The effect of capital structure on profitability of selected firms listed on the Ghana stock exchange.
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Date
2016-08
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KNUST
Abstract
The role played by capital in a profit making organization cannot be underestimated. Companies require a mix of equity and debt to finance their fixed assets, current assets and operational expenditure. However, the extent to which the structure of the capital affects the profitability of firms remains a debatable proposition. Against this backdrop, the study sought to examine the extent to which capital structure could impact profitability of Fast Moving Consumer Goods (FMCG) companies in Ghana. Panel regression techniques were used to examine the relationship between the study variables. The Hausman’s test indicated that random effect model was appropriate for the selected sample. The result of the analysis also showed that capital structure (measured by debt to equity ratio, long term debt to total assets ratio, short term debt to total assets ratio, and debt to total assets ratio) had significant effect on the profitability of the selected FMCG companies. Furthermore, the findings showed that the main determinants of capital structure of the selected companies include profitability of the companies and asset tangibility.Based on the
findings of the study, it is recommended that companies with high asset worth is likely to get funding both short and long term from financing companies as tangible assets of companies are considered as one of the main factors considered by creditors when granting loans. However, companies should do so with caution by not relying so much on debt as the use of too much debt is will cause financial distress.This study recommends that other performance indicators other than Return on Assets and Return on Equity should be explored. It is also recommended that companies take steps to understand their optimal capital structure in order to improve profitability. Future studies should focus on other sectors within the Ghana stock exchange to determine whether variations exist in the findings.
Description
A Thesis Submitted To The Department Of Accounting And Finance In Partial Fulfillment Of The Requirement For The Degree Of Master Of Business Administration (Finance-Option).