WOLAITA SODO UNIVERSITY

GRADUATESTUDIES DIRECTORATE

FACTORS DETERMINED FINANCIAL PERFORMANCE OF MEDIUM

MANUFACTURING ENTERPRISE: WOLAITA ZONE

MSC RESEARCH PROPOSAL

BY TIGIST DECHASSA

COLLEGE: BUSINESS AND ECONOMICS

DEPARTMENT: ACCOUNTING AND FINANCE

PROGRAM: REGULAR

Advisor: Mr. Tesfaye J. (Asst prof.)

DECEMBER 2020
WOLAITA SODO, ETHIOPIA

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APPROVAL SHEET

Assessing the “factors determined financial performance of medium manufacturing

enterprise” in Wolaita zone.

Submitted by:

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Approved by:

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Co-Advisors’ Name Signature Date

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 Table of content

Contents
APPROVAL SHEET ................................................................................................................................ i
Table of content...................................................................................................................................... ii
LIST OF ACRONYMS AND ABBREVIATIONS ............................................................................ iv
ABSTRACT............................................................................................. Error! Bookmark not defined.
CHAPTER ONE .................................................................................................................................... 1
INTRODUCTION ................................................................................................................................. 1
1.1. Background of the study ....................................................................................................... 1
1.2. Statement of the Problem ...................................................................................................... 8
1.3. Research Objectives.................................................................................................................... 9
1.3.1. General Objective .................................................................................................................. 9
1.3.2 Specific Objectives ................................................................................................................. 9
1.4. Research Hypotheses ........................................................................................................... 10
1.5. Significance of the Study ..................................................................................................... 10
1.6. Scope of the Study ................................................................................................................ 11
1.7. Limitations of the study....................................................................................................... 12
CHAPTER TWO ................................................................................................................................. 13
2. LITERATURE REVIEW ........................................................................................................... 13
2.1. Introduction................................................................................................................................. 13
2.2. Theoretical Framework............................................................................................................ 13
2.2.1. Modigliani-Miller Theory .................................................................................................... 13
2.2.2 Trade-off Theory................................................................................................................... 15
2.2.4 Agency Theory ..................................................................................................................... 16
2.3 empirical literature ....................................................................................................................... 18
2.5 Conceptual Framework............................................................................................................. 24
CHAPTER THREE ............................................................................................................................. 26
RESEARCH METHODOLOGY ....................................................................................................... 26
3.1 Introduction.................................................................................................................................. 26
3.2 Description of the Study Area................................................................................................... 26
3.2 research design ........................................................................................................................... 27

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3.3 target population ........................................................................................................................ 27
3.4 Sampling Frame ......................................................................................................................... 28
3.5 Sampling Technique .................................................................................................................. 28
3.6 Sample size ................................................................................................................................. 28
3.7 Types of data .............................................................................................................................. 28
3.8 Data Collection Methods ........................................................................................................... 28
3.7 Data Collection Procedures....................................................................................................... 29
3.9 Data Analysis and Presentation ................................................................................................ 30
4.1 Work plan ...................................................................................... Error! Bookmark not defined.
4.2 Budget Breakdown .................................................................................................................... 35

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 LIST OF ACRONYMS AND ABBREVIATIONS
AF - Access to finance

