Author(s): Ezenwakwelu Charity,Onyeama Chigozie Austin,Osanebi Chimsunum orji,Emengini Emeka Steve, Abugu James Okechukwu
Small and medium enterprises in developing economies do not usually utilize the right mix of the various sources of long term funds to finance its capital assets due to ignorance and thus deprived of the benefits accompanied with optimal level of debt and equity mix. This paper examined the determinants for the level of equity and debt in the firm’s capital structure and assessed the extent to which financial leverage affects firm’s financial performance. This study relied on secondary source of information and thus focused on conceptual exploration, review of theories and critical analyses of empirical previous studies. The study presented some practical illustrations and solutions which were derived from the theory provided for the study Table (1) revealed that the more a firm is levered, the higher the rate of return to the equity holders. Levered firms in addition, have the advantage of tax shelter. Table (2) revealed that (when the net operating income is week) unlevered firms will be in a better condition than the levered firms. Table 3 revealed that so long as the net operating income of a firm is strong, the more a firm is levered, the higher the rate of return. The study concluded that the level of debt and equity in a company’s capital structure has risk and return implications. A firm should keep its optimal capital structure in mind when making financing decisions to assure that any increase in debt and preferred equity increase the value of the firm. So long as the net operating income of a firm is strong, the more a firm is levered, the higher the rate of return because interest paid on debt is tax deductible.