure financial performance requires the evaluation or appraisal of some factors. Put differently, financial performance is obtained through performance evaluation of the business.

Okwoh understands performance evaluation as "the cumulative consideration of the factor that may be representative indicators or appraisal of an individual or entity's activity or performance in reference to some standards over a period of time". Hansen and Mo wen in Okwo (2012) opine that financial measures focus mainly on figures which may not tell the whole story of the company. However financial measures are commonly used to evaluate performance.

1.2 STATEMENT OF THE PROBLEM

Failure to plan for the capital structure, that is, the appropriate capital mix of the business will often lead to problems in sourcing funds to finance the firm's future operations and can even lead to the failure or liquidation of the business. This is so because improper capital mix can lead to earning per share problem as well. According to institute of chartered accountants study pack, the international accounting standard number 33 clarified earnings per share into basic earnings per share and fully diluted earnings per share. The formula for basic earnings per share is profit on ordinary activities after tax before extra ordinaiy items less preference dividend divided by No of ordinary per shares in issue and ranking for dividend. The implication of the formular is that where there is cumulative preference share, it is the entire cumulative preference dividend due in an accounting year that should be deducted. This definitely affects the earnings per share calculation where there is cumulative preference shares in the capital mix, and will result in lower earnings per share. Furthermore if all the ordinary shares in issue rank for dividend, there will be more number of ordinary shares that will divide the available profit. These will also reduce the earnings per share. Besides problems arising for improper planning of capital structure, there are other problem areas that affect, both the capital structure and earnings per share. One of such problem is power supply. The chief executive of Dangote conglomerate while discussing arrangement to build cement factory in Liberia, told the president of Liberia, that throughout Africa, the major issue is power supply: he stated "No power, No growth" (the Guardian newspaper of 12th Feb, 2014). He pointed out to the president that the new cement factory would require 1.2 megawatts of electricity and proposed that his own coal burning power plant (as alternative) would produce 2.0 megawatt. Now since Liberia could not produce the 1.2 megawatt, using the 2.0 megawatt, of Dangote firm would result into excess of 0.8 megawatt, and this will result into excess cost and therefore decline in (profit/earnings per share.

The Liberia/Dangote company power/electricity supply problem stated above is also applicable to Nigerian and affects many industries including the conglomerates in Nigeria to meet up with the power supply problem. The companies have to borrow enough fund to combine with their equity fund. Failure to plan well for the capital fund especially the debt fund will definitely affect the capital structure and earnings per share due to high cost of borrowing (owners / interests).

Many firms in the conglomerate sectors which had in the past contributed greatly to the economics of Nigeria are now phasing out or reducing their operations. The cause of the problem is traceable to the capital structure and earnings per share problems.

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