ANOVA - Analysis of variance

CS - Capital structure

EPS - Earnings per share

FDI - Foreign direct investment

GDP - Gross domestic product

GP - Gross profit

KMO - Kaiser-Meyer-Olkin

NIM - Net Interest Margin

MFI - Micro Finance Institutions

MM - Modigliani and Miller

MSE - Micro and Small Enterprises

NGO - Non-governmental Organization

NP - Net profit

PE - Price Earnings Ratio

ROA - Return on assets

ROC - Return on Capital

ROE - Return on equity

ROI - Return on investment

ROS - Return on Sales

SME - Small and Medium Enterprises

SPSS - Statistical Package for Social Scientists

UK - United Kingdom

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List of tables

List of Figure

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 CHAPTER ONE

INTRODUCTION

1.1.Background of the study

Performance is used as a measure to dictate organizational growth and development. The
performance of an organization shows the level of improvement made by a firm within a period
of time that is, firm performance serves as a barometer that measures the success of the
company, hence used as a bench mark for investors to invest their funds (Kariith, 2017).
Performance is a complex phenomenon and this has consequently increased the studying of
firm performance and its determinants globally. It is the objective of every profit-oriented
organization to attain financial performance, which is seen as the metric for assessing the
effectiveness of management. Kariithi (2017) posit that the ability of the organization to align
the people and resources to tasks that are strategic for attaining organizational performance, in
moral and ethical ways that ultimately leads to sustainable competitive advantage. In measuring
organizational performance, managers use financial performance and non-financial
performance to assess their ability and that of the whole organization in moving the business
towards financial performance. Both measurements have been confirmed as significant in
illustrating companies’ wellbeing (Okelo, 2015) Therefore, the focus of this study is on
financial performance aspects with strong emphasis on the factors that are directly related to
survey data and financial reports of the organization. Taking into consideration that measuring
firm performance is rather challenging, and there is no consensus among scholars and business
practitioners on the metrics to be used in tracking the efficiency and effectiveness of individuals
towards the organizational goals. In this study, return on assets and return on equity are relied
upon to assess financial performance with the link to organizational factors. Furthermore, links
between organizational factors of access to finance, capital structure, and cost of capital, firm
size, liquidity, and financial performance of firms are conceptualized.
It is important to understand how capital structure influences financial performance of
manufacturing firms. Capital structure influences both profitability and riskiness of the firm.
The greater the gearing a firm exhibit, the higher the potential for failure if cash flows fall short
of those necessary to service debts (Okelo, 2015). Capital structure decisions attracts numerous

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interests in corporate finance from many scholars and researchers, mainly to prove or
disapprove the earlier theoretical backgrounds such as the pecking order, Modigliani and Miller
propositions and the static trade-off theories and their relationship with firms’ performance.
Pouraghajan & Malekian (2013) argues that there is a strong negative and significant
relationship between debt ratio and performance of firms, that is, companies that have a high
debt ratio will have a negative impact on firm performance and value. Okiro (2014) in a study
of corporate governance, capital structure and performance of firms listed at the East African
community securities exchange found a significant relationship between capital structure and
financial performance. Ahmad (2012) documents that firms that are profitable and therefore
generate high earnings are expected to use less debt capital than those who do generate low
earnings.
Financial access is an important determinant of the performance of enterprises as it provides
them working capital, fosters greater firm innovation and dynamism, enhances
entrepreneurship, promotes more efficient asset allocation and enhances the firm’s ability to
exploit growth opportunities (Njeru, 2012). Firms with access to funding are able to build up
inventories to avoid stocking out during crises, while the availability of credit increases the
growth potential of the surviving firms during periods of macroeconomic instability (Atieno,
2014). Access to external resources allows for flexibility in resource allocation and reduces the
impact of cash flow problems on firm activity. Bunyasi, Namusonge and Bwisa (2014), argues
that the government should build capacity of the financial institutions to enhance firm’s access
to finances. Manufacturing is a challenging undertaking that requires a lot of financial resources
for acquisition of raw materials, investment in technology and distribution thus the inability of
manufacturing firms to access finance would greatly exacerbate their current quality and market
expansion problems thereby negatively affecting their competitiveness and that of the country
(Rotich, 2016). Javed and Akhta (2012) postulates that access to finance is a key determinant
of a firms’ ability to develop, operate and attain profitability. Lack of access to land, utility,
installation and import procedures act as constraints to manufacturing firm’s growth and
profitability. Other constraints such as poor financial management skills and lack of required
collateral make it difficult for the firms to access finance (Ayallo, 2012).

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Cost of capital is primarily a risk measure, but it is also related to firm value and can be
considered a key determinant of firm’s value other than accounting performance measures.
Value is created when the firm is able to enjoy a cheaper source of capital. Given a rate of
interest or cost of capital, an investor would choose a project whose internal rate of return
exceeded the cost of capital. In addition, the cost of capital is very important for a firm in order
to assess future investment opportunities and to reevaluate existing investments (Okiro, 2014).
The cost of equity for a firm is affected by several factors, some of which are related to
characteristics of the firm itself, while others stem from the macroeconomic environment in
which it operates. A study by Ahmad (2012), found that greater firm size and greater liquidity
of a firm’s stock are associated with a lower cost of capital.
The size of the firm is the primary factor in determining its profitability. the traditional neo
classical concept of economics of scale indicate that item or product can be produced at much
lower costs by bigger firms (Niresh and Velnampy, 2014).big firm have more competitive
power when compared to small firm in fields requiring competition (dogan, 2013). Firm of
different size distinguish the selves along different observable and unobservable dimension. In
addition to this big firm are able seize the opportunity to work in the field which require high
capital sience they have large resource, and this situation provides them the opportunity to work
in more profitable field with little competition (Bayyurt,2007). Firm size is a construct of
scholarly interest since it traditionally has much explanatory power and an understanding of its
importance can be vital for managers who operate in today’s competitive environment (kioko,
2010).
One of the most common definitions of term “liquidity” is based on the ability of company to
pay its bills on time (Van Horne & Wachowicz, 2000). In every company relation between
liquidity and financial condition is very important. Stronger financial conditions will be
implicated by greater liquidity (Van Horne & Wachowicz, 2000). Liquidity is very important
for continues of company’s everyday operations. This is affected by quantity of current assets.
Current assets can influence liquidity on two ways. One of the possibilities is that there are
fewer current assets in one company and that will result in problems with operations. Other
possibility is that there is too much current assets in the company. If this is the case problem is
reflected in return on investments (Van Horne & Wachowicz, 2000). Cash flow is also very

