The current dynamic nature of business environment has made it challenging for managers in making strategic financial decisions especially in Africa where financial market that is not much developed as compared to other developed markets. The immaturity of the market makes it difficult for financial managers to make certain financial decisions that will increase the value of the firm. The capital structure selection by financial managers of the firm has a strong impact on the general wellbeing of the firm and also affects the future activities of the firm in general. This study is meant to analyses the capital structure policies of companies listed on the Nigeria Stock Exchange taking a case study of bottling companies, hence the topic analysis of the capital structure policies of companies listed on the Nigeria Stock Exchange: A case study of bottling companies.
The capital structure of a firm may vary depending on the management decisions with respect to the treatment of equity (Both preferred and common) and debt ownership of the organization. The working capital policy adopted by managers whether to use aggressive, conservative or moderate policy should therefore be analysed. The two main basic sources that a business need in investing in its assets are debt and equity sources which need to be compensated for the use of their capital with debt requiring interest and equity requiring dividend (Tracy, 2002). Management should therefore be circumspect in planning and designing the capital composition of a company by looking at all essential factors critically since it is necessary in predicting the well-being of the company. This brings into the concept and thought of optimal capital structure.
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Determining the optimal capital of a company is not a simple decision and it is very critical for most organization. Optimal capital structure decision has a great impact on the returns of the organization and competitors in general. According to Tracy 2002, 'a perpetual question that is not easy to answer concerns whether a business is using optimal or best capital structure'. Vessey, et al. (2006), state that 'A company's target or optimal capital structure is the mix of debt, preferred equity and common equity in its balance sheet that will maximize the company's stock price'. This implies there are some evidences of optimal capital structure but to determine the optimal capital structure for a particular company may be difficult.
Capital structure decision is the most essential element of every business organization and requires proper evaluation and selection processes. This is because the survival of every business entity depends on the selection of appropriate debt and equity position that maximizes shareholders wealth.
There are a few empirical evidences from a few emerging economies (there are also empirical evidence from developed economies) to show that an economy's performance and stability depends on its business market and services. However, without adequate finance, incentive of operations (profit), a tolerable business environment, an effective management and operations structure, a growth-oriented government policies and regulations, firms will under-perform.
Maksimovic (2001), defines capital structure as a long-term source of funds which is in the form of either equity (reserve and/ surplus) or debt rating credits for the firm.
The choice of debt and equity position by business entities has called for several studies to be done on the subject matter and this has led to the discovery numerous theories surrounding capital structure. Modigliani and Miller (1958) is one such theory. However, the dominant theories in use explaining the financing decisions of firms are the Trade-off theory and Perking order theory. However, most researchers conclude that the 'irrelevance proposition' that M& M outlines is not that simple. Uwalomwa (2012); Scanlon (1972); Popsescu (2009), show that the nature and objectives of a business, makes capital structure theories subject to interpretation.
This implies that theories in use explaining the financing decisions of firms like the Trade-off theory and Perking order theory may appear the preferred for most firms but it does not make it the optimal theory. For instance, M&M (1958) capital structure theory suggest that outside influences and/ other determinants affecting the growth and value of a firm is irrelevant.
However, Ogbulu (2012) state that ignoring these outside influences on a firm could be interpreted as if capital structure decisions of firms based on the 'irrelevance proposition' exist in a perfect world. Thus, making such a world of business perfect where taxation, debts equity, high debt ratings, risks of bankruptcy and financial crisis irrelevant.
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It could therefore, be deducted based on Ogbulu (2012) suggestions that if the irrelevant determinants that affect the capital structure decisions of firms are evaluated, said 'irrelevance' should be considered in the real world as relevant. Thus, bankruptcy cost, profit from tax credit etc. become relevant to capital structure decisions of firms. In effect, capital structure decisions of firms are relevant because they affect firm leverage and influence market value (Collins, 2012).
BACKGROUND OF SAMPLED NSE FIRMS
According to Catherine Dawson (2005), what makes a research differ from any non-research activities is the process by which answers are acquired. That is, the process to find an answer to a question in a research-oriented study is that the process is guided by marked parameters.
Therefore, in the process of finding answers to the posed question; "Analysis of the capital structure policies of companies listed on the Nigerian Stock Exchange: A case study of bottling companies", there was a process followed. One of the criteria of the process was to select companies on the Nigeria Stock Exchange, which falls within the parameters of the set task. The sampled firms were selected based on their being members or listed on the Nigeria Stock Exchange and that they are a bottling company with its main operations in Nigeria. The companies selected are The Dangote Group, A. G. Leventis (Nigeria) Plc., PZ Cussons and Nigerian Breweries Plc. These four companies were selected out of the rest of the bottling companies listed on the Nigeria Stock Exchange because of their performance on the market.
