Impact of Financial Leverage on Firm Value

Impact of Financial Leverage on Firm Value Introduction If there is debt in a companys capital, such a company is termed leveraged or geared company. A gearing ratio demonstrates the relationship between fixed interest and equity capital in the finance of a business Measured: Fixed Interest Capital OR Fixed Interest Capital Capital Employed Equity The financial lever is a norm in measuring the scale of using debt in the firms capital structure. One of the most 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 required link between debt and the equity that provides financial needs for preparing the companys properties. STATEMENT OF RESEARCH QUESTION There is a negative and significant correlation between financial leverage and firm. 1.There is a negative and significant correlation between financial leverage and earnings per share 2.There is a negative and significant correlation between financial leverage and price earnings ratio. 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 INTERESTING The above research questions are interesting as they will address the following: Provide answer on the impact of gearing on the firms value; 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 THEORIES A 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 of: Ordinary share capital Preference share capital Debt capital. There are two main theories about the effect of changes in gearing on the WACC and share value. There are: a.The traditional view b.The net operating income approach For which a behavioral justification was proposed by Franco Modigliani and Melton H. Miller (M M) in 1958 (Gitman, 2006). TRADITIONAL VIEW The 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). Return Kw Ke Kd P GEARING With the traditional theory, the following assumptions hold sway: Â   1.The cost of debt will remain constant until a significant point is reached when it would start 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 market value and the market value per share will be maximized where WACC is at the lowest point. M-MS SUPPORT OF THE OPERATING INCOME APPROACH The 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 propositions by M-M, it will be better to understand the M-M assumptions which are stated below. From these assumptions, M-M set out their three propositions. PROPOSITION I This 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 II The 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 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 III This 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 unaffected 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 increased cost of equity (due to increased risk) and WACC therefore remains unchanged. Proposed methods STATEMENT OF METHOD Secondary data from financial database 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 collection method rested on their validity and research question. I also consider them to be less costly in relation to others. The study will try 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 THEORY There 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 STRUCTURE In 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 assets. In this analysis, 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 COLLECTION The collection tools for the research project 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 newspaper 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 employed 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 fit test. SAMPLE FRAME The 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 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 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 personnel. Firm size also measures a firms market power or level of concentration within the industry. Reflections Finance: The execution of this 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 few 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 vitiate the research outcome, more especially because the researcher managed to overcome the obstacle. Physically, only some selected leveraged companies in manufacturing activities as an option for growth enhancement of market are included 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 review which confounds 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 availability of data for 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 Submission August 2015 Proposal Approval September/October 2015 Literature review November 2015 submission and amendment of chapter 1based on examiners approval/comment December 2015 submission and amendment of chapter 2 based on examiners approval/comment January 2016 submission and amendment of chapter 3 and 4 based on examiners approval/comment February 2016 submission and amendment of chapter 5 based on examiners approval/comment March 2016 Proof reading, final editing, printing/binding and project submission References Akinsulire, O. (2002), Financial Management 2002. COEMOL Nig. Ltd Gitman, 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).

