AN ANALYSIS OF CAPITAL RESTRUCTURING AS A SOLUTION TO CORPORATE FAILURES
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ABSTRACT
Capital restructuring of corporate entities is the systematically planned and packaged re-positioning exercise deliberately embarked upon by entrepreneurs with the aim of recognizing the ownership equity of the firm and repositioning the firm in proper footing as to effect survival and withstand increased profitability.
The main objective of this study is to determine the problems that leads to frequent corporate failure as well as the prospect of Nigeria as a base. For this research work three firms in Nigeria were visited.
In effecting this research work, the researcher used questionnaire administered to both prospective investor, existing owner of these three firms and a sample of customers drawn from Enugu-Onitsha, Aba and Nnewi depots of these firms. The researcher also used oral interviews with the key management staff of these three firm, as well as related published and unpublished data. The researcher analysed the data and information obtained and also tested the hypothesis using chi-square and correlation analysis.
Though critical analysis, it was observed that some of the problem militating against production firms that leads to their failure in Nigeria could have been averted through capital restructuring and proper financial portfolio. However, some customers undertaking proper feasibility studies. Monetary authorities and National Economic Reconstruction Fund (NERFUND) could give lighter conditionalities for and, fund assistance as well as eligibility for firms enlistment into the stock market (going public) this would enable entrepreneurs evolve effective growth policies, consolidation programmes as well as fund mobilization, strategies that would be possible for their management to implement.
In view of the finding and outcome of the tested hypothesis it was concluded that the investors dissatisfaction with the present enterprises approach to survival and profiteering as well as the various constraint on production companies ability to survive in a harsh economic environment would be minimized firm in the Eastern states has brighter prospects if they could recongnize their capital structure and base and be positioned for greater profitability and growth. This is because most of the problem are amended solution.
TABLES OF CONTENT
CHAPTER ONE
Introduction 1
1.1 Background of Study 1
1.2 Statement of the Problem 4
1.3 Objective of Study 6
1.4 Significance of Study 7
1.5 Research Question 8
1.6 Research Hypothesis 9
1.7 Scope and Limitation of the Study 10
1.8 Plan for the Development of Study 11
1.9 Definition of Operational Terms 12
Reference 16
CHAPTER TWO
2.0 Review of Related Literature 17
2.1 What is finance, capital structure & Capital Restructuring 18
2.2 Debt and Equity Mix (Gearing) 19
2.3 Cost of Capital 21
2.4 Optimum Capital 22
2.5 Capital management in a Contemporary Business 23
2.6 Causes of Corporate Failure in Nigeria 27
2.7 External (Environmental) Factors 31
2.8 Internal Factor 35
2.9 Effects of Corporate Failure in Nigeria 37
2.10 Signs of Corporate Failure 40
2.11 Steps to take to avoid Corporate Failure 41
Reference 44
CHAPTER THREE
3.0 Research Design and Methodology 46
3.1 Research Design 46
3.2 Sources of Data 46
3.3 Primary Sources of Data 47
3.4 Secondary Sources of Data 48
3.5 Area/Unit of Study 49
3.5.1 The Universe 49
3.5.2 The Target Population 49
3.6 Method of Investigation 50
3.7 Oral Interview Method 50
3.8 Questionnaire Method and Its Design 51
3.9 Sampling Population and Sample Size 53
3.10 Determination of Sample Size 54
3.11 Method of Data Presentation 56
3.12 Method of Data Analysis 56
Reference 59
CHAPTER FOUR
4.0 Data Presentation Analysis 60
4.1 Data Presentation 60
4.2 Data Analysis 70
CHAPTER FIVE
5.0 Finding Conclusion and Recommendations 81
5.1 Findings 81
5.2 Recommendations 83
5.3 Conclusions 86
Bibliography 88
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The Nigeria Economic Crises, which has persisted up to this 1999, got to its peak in 1989. The effects then had seen that of gross underutilization of human and material resources, how level of operations and out right corporate failure.
Virtually every industry in the Nigeria economy has suffered one form of a problem or the other. The banking industry through it controls the greatest financial resources in the economy experienced and is still experiencing its own share of Decree of 2000 construction industry has enjoyed continuous negative growth trends, manufacturing industry amongst other was not spared.
Prior to the economic crises was the decade of economic Joom (1970 – 1980) which saw the dominance of the oil sector accounting for up to 80% of the total foreign exchange earning in 1985 and 90% in 1999. During this decade, Nigeria had the singular good fortune of benefiting from the skyrocketing. Oil prices being of member of organization of Petroleum Exporting Countries (OPEC). The failure of government planning machinery to channel these vast resources into other investment pool culminated into serious problem the economy is facing.
This lapse resulted into inflationaring pressures manifesting itself in escalating prices, shortage of basic goods and service low income per capital, high unemployment rate, with many industries shut and a host of them producing at far below installed capacity (Baffa S.S. 1999).
A period of Recession is this period when firm failures is high pronounced research “a recurring period of decline in the total output income, employment and trade, usually lasting six months to a year, and marked by widespread contraction in many sectors of the economy.
These negative economic trends continued until the introduction of Structural Adjustment Programme SAP in 1999. The economy had witnessed serious internal and external disequilibria and structural imbalances, such that all economic indicators like inflation rate, Gross Domestic Product (GDP), employment rate, idle capacity. In industries amongst other attested to this fact as there were obviously manifest.
It was against their background that Structural Adjustment Programme (SAP) was introduced with the intention of reforming the structural pattern and restructure the productive base of the economy, in order to ensure viability and sustained growth. These, however made it inevitable for restructuring of corporate bodies to ensure survival in business. To make these possible, most companies had rolled off liquidated, some were on the verge of rolling off. The surviving ones were those that restructured and adjusted extensively to accommodate the new precept of economic change. These were done with great economic cost and difficulties. Structural Adjustment Programme on its own has been a blessing in disguise in that it has brought with itself reliance. Viability, prosperity and sustained growth.
All these have lent credence to the fact that slow growth and subsequent failure of an enterprise often depends to a large extent, on its financing, structure and its implication for financial risk.
It is therefore hoped that this little efforts made in this project will contribute in no small measure to increase the knowledge of how to curb corporate failure while establishing a workable capital structure (Ama G.A. 1992).
1.2 STATEMENT OF THE PROBLEM
Corporate problems perhaps started with the “oil boom”. During the era adequate financial decision were hardly taken, investments were no made, and where it was never considered. Specifically most firms failed due to some factors such as capital shortage unskilled labour, poor management team, rigorous competition and excessive government control which hampered raw material procurement.
In Nigeria, firms that could not source their raw material locally ran into serious problems and a considerable number of them started to produce below installed capacity. Infact it is estimated that not less than one hundred and forty firms failed during this period. The negative effect is still being felt today (2002) depending on government policies and implementation.
Apart from the problems mentioned above, most of the firms failed as a result of over trading, undercapitalization, poor research methods and excessive investments in fixed asset leading to little or nothing for working capital.
Reactivation of some of these companies has been in progress with varying degree of success. Most of them have acquired one from of assistance of the other, while some have sold off unproductive fixed assets, other have sold some part of their accumulated debt for ownership proportion (debt equity shares) in the firm. In all there still exist some problem like inadequate funding and inability to source for materials locally. Also there is problem of an acceptable capital mix and creditors refused to some restructuring schemes (proposals). The issue of interest rates
