Cost of Loan Capital and Capital Asset Acquisition in Nigeria: Implications on Organisational Profitability

Abstract

This paper discusses the extent to which cost of loan capital (measured in terms of interest charges) moderates the influence of capital asset on organisational profitability from the perspective of construction companies quoted on the Nigerian Stock Exchange. Data are collected through questionnaire. Analyses were performed using descriptive statistics, Pearson’s product moment co-efficient of correlation and multiple regression analysis. From the findings, capital asset as a resource significantly accounted for changes in organisational profitability measured in terms of net profit by 34.81%. The emergence of cost of loan capital (as a moderating variable) introducing borrowed funds improved the explanatory power to 38.1%. However, an evaluation of the individual regression coefficients indicate that cost of loan capital has the least contribution per naira of net profit, apparently, due to the fact that interest charges reduce net profit. Against the thinking of some scholars, borrowed funds which attract costs in the context of interest charges enhance cashflow for investment in capital assets and improvement of organisational profitability. In sourcing for funds to improve profitability, the impact of cost of loan capital in its individual capacity should be considered.

Key words:  Cost of loan capital, capital asset, profitability, construction, Nigerian Stock Exchange, Nigeria.