The Dangote Group was initially a trading business started by Alhaji Aliko Dangote in 1981, on his return to Nigeria after graduating from business studies in a university in Egypt in 1978. The trading company dealt in rice, sugar and cement before launching into full-scale manufacturing. The company has become a diversified business dealing in the manufacturing of cement, sugar and flour refineries, pasta and noodles manufacturing, poly products manufacturing, logistics (port management and haulage) and real estate. This was prompted by a visit to Brazil in 1999, to study the emerging manufacturing sector.
The vision of the Dangote group is to promote the standard of living of the populace and earning high yields on the returns of their stakeholders. The core value of the Dangote group which they share with their stockholders are to provide customers with services that reflect the firms integrity and care for the community they operate from by learning new procedures that is good for the wellbeing of the community and the business. That is, developing the firm by seeking innovative methods to retain their market leadership.
Dangote is focused on cost leadership by promoting the efficiency of its human capital. It aims to provide local value added products and services that "meet the basic needs of the population" one of which is creating job opportunities for the labour market.
Nigerian Breweries Plc. was incorporated in 1946. It is a company which produces alcoholic (larger beer, star beer, beer stout) and non-alcoholic (maltina, malta, climax energy drink, fayrouz etc.) beverages in Nigeria, West Africa (five operational plants). It current owners are Heineken Brouwerijen B. V. with 37.74% of the company's shares, Distilled Trading International B. V. with 16.36% of the company's shares and the stakeholders of the company (Nigerian citizens) owning 45.9% of the company's shares.
Chief Kolawole B. Jamodu is the current chairman appointed to the post in March 2006, becoming the chairman of the board of directors of Nigerian Breweries Plc. in January 2008. He is a qualified chartered account and a former minister of industries of the Federal Republic of Nigeria.
Nigerian Breweries Plc. Aims to be the leading beverages company in Nigeria producing quality products for customer satisfaction through environmentally sound operations. The company's core value, which it shares with its stockholders, is to become a global name in the beverages market by promoting the personal developments of their employees and supporting the community and the environment through their corporate structure responsibilities. Thus, incorporating CSR activities, to promote high performance in the market to earn profit on the returns for their stakeholders by producing quality products that their customers enjoy (customer satisfaction).
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The third sampled company, PZ Cussons was a trading post in Sierra Leone in 1879, then name Paterson Zochonis (PZ) after its founders. George Paterson and George Zochonis, the founders, opened a branch in Nigeria in 1899. In 1975, it acquired Cussons Group Ltd and the name was changed to PZ Cussons and in 2007, the Nigerian branch of PZ Cussons was changed to PZ Cussons Nigeria Plc.
PZ Cussons is an international company operating in Nigeria with a mission to enhance the lives of consumers through their innovative production of quality products (value for money). The aim of PZ Cussons is to perform in the global market and become a market leader by producing quality products, provide a means of growth for their employees that enhance their quality of life and gaining profit for their stakeholders.
PZ Cussons products include health and wellbeing products; brand name Carex, that is, antiseptic soaps; brand name Robb, that is, ointments such as rubb original, for pain and nasal congestion relief and inhalers; brand name everyday, which comprises of feminine hygiene sanitary products; brand name Joy (joy roll-on, joy cologne, joy talc and joy lip-gloss). It health and beauty products include dairy products such as evaporated and powdered milk, beauty products; brand name Venusâ€• a product line including shampoo, hair relaxer, hair conditioner and hair growth creams (products specific for African hair types). It detergent products include toilet soaps; brand name premier and imperial leather.
The fourth selected firm is A. G. Leventis. In 1920, Anastassios G. Leventis, from Cyprus was engaged by a trading company based in Nigeria. He left his employers to establish a trading company of his own in 1937, and was later joined by his younger brother, C. P. Leventis in his business venture. They initially exported agricultural products, import and sale of textiles and other commodities. The beginning of the 1950's, saw them branch into retails stores. They also became an agent for Mercedes Benz cars and trucks ( including assembly, sale and after sales care), manufacturing and distribution of coca cola products throughout Nigeria, the assembly and distribution of air-conditioners, the sale and servicing of refrigerators and generators (a joint venture it shares with Cummins West Africa ltd and Cummins Inc., USA). Another business venture of the Leventis group during this period was to branch into the manufacturing of crown and plastic containers for the beverage industry.
In the 70's, the group started expanding their operations beyond Nigerian borders. It currently employees more than ten thousand people directly and indirectly, two hundred thousand people. It current market activities include three food processing factories and approximately two hundred and fifty residential and commercial properties in real estate development and management. It also has a sales and servicing sector, overseeing vehicles (Volkswagen brand of trucks and buses from brazil and Mercedes Benz cars). This includes an engine overhaul and rebuild department. Another of the Leventis group ventures is in the hospitality sector with a hotel located in the mainland of Lagos. This means that the Leventis company in Nigeria has an annual sales turnover of approximately one hundred and thirty billion Nairas, and has invested about one hundred billion Naira in Nigeria in the last five years.
Thus, the four sampled firms fulfil a criteria in the parameters of the model and/ process in answering the question of the impact of capital structure policies on Nigerian bottling firms listed on the Nigeria Stock Exchange.