Readers of his detective stories Essay

Readers of the Sherlock Holmes stories are captured by the excitement which is produced when Holmes and Watson foil the evil masterminded plans of criminals. Sir Arthur Conan Doyle creates all this excitements by using Holmes’ and Dr Watson’s expertise in their field, as this is typical in the detective genre. An obvious place to start looking for this excitement is reading â€Å"Case of Identity†. Excitement in this story is used to keep the reader interested. The excitement is created by Mary Sutherland getting such a large amount of money being left her as inheritance as that was a lot of money in the time that Conan Doyle wrote the story. The amount of money Miss Mary Sutherland gets from her inheritance left to her by her Uncle Ned is i 2,500 but she can only touch the interest which stands at four and a half percent a year, â€Å"so large a sum as a hundred a year. † This was a lot of money in the Victorian times for a single person this creates excitement as very few people had that amount of income without doing anything. Conan Doyle uses a strange happening to create excitement as the reader starts to think about the possibilities about what has happened a good example of this is when Miss Sutherlands fianci Mr Hosmer Angel disappears from the cab on the day of the wedding, â€Å"we waited for him to step out, but he never did. † It is not possible for a man to disappear from the face of the earth when people saw him get into the cab. This creates excitements for the reader as they start to guess what has happened to Mr Angel. Clues play the biggest part in the excitement in this story as the reader is able to figure out the culprit as the clues only point to one person, Mr Angel does not have an address as he sleeps on the premises of his work, the address of Mr Angels place of work is also unknown apart from the fact that it is in â€Å"Leadenhall street†. This meant all his letters were sent to the Leadenhall post office â€Å"he slept on the premises† this is strange as he has no where to live and he doesn’t want the letters to be sent to him at work. This excites the reader as the reader has to think about why he doesn’t want her to know where he lives. The way the characters act are a good example of how Conan Doyle creates excitement as Mr Hosmer Angel is a very shy man who does not want to be seen as he wears dark glasses and he talks on a very soft voice, â€Å"he would rather walk with me in the evening. † This is because Mr Angel does not want to be seen with Miss Sutherland so this creates excitement as the reader gets the feeling that there is something not quite right with Mr Angel and that he is secretive about some thing this will start to make the reader excited as they know something big is going to happen this is also a good way of using the suspense of the story to create the excitement. Conan Doyle creates a fair amount of excitement in â€Å"The Boscombe Valley Mystery†. Conan Doyle creates this excitement by using the argument between the father and son even though a father son relationship is hard to destroy. Seeing as he uses the strange argument between father and son â€Å"having a violent quarrel† this makes the reader wonder why the father and son are arguing about, this creates tension for the reader as it gives them topic to think about this creates excitement as the reader is becoming involved with the story. This is because in Victorian Britain violent quarrels between father and son would not have been common things, this is because the Victorians have been classed as the most respectable and caring people in the history of Britain and the fact that there were large families. The lead form the violent quarrel leads to further events; this creates excitement because a son would not get to a point where he could kill his father as it would be as if he was destroying himself. This excitement is where the son found his father dead, the son heard the call of â€Å"cooee† to which his son turns round to see his father dead on the floor, a she goes to his father he mentions something about â€Å"a rat† this was all that he caught of his fathers last words but he could have misheard what his father said, this sudden turn from the argument and the son walking away to the father being killed creates excitement as the reader would expect the son to have killed the father but the last words get the reader wandering about how the father died, and what is this rat. Conan Doyle creates excitement for the reader a tension build up as Holmes is about to reveal the murderer. The reader is excited as Holmes is about to unveil who committed the murder and he is doing this based purely on the last words of the old man â€Å"a rat†. There is a large amount of tension as holes is about to say who committed the murder and there is a sudden burst form Holmes who reveals that the murderer was from â€Å"Ballarat† . Ballarat is the name of an Australian gang and that the call of â€Å"cooee† was a native Australian call. This creates the element of excitement as the murderer is revealed. And the Murder was committed by â€Å"Black Jack of Ballarat†. Sir Arthur Conan Doyle creates an element of mystery in â€Å"5 orange pips† when it is revealed that 5 orange pips have been sent to Elias Openshaw who lived in Horsham. The orange pips arrived in an envelope with a foreign stamp on it, â€Å"5little dried orange pips† the reader does not know what these orange pips are about so this creates a moderate amount of excitement for the reader as they wander what these orange pips are about.