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important for continuous of liquidity ratios. If there is problem with process of collecting the
receivables from customers then it will result in inability to pay further obligations. This
problem in the cash flow importantly affects inadequate liquidity. Company liquidity in general
is not reliant on the value of its assets; rather it is depended on operating cash flows
(Soenen, 1993). Cash flow is not important only for company performances it reflect also
satisfaction of customers. Identifying drivers of company’s future cash flow is very important
for shareholders (Gruca & Rego, 2005). In relation to this it can be conclude that cash flow is
important not just for financial but also for non-financial performances. Liquidity in the
term of effectiveness is in the function of cash flow and its possibility to generate into and
invest out of firm in same certain period of time. When it is about generating cash the same
is if it is about retail or engineering company (Fadel & Parkinson, 1978). Liquidity is
short term indicator which shows company’s possibility of a settlement. Liquidity depends on
degree to which some asset can be converted to cash. This money then can be used for paying
current obligations. Important for the concept of liquidity is that large quantity of assets
or commodities can be trade without changing its price (Pastor & Stambaugh, 2003). One of
liquidity measures is based on comparing current assets with current liabilities. This racio
have been developed in the nineteenth century. It is believed that the ideal proportion between
those measures should be three (Sorter & Becker, 1964). Those authors (Sorter & Becker,
1964) have also developed psychological model in constrain with financial ratios and made
conclusion that conservative corporations are oriented on higher liquidity ratio. From one year
to another, there could be increasing of liquidity ratio in one company. (Fadel & Parkinson,
1978) emphasize that cause of the liquidity ratio increasing must be considered. Only in case if
it is naturally caused it can be used for comparing one company with another. If market
conditions are changing in dramatically way, it will influence liquidity of company. For
example the company that is analysed had a very big problem few years ago. The problem was
about main supplier of company (about 90% of total supplies), who stop further produce
of elementary material.

1.1.1. Global Perspective of Determinants and Financial Performance

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The term manufacturing refers to the processing of raw materials or parts into finished goods
through the use of tools, human labor, machinery, and chemical processing (Will Kenton,
2022). The manufacturing industries sector is one of the most important economic sectors,
because of its role and high impact in the development of the economy at the local and global
level. Global manufacturing production increased by 9.4 per cent in 2021, after the pandemic-
related drop of 4.2 per cent in 2020 in large developing economies. The manufacturing sector
in the developed nations is large and contributes significantly to economic development,
innovation and productivity. The sector cannot be ignored in the process of economic
development in any state as it remains one of the most powerful engines for economic growth
(Khalifa & Shafii, 2013). (Sankaran, 2021) The estimated statistical evidence illustrates that a
1% increase in import increases the export by 0.96%. The development of global value chains
has facilitated the rapid integration of emerging into the global economy. (M. West and
Lansang, 2018) the top ranked nations in overall manufacturing environment were the United
Kingdom and Switzerland (both with 78 points out of 100), followed by the United States (77
points), Japan (74 points), and Canada (74 points). Fuentes and Ferreira (2017) carried out a
study on the effect of capital intensity and foreign direct investment (FDI) on multinational
manufacturing firm’s financial performance. They found a positive effect between capital
intensity and financial performance of multinational manufacturing firms.

Manufacturing sector acts as a catalyst to transform the economic structure of countries from
simple, slow growing and low value activities to more vibrant and productive economies
(Kungu, 2015). In 2009, manufacturing was the third largest sector in the UK economy, after
business services and the wholesale/retail sector in terms of share of UK Gross Domestic
Product. It generated some £140bn in gross value added, representing just over 11% of the UK
economy. It also employed some 2.6 million people, representing over 8% of total UK
employment.

1.1.2. Regional Perspective of Determinants and Financial Performance

The share of manufacturing value added in Growth Domestic Product (GDP) declined from
16% in 1980 to less than 10% in 2016 in Africa. Gross domestic product (GDP) growth is
projected to gather pace, increasing from 1.3 percent in. 2017 to 1.4 percent in 2018, 1.8 percent

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in 2019, and 1.9. As nations achieve higher levels of economic growth, manufacturing sector
seems to contribute more to the GDP, employment levels, innovation and trade (Kungu, 2015).
The manufacturing sector plays a big role in national income of African countries. The sector
contributes to the progress of the African economies, increased rate of economic growth,
diversified production, reduced imports, and expanded the economic infrastructure (Rotich &
Namusonge, 2016). The share of the manufacturing sector in total employment and per capita
manufacturing value added are rough indicators of industry’s contributions in the social,
economic and environmental dimensions of African countries. The economic role of industry
in sustainable development presents per capital manufacturing value added as a general
indicator of industrial development in the economic perspective. One important contribution of
industry to the social component in sustainable development is creation of employment (Rissa,
2014).

