ABSTRACT
The issue of value creation for stakeholders of the firm as a result of the composition of its
financial mix can be traced to the seminal work of Modigliani and Miller (MM) in 1958.
Their argument is the irrelevance of the financing mix of firms on value. Thus, whether the
firm uses equity or debt, the value of the firm does not change. There have been several
theories after the works of MM carried out by several scholars either criticizing or supporting
the Modigliani and Miller Irrelevance theorem. The Trade-off theory of capital structure
suggests that there is an advantage to finance the firm with debt and also a cost of financing
with debt. As a result, firms are assumed to trade-off the tax benefits of debt with the
bankruptcy cost of debt when making their financing decisions. However, present and
potential investors need single information which is, the value creating potential of the firm
no matter the composition of the firm’s financing mix. Therefore this study had the following
objectives; to determine the impact of debt financing on the ability of the firm to make profit;
to determine the impact of debt financing on the ability of the firm to maximise the use of its
assets; to determine the impact of debt financing on the firm’s earning power on per share
basis; to determine the impact of debt financing on the ability of the firm to reward
shareholders on per share basis; to determine the impact of debt financing on the firm’s
ability to meet its’ financial obligations as at when due and to determine whether debt
financing enhance the value of Nigerian firms. The ex post facto research design was
adopted to enable the researcher make use of secondary data and determine cause-effect
relationship for twenty-eight quoted Nigerian firms for the period 2004-2008 on a firm by
firm as well as on aggregate basis.
The Ordinary Least Square (OLS) estimation technique
was adopted using SPSS statistical software to evaluate objectives one to five where ratio
values of Total Debt Rate (TDR) was used as the independent variable while Net Profit
Margin (NPM), Total Asset Turnover (TAT), Earnings Per Share (EPS), Dividend Per Share
(DPS) and Current Ratio (CR) as dependent variables, while adopting a bankruptcy model,
the Multiple Discriminant Analysis Model (MDA) to evaluate objective six using MDA’s Zscore
benchmark of 2.675 to determine value (Rashmi and Sinha, 2004; Xing and Cheng,
2005). The study revealed that on a firm by firm basis there were mix variations of the impact
of Total Debt Rate on the firms’ value parameters (NPM, TAT, EPS, DPS and CR) across
firms sampled while on aggregate basis; there was a positive non-significant impact of Total
Debt Rate on Net Profit Margin; there was a negative non-significant impact of Total Debt
Rate on Asset Turnover Rate; there was a positive non-significant impact of Total Debt Rate
on Earnings per Share; there was a positive non-significant impact of Total Debt Rate on
Dividend per Share and there was a negative non-significant impact of Total Debt Rate on
Current Ratio and twenty firms created value as a result of the firms’ use of debt financing
representing 71.4% of firms sampled while eight firms representing 28.6% of firms did not
create value. From the foregoing therefore, the use of debt financing enhances the value of
Nigerian firms, thus could be used to enhance shareholders’ wealth, however further studies
could still be carried out as to determine why some firms did not enhance value as a result of
the used of debt finance in the financial mix of Nigerian firms .
