Cost of Capital and Optimal Financing of Corporate Growth of Selected Manufacturing Firms Listed on the Floor of Nigerian Stock Exchange

Abstract

This dissertation empirically investigated the relationship between cost of capital and optimal financing of corporate growth of selected manufacturing firms listed on the floor of Nigerian stock exchange. Annual time series data were generated from the Annual Reports of the quoted firms and stock exchange fact book. Fifty manufacturing firms were selected from the population of quoted manufacturing firms. Four multiple regression models were specified and estimated with the aid of Software package for social services (SPSS). Equity financing measured as equity capital to total capital, debt financing measured as debt capital to total capital and return on investment were modeled as the function of cost of debt, cost of equity and weighted average cost of capital. The generated collinearity diagnostics result shows that the Eigen values that correspond to the highest condition index and variable constant are less than 0.5 rule of thumb. The Durbin Watson test shows absence of auto-correlation. The regression coefficient shows that cost of debt and cost of equity have negative relationship on equity financing while weighted average cost of capital have negative effect, cost of debt and weighted average cost of capital have positive relationship with debt financing while cost of equity have negative effect on the dependent variable. Cost of debt and reweighted average cost of capital have positive effect on return on Investment while cost of equity has negative effect. Model four found that cost of capital have positive relationship with financing mix of the quoted firms. From the model summary, the study conclude that cost of capital have no significant effect on equity financing and return on investment but significantly affect debt financing. It therefore recommends that Management should formulate internal policy that will enhance the realization of optimal capital structure of the firms, formulating capital structure of the firm should be well examined with the investment policy of the firms, the environmental factors should be acknowledged in formulating cost of capital to avoid risk associated with inadequate or wrong capital structure, external source of capital such as debt should be properly appraised and integrated with the investment policy and cost of equity should be integrated with the objective of maximizing shareholders’ wealth through investment policies.