1.1.3 Local Perspective of Determinants and Financial Performance

In Manufacturing firms have become an important contributor to the economy. The sector
contributes to the national objective of creating employment opportunities and generating
income for the economy (Njoroge, 2014). As an important sector in the overall economic
growth, manufacturing sector requires an in depth analysis at industry as well as firm level.
This sector occupies an increasing importance in the development plans in developing countries
which seeks to break the cycle industrial underdevelopment have in order to achieve economic
development. Manufacturing sector today has become the main means for developing countries
to benefit from globalization and bridge the income gap with the industrialized world
(Amakom, 2015).
The financial performance measures have a variety of users but they are assumed to be of
primary interest to shareholders as they entrust their money to company managers who are
responsible for the application of capital but may have no incentives to increase shareholders
value (Njeru, 2015). Additionally, agency theory argues that unless managers are monitored
constantly they act in self-interest, which might be at variance with interests of shareholders.
But this variance can be reduced through the added costs of monitoring or designing appropriate
incentive structures. In order to achieve goal congruence, managers’ compensation is often

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linked with the performance of the responsibility centers and also with overall company
performance (Uzel, 2015).
Moreover, for the case of wolaita zone it is valid to note that members want to earn a dividend
and how much dividends manufacturing firms can pay is a function of how well assets have
been deployed to generate revenue, and how well cost elements have been managed. Further,
applying the profit maximization approach to modeling financial performance would not negate
the principal of maximizing member’s profitability benefit (Rotich, 2016). Since in this study
the objective is to identify the determinants of financial performance of manufacturing in
wolaita zone, two issues have to be addressed.
These are how to measure financial performance and then how to attribute financial
performance to variables posited to be the determinants of performance. Traditionally, analysis
of financial statements using ratio analysis is the most common method employed in measuring
financial performance of business entities. For instance, Okelo (2015) notes that return on
equity (ROE) ratio is one of the most important relationship in financial analysis. Additionally
Ogindo (2015), observes that profitability indicators such as return on equity (ROE) and return
on assets (ROA) tend to summarize performance in all areas of the company. If portfolio quality
is poor or efficiency is low, this will tend to be reflected in these ratios. Gupta, (2012) uses both
ROE and ROA to measure profitability. Kiaritha, (2014) argues that regression analysis is the
most common methodology of relating the measures of financial performance to variables
posited to be the determinants of financial performance. Other common multivariate tools used
to establish relationship between performance and firms or environmental variables include
descriptive statistics (includes tables of means, t-tests, tests of proportions, chi-square),
correlation, analysis of variance and other multivariate methods (discriminant, cluster and
factor analysis, canonical correlation). Investors measure overall company performance in
order to be able to make right investment decisions. The financial performance measures are
assumed to be of primary interest to shareholders as they entrust their money to managers who
are responsible for the application of capital but may have no incentives to increase shareholders
value (Ongore & Kusa). Okelo (2015) observes that the goal of management should be to
maximize the market value of the company’s shareholder equity through investments in an

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environment where outcomes are uncertain. A proper balance between risk and return should
be maintained to maximize the value of a firm’s shares (Njoroge, 2010).

1.2.Statement of the Problem

In Wolaita zone, manufacturing sector is the second most important sector next to agriculture.
It is important in terms of contribution to gross domestic product and employment. The rapid
growth of the manufacturing sector in most developing countries like Ethiopia has a number of
implications for activities in this sector to implement reforms necessary to strengthen such
sectors (Rotich & Namusonge 2016). Such improvements may include steps such as
privatization, trade development, regulatory and competitive framework reviews and industrial
productivity and tax reforms.

The manufacturing sector in wolaita zone is large with compare to other sectors and contributes
significantly to economic development, innovation and productivity.

There is need to understand the determinants of financial performance of manufacturing firms.

High performance reflects management effectiveness and efficiency in making use of
company’s resources and this in turn contributes to the country’s economy at large (Kung’u,
2015). Kiaritha (2016) found a positive relationship between financial performance and access
to finance. Bunyasi, Namusonge and Bwisa (2014), argued that access to entrepreneurial
finance has a positive influence on the performance of SMEs. Kinyanjui (2015) found a positive
relationship between access to financial resources and firm performance. Additionally
Nanagaki and Namusonge (2014) argues that there is a positive relationship between access to
finance and performance of enterprises.

