Abstract:
Capital structure refers to the way a corporation finance it assets through some combination of equity, debt or hybrid securities
The purpose of the study was to determine if there would be any relationship (being it negative or positive) between capital structure and banks profitability.
The financial statements of two banks listed on the Ghana Stock Exchange (GSE) were used as a method of data analysis. Which are HFC GHANA LIMITED and UT Bank ranges from 2008 to 2010.
Dependent and Independent variables were determined by using the regression analysis.
According to the study, it was noticed that for an increase in the debt component of the capital structure, profitability decreases and for any decrease in the debt component of capital structure of the bank, the profitability increases. Therefore there will be conclusion that the kind of capital structure, (debt/equity) chosen affects the bank’s profitability.
The hypothesis is true. In the sense that, there is a positive relationship between Return on Equity and Long Term Debt to equity.
A positive relationship between the Return on Asset and the Short Term Debt to equity is realized: Hence (ROA) is dependent on the Short Term Debt to Equity. This makes the hypothesis true.
Description:
In finance, capital structure refers to the way a corporation finance it assets through some combination of equity, debt or hybrid securities. A firm’s capital structure is then the composition or structure of its liabilities, for example a firm that sells $20billion in equity and $80 billion in debt is said to be 20% equity financed and 80% debt financed. The firm’s ratio of debt to total financing, 80% in this example is referred to as the firms leverage. In reality, capital structure may be highly complex and include dozens of sources. Gearing ratio is the proportion of the capital employed of the firm which comes from outside of the business finance; example is by taking a short term loan.
The Modigliani- Miller theorem, proposed by Franco Modigliani and Merton Miller forms the basis for modern thinking on capital structure though it is generally viewed as a purely theoretical result since it disregards many important factors in the capital structure decision. The theorem states that, in a perfect market, how a firm is financed is irrelevant to its value. This result provides the base with which to examine real world reasons why capital structure is relevant, that is a company’s value is affected by the capital structure it employs.
The reason for this research is to investigate the impact of capital structure and profitability on the performance of HFC Ghana limited and UT Bank.