Mill Happiness Theory

The moral of utilitarianism, especially in reference to John Stuart Mill, was the proportion of rightness or wrongness in action and living is ultimately determined by the action that produces the most happiness through its endeavor, and by the amount of people affected by it.   The most good that can come from an action then is the purpose of utilitarianism, as Mill states, â€Å"The creed which accepts as the foundation of morals, Utility, or the Greatest Happiness Principle, holds that actions are right in proportion as they tend to promote happiness, wrong as they tend to produce the reverse of happiness† (42).   Thus, the moral of utilitarianism involves achieving the greatest happiness through actions, which was the original basis for the government. Pleasure, and freedom are must both be free of pain if they are to be considered true to the moral of utilitarianism.   The theory does not only address the fulfillment of happiness for the ‘doer’ but the lack of pain in any action accomplished.   The desire for pleasure is the supreme goal of the theory, and the prevention of pain is the underlining supposition. Mill states that being of higher intelligence thusly requires more to satisfy him.   Although man is more than capable of great joy, this joy is always coupled with great sorrow, yet, man would not trade the sorrow for the happiness of the pig because the joy of man’s life is go much more than that of a dunce. Happiness, joy, or good for the utilitarian is that which is righteous in mankind, his power to achieve greatness sometimes lies in his ability to sacrifice for the greater good and in this is found the pinnacle of the moral of utilitarianism as Mill writes, â€Å"Utilitarianism, therefore, could only attain its end by the general cultivation of nobleness of character, even if each individual were only benefited by the nobles of others, and his own, so far as happiness is concerned, were a sheer deduction from the benefit.   But the bare enunciation of such an absurdity as this last, renders refutation superfluous† (45). On the opposite side of the spectrum of good and bad according to utilitarianism, bad means the selfish nature of man; that is, sacrificing for egotistical reasons.   If a man sacrifices, becomes a martyr, and they seek personal gain instead of the aim of increasing happiness for the world, then their actions are deplorable because they were not given for the world but for the self. Man achieves the Greatest Happiness Principle by not always sacrificing himself for the good of the whole, but by being virtuous on a daily basis, and by acting out of charity, not by gainful employment towards the self and with this fact is found the foundation of political liberalism in its perfect state.   For utilitarianism, and the good that is meant in its concept of moral, Mill states, â€Å"To do as you would be done by and to love your neighbour as yourself constitute the ideal perfection of utilitarian morality† (49). Utilitarianism construes good to mean a variety of things such as power, knowledge, beauty, moral quality, etc. and because of these parlayed meanings other forms of utilitarianism are endorsed from the original meaning.   Modern utilitarians believe that good is not the sole aim of the theory but other items (as listed above) have intrinsic value.   Ideal utilitarianism states that the actions of a person in the gaining of power, beauty, knowledge, etc. should also increase happiness, which in turn fulfills life.  Ã‚   On the other side of the spectrum, Classical utilitarianism suggests that pleasure is the main component of intrinsic good. This assignment has been given in order to distinguish Mill’s philosophy as well as to understand more thoroughly what is meant by individual happiness and a person’ s right to pursue such happiness. Work Cited Mill, John Stuart.   On Liberty.   Modern Library; New Ed edition (2002).   

Essay about Small Change - 1527 Words

Small Change What determines a movement? Malcolm Gladwell defines what pushes a movement to make a difference. He analyzes the concept of â€Å"strong ties† and â€Å"weak ties† and how these relationships affect an individual’s willpower and determination to help a cause. Gregory Orr puts these ideas into context in his memoir, â€Å"Return to Hayneville†, in which he recounts his experience and involvement in the civil rights movement of the 1960s. Malcolm Gladwell’s â€Å"Small Change: Why the Revolution Will Not Be Tweeted†, focuses, in particular, on the civil rights movement concentrates to the lunch counter sit-ins in Greensboro, North Carolina. Gladwell’s ideas and opinions of social and political emancipations are given a real world setting, as†¦show more content†¦Orr’s experience helped him learn about himself and primarily helps an individual discover the importance of living. Gladwell would classify Orr as someone who shared no relationship with the cause and only joined because because he wanted to find himself in the midst of chaos not necessarily because he was passionate about the civil rights movement. Gladwell describes the movement of sit ins across the south as a â€Å"fever†. Orr found himself caught up in the contagion, he endured the beatings and the injustice the same as everyone else but his motives were not set for civil rights, he realized this when he was taken and held captive, â€Å"Even as I sank into depression and brooded in the stifling heat of that jail-barn, I was learning that I wanted to live,† (Orr, 223). When he was released Orr left without alerting the COFO office because he felt ashamed. It was easy for him to walk away from the cause for him to walk away from the cause because he as he left he wasnt leaving anything or anyone behind. Gladwell’s explains that â€Å"weak ties seldom lead to high-risk activism† (Gladwell, 137). 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