Additionally, Gupta, Srivasta and Sharma (2015) postulates that companies that have high
profitability and good performance have less debt. Ummar, Tanveer and Aslam (2014) in their
study on the impact of capital structure on financial performance in Pakistan concluded that
capital structure choice is an important determinant of financial performance of firms. Javed

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and Akhta (2016) found a positive relationship between capital sturacture, financial
performance, and growth. Okelo (2016) argues that capital structure affects financial
performance of firms. Earlier work on performance in wolaita zone only focused on business
performance of small and medium enterprises (Namusonge, 20). Mwangi (2016) argues that
equity financing was positively related to financial performance. Lack of enough studies
targeting financial performance in the manufacturing sector necessitated the carrying out of this
study. The study aimed at establishing factor determine of financial performance of
manufacturing firms in wolaita zone. Measures of firm performance would be a combination
of both financial and nonfinancial measures. Financial measures can be represented by profit,
revenue, returns on investment (ROI), returns on equity (ROE) and earnings per share (EPS)
(Omar, 2017).

They have the advantage of being objective, simple and easy to understand. However, they have
the drawback of being not easily available and being historical, therefore offering only lagged
information. They can also be subject to manipulations and incompleteness (Ng’ang’a, 2017).
Non-financial measures include number of employees, revenue growth, revenue per employee,
market share, customers’ satisfaction, employees’ satisfaction. The non-financial measures
have the disadvantage of being subjective (Njeru, 2015). Owing to the limitations of the
financial and nonfinancial measures, the study employed a hybrid approach combining both
financial and non-financial measures of performance.

1.3. Research Objectives

1.3.1. General Objective
The general objective of the study will be to identify factor that determine financial performance
of manufacturing firms in wolaita zone.
1.3.2 Specific Objectives
To determine the effect of access to finance on financial performance among manufacturing
firms in wolaita zone.

To evaluate the effect of capital structure on financial performance among manufacturing firms
in wolaita zone.

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To analyses the effect of cost of capital on financial performance among manufacturing firms
in wolaita zone.

To assess the effect of firm size on financial performance among manufacturing firms in wolaita
zone.

To analyze the effect of liquidity on financial performance among manufacturing firms in

wolaita zone.

1.4.Research Hypotheses
The researcher will be testing the following null hypothesis:
H01: Access to finance does not significantly affect financial performance among
manufacturing firms in wolaita zone.
H02: Capital structure does not significantly affect financial performance among manufacturing
firms in wolaita zone.

H03: Cost of capital does not significantly affect financial performance among manufacturing
firms in wolaita zone.

H04: firm size does not significantly affect financial performance among manufacturing firms
in wolaita zone.

H05: liquidity does not significantly affect financial performance among manufacturing firms
in wolaita zone.

1.5. Significance of the Study

The significance of this study will be to identify factor determine financial performance among
manufacturing firms in wolaita zone.
1.5.1 Policy Makers
The establishment of new structures of governance at zonal level might be geared towards
making policies that will have positive impact on manufacturing firms in wolaita zone. Such
contributions will help policy makers focus on the areas that will bring support to those firms
such as easy access to capital, choose of capital structure, identifying cost of capital, firm size

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and liquidity. The findings will be supportive in structuring appropriate manufacturing
strategies and formulate policies to improve the manufacturing sector.

1.5.2 Investors
Other stakeholders such as the government would be interested in supporting manufacturing
firms as way of eradicating poverty in the country and stimulating economic development. The
findings of this study will contribute towards a better understanding of financial performance
in manufacturing sector firms in wolaita zone. The government will identify key variables that
influence financial performance to facilitate and strengthen the manufacturing sector to meet
the challenges of the new millennium.

1.5.3 Researchers
Literature from this study will also be of benefit to the researchers who would want to
understand determinants of financial performance for manufacturing firms in wolaita zone. The
findings and recommendations from the study will benefit researchers and guide them into
further areas of research. The study will be adding to the existing body of knowledge in the area
of financial performance in general. It will be contributed to the academic literature in the
manufacturing sector in wolita zone.
1.6. Scope of the Study

The study will be focus on factor that determine financial performance such as capital structure,
cost of capital, firm size, liquidity and access to finance and their effect on manufacturing
enterprise. The geographical scope included manufacturing enterprise in wolaita zone. The non-
manufacturing firms were excluded from the study. Small and some medium enterprises were
also excluded from the study as most of them have stagnated growth and were not appropriate
for the purpose of this study. This study will be focused on determinants of financial
performance of manufacturing firms in wolaita zone. Therefore, the study will be a good
representation of the manufacturing sector. The study will be limited to manufacturing firms
that have five year consecutive financial statement because of financial statement is an

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important thing to analyze company financial performance, in case of this scope of this study
only include medium manufacturing enterprise that have life of five year with in a medium
rank. Manufacturing firms are drawn from many categories thus providing a diversified
population relevant for comparative analysis.
1.7. Limitations of the study

The researcher will be facing several limitations as some respondents were reluctant to provide
the information due to fears that the information, they provided could be used against them or
bear some adverse effects on the manufacturing firms and therefore they did not wish to
participate in the study. This limitation will be overcome by the introductory letter from the
University reassuring them that the information was strictly for academic purpose and would
be treated with confidentiality. Other limitation face by researcher will be covering of all
manufacturing firm that operate in wolaita zone due to some manufacturing firm are micro,
small, and medium that have not financial statements.

