Relationship between Capital Strength and Risk (A Case Study of Selected Flour Mill Companies in Nigeria)
Keywords:
Capital strength, profitability, Leverage, risk, financing decisionAbstract
This study examined the relationship between capital strength and risk. Financing decision is one of the major challenges confronting manager of finance. There are many ways to source for fund to finance the assets of a company. The choice undoubtedly will have effect on the level of profit. Leverage either directly or indirectly will affect the risk perception of the firm. The objective of the study is to find out the relationship between rofitability and capital strength. Return on capital employe (ROCE) is used as proxy for profitability while financial leverage, asset leverage and operating leverage are used as proxies for capital strength. Three hypotheses covering the three leverages were formulated to see how each is related to profitability using this model: ROCE= β0 +β1 (FINL) +β2 (ASSL +β3 (OPEL) +ε .The result of the analysis showed that there is significant relationship between profitability and financial leverage, asset leverage and operating leverage.
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