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 CHAPTER TWO

2. LITERATURE REVIEW
2.1. Introduction
This section reviewed a detailed account of the various literature in financial performance. The
chapter reviewed the theoretical framework for determinants of financial performance which
include access to finance, capital structure, and cost of capita, firm size and liquidity and
empirical literature. These independent variables were linked to the dependent variable through
a conceptual framework. Research gaps were identified.

2.2. Theoretical Framework

Theoretical literature provides several motivations for their well-documented evidence.
Theories on financial performance of firms and on factors influencing financial performance
were reviewed. The theories that were used in the study include capital structure theory, trade-
off theory and pecking order theory.

2.2.1. Modigliani-Miller Theory

Modern capital structure theory is based on the Modigliani-Miller hypothesis, which was put
forth by Franco Modigliani and Merton Miller in 1958. Numerous crucial aspects of the capital
structure decision are ignored. The theory identifies the financial choices made by businesses
that have no bearing on their worth. According to the theory, a company's worth is unaffected
by how it is financed in a perfect market. The outcome gives us a starting point from which to
study capital structure's relevance in the real world. With perfect knowledge and no transaction
or bankruptcy fees, Modigliani and Miller imagined the ideal capital market. The theory made
the following assumptions: there are no taxes, borrowing costs are the same for businesses and
individuals, and financing decisions have no influence on investment choices. Modigliani and
Miller made two findings under these conditions.

Their initial claim was that a company's worth is independent of its capital structure. According
to their second claim, the price of equity for a leveraged company is the same as the price of
equity for an unleveraged company plus an additional premium for financial risk. This means
that as leverage rises, total risk is conserved and no additional value is produced even though

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the cost of individual risks is distributed across various investor groups. The impact of taxes
and risky debt was added to their analysis. Debt financing is advantageous under a traditional
tax system since interest payments are tax deductible, which lowers the cost of capital as debt's
share of the capital structure rises. Then, having almost no equity at all would be the ideal
structure.

According to Modigliani and Miller's second "irrelevance" proposition, given a company's

investment strategy, the dividend payout strategy it chooses to employ won't have an impact on
either the stock's present price or the total return to shareholders (Okelo, 2015). In other words,
neither decisions regarding the capital structure nor the dividend policy matter in a perfect
market. Studies have demonstrated that several indicators are used to gauge a company's
financial leverage and, consequently, its financial performance. The "irrelevance" theory of
M&M leverage is supported by a number of recorded studies, as noted by Kumar (2014) that
demonstrate a decline in share prices soon before the announcement of a new equity issue and
in the few years that follow. In reality, there are several complicated interactions between the
personal and corporate tax systems. According to Okelo (2015), the tax benefit of debt financing
may be lessened if there are personal income taxes in place. This is due to the fact that
businesses may reduce their corporate taxes by increasing their debt-to-equity ratio, but
investors would have to pay more personal taxes and would consequently need larger returns
to make up for this tax and the associated increased risks. As a result, the MM proposal was
altered in 1977 to include personal taxes while maintaining the same justification that capital
structure does matter. A typical company might potentially double tax benefits by issuing debt
up until the point at which the marginal tax benefit starts to fall, according to Mwangi (2015).
Consequently, it is impossible for a company to have 100% of debt financing.

In conclusion, MM shows that if capital structure does matter, taxes and default risk may be the
reasons why (Aroni, 2015). The core idea of MM is that any combination of funding sources
is equally effective. No matter how many financial resources are employed, the resulting capital
structure is only another method of distributing the net cash flow among the contributors of the
capital that supports the business' operations (Myers, 2001). Therefore, the MM theory is used
in this study since the capital structure a firm uses has an impact on its financial performance.

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2.2.2 Trade-off Theory
The Jensen and Meckling trade-off theory permits bankruptcy costs to exist (Okelo, 2015). The
theory examines the trade-off between the expenses of bankruptcy and the tax benefits of debt.
It contends that businesses will use debt as much as they can, but they must be cautious of any
potential negative effects of bankruptcy (Mwangi, 2015). . The tax advantages of debt are listed
as a benefit, whereas the disadvantages of debt financing are shown as bankruptcy charges and
costs associated with financial difficulty. When determining how much debt and equity to
utilize for financing, a company that is maximizing its overall value will focus on this trade-off
because the marginal benefit of debt drops as debt increases while the marginal cost increases
(Migiro, 2013). According to Okelo (2015), paying down debt reduces managers' cash flow
options. On the other hand, he claims that this decline will lessen the chances of successful
investing. As a result, businesses with less debt have more investment prospects and more
liquidity than other companies engaged in the same industry. Potential bankruptcy costs and
agency fees related to bondholders' investment monitoring are additional costs of debt. The
necessity to balance the costs and advantages arises from the fact that, in reality, businesses do
not operate with a 100% debt financing due to financial crisis, insolvency, and agency expenses.
Furthermore, the theory predicts that the tax rate and leverage will have a favorable impact on
taxable income because of permissible financial expenses, but it does not detail how this will
happen (Mwangi, 2015). In this study, trade-off theory is used because the costs and advantages
of alternative financial sources are "traded off" until the marginal cost of equity equals the
marginal cost of debt, resulting in the ideal capital structure and maximizing firm value.

According to Mwangi (2015), Myers and Majluf further expanded the theory in 1984 after
Donaldson first proposed it in 1961. It contends that businesses prioritize internal financing
over all other types of external funding in their preferred hierarchy of financing options. This
is because internal funds do not require additional financial information disclosure or flotation
fees, which could result in a probable loss of competitive advantage on the market. Thus, the
wealth transfer from existing to new owners may result in harm to current shareholders when
new shares are issued. If internal sources (such as retained earnings) are insufficient to finance
new investments, management will go to external sources, such as debt, as a backup. Equity

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comes last. In light of the fact that profitable businesses are able to finance their investment
possibilities with retained earnings, the pecking order hypothesis predicts that these businesses
will employ less debt in their capital structure than those that do not generate high earnings.
According to the Pecking Order theory, businesses order their sources of funding from internal
financing to equity. Therefore, internal financing is employed first, followed by the issuance of
debt when it runs out, and the issuance of equity when it becomes unnecessary to issue any
more debt.

According to the idea, businesses follow a hierarchy of financing options and favor internal
funding when it is available. If external financing is needed, debt is favored above equity.
However, the theory presupposes that corporate managers would operate in the existing
shareholders' best interests and are better knowledgeable than outside investors about the
company's current profitability and potential for future growth (Sheikh Wang, 2013). Since
managers are not required to disclose information about the company's investment opportunities
and prospective returns on those investments to the public due to the usage of internal funds,
there is a strong motivation to keep such information confidential Managers may even decide
to abandon a project with a high rate of return if doing so would protect the interests of the
current shareholders (Mwangi, 2015).

Would necessitate the issuance of fresh shares as this would transfer a significant portion of the
project's value to new investors. Shares, according to Aroni (2015), is a less preferred method
of capital raising since investors perceive managers are taking advantage of the firm's
overvaluation when they issue new equity. Investors will thus give the new equity offering a
lesser value. According to Okelo (2015), high tax rate businesses employ debt more frequently
than low tax rate businesses in order to benefit from tax breaks on interest payments. The form
of financing sources a corporation chooses can serve as a signal of its ability to acquire capital,
hence the pecking order hypothesis is used in this study. Subsequently, financial performance
and finance.

2.2.4 Agency Theory

In an agency relationship, one or more people (the principals) hire another person (the agent)
to carry out a task on their behalf and give the agent some decision-making authority. According

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to Okelo (2015), an ideal capital structure can be achieved by lowering the expenses brought
on by disputes between managers, owners, and debt holders. Therefore, a balance between
different funding alternatives (own money or loans) that enable the resolution of conflicts of
interest between the capital suppliers (shareholders and creditors) and management yields the
ideal financial structure. The total of the principal's monitoring costs, the agent's bonding
expenses, and any residual losses is referred to as agency costs. There will be an agency
difficulty because of the disputes between shareholders and debt holders or between
shareholders and managers (agency cost of equity). According to Ng'ang'a (2017), agency
theory aims to identify and address issues that arise in the interactions between shareholders
and their professional agents.

The utilization of debt capital is a dependable strategy for regulating agency costs. Because
interest payments are required, leverage will make managers produce and disburse funds. The
amount of leftover cash flows will decline as a result of interest payments. Therefore, debt
might be seen as a clever tool to lower agency cost (Zurigat, 2014). The conflicting interests
of managers and stockholders are the central theme of the agency theory. According to Okiro
(2014), managers optimize a utility function that includes compensation, power, job security,
and status whereas stockholders maximize money. According to Mwirie (2015), using debt to
ensure quick interest payments can be used to influence managers' conduct by decreasing free
cash flows within the company. Thus, less money is spent the removal of managers who may
misuse funds for personal gain or still spend money on organizational inefficiencies at the
expense of the company's goals. One of the main goals is to increase shareholders' wealth
through raising profitability, a key indicator of financial performance. The ability to be indebted
allows management and shareholders to share the same goal of maximizing financial success
and, ultimately, shareholder wealth. For managers, the debt has the capacity to motivate them
to succeed since the more indebted the firm is, the higher the chance of bankruptcy and the risk
of losing their positions, pay, and other benefits. This is thought to be a sufficient threat to get
them to change their ineffective management practices and produce the most cash flow possible.
The removal of managers who may misuse funds for personal gain or still spend money on
organizational inefficiencies at the expense of the company's goals. One of the main goals is to

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increase shareholders' wealth through raising profitability, a key indicator of financial
performance (Luigi & Sorin, 2014). The ability to be indebted allows management and
shareholders to share the same goal of maximizing financial success and, ultimately,
shareholder wealth. For managers, the debt has the capacity to motivate them to succeed since
the more indebted the firm is, the higher the chance of bankruptcy and the risk of losing their
positions, pay, and other benefits. This is thought to be a sufficient threat to get them to change
their ineffective management practices and produce the most cash flow possible (Mwangi,
2015). Pay back the debt the level of debt that allows for the lowest possible overall agency
costs is the ideal level of debt. In order to enhance financial performance, it is necessary to
minimize costs brought on by disputes between managers, owners, and debt holders. As a result,
agency theory is used in this study (Zurigat, 2014).

2.3 empirical literature

Anitha Audax (2018) studied Factors Affecting Financial Performance of Manufacturing Firms
Listed in Nairobi Securities Exchange Kenya. The study employed longitudinal design to
analyze the determinants of financial performance in manufacturing firms listed in NSE Kenya.
The target population of the study was ten listed manufacturing firms in Kenya. The sample
size in this study was ten listed manufacturing firms. The study relied mainly on secondary
data. Data were obtained from audited financial reports. Data were analyzed using both
descriptive, correlation and regression analyses. Statistical Package for Social Sciences was
used as tool for data analysis. Data was presented in the form of tables, graphs and pie charts.
The study established that there was a significant influence of firm size on the financial
performance of manufacturing firms listed in NSE. The correlation analysis showed that an
increase in firm size led to a rise in financial performance of manufacturing firms listed in NSE
Kenya. Correlation analysis also revealed that a unit increase in firm size increased financial
performance of listed manufacturing firms by thirty-seven percent. The study also revealed that
there was a significant influence of leverage on the financial performance of firms listed in
NSE. Correlation analysis also revealed that an increase in leverage increased financial
performance of manufacturing firms listed in NSE. Regression analysis further revealed that a

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unit increase in leverage led to a rise in financial performance of listed manufacturing firms by
forty percent.

Gladys Micere Wamiori (2017) this study was to examine the determinants of financial
performance of manufacturing firms in Kenya and was guided by the following general
objective: to establish the determinants of financial performance of manufacturing firms in
Kenya. The target population of the study being 741 manufacturing firms in Keya and a sample
of 252 firms taken to be a representative of all manufacturing firms in Kenya. In order to collect
data from the sampled respondents, cluster sampling was used to classify each of the twelve
sub sectors into individual strata. Simple random sampling procedure was then used to select
the sample in order to ensure each and every firm in the target population was represented. The
study adopted a survey design that was descriptive in collecting data. A structured questionnaire
was distributed targeting manufacturing firms in Kenya. The data analysis was done using
Statistical Package for Social Scientists (SPSS) version 24 to facilitate computation of
descriptive statistics, multiple regression and Pearson correlation to get answers to the study
questions. The key findings were that determinants of financial performance individually had a
positive influence on the financial performance of manufacturing firms. The overall results
indicated that there was a significant linear relationship between access to finance and
manufacturing firm’s financial performance. The results indicated a moderately significant
linear relationship between capital structure and manufacturing firm’s performance. There was
a significant positive relationship between cost of capital, tax incentives, investment practice
and manufacturing firm’s financial performance.

Hayleslasie Tsegay Aregawi (2018) did study on Determinants of Leverage and Its Impact on
Firm Performance- Ethiopian Insurance Industry. The study was covered 10 years' secondary
data audited financial statements (panel data) on 12 unlisted insurance companies including one
public insurance company covered a time span of 2006 to 2016, total observation of 120. In this
study, we apply a multiple regression model to examine determinates of financial leverage and
firm performance using proxy of Return on Asset (ROA). Fixed effect regression model found;
Firm size and growth opportunity have a positive relationship with the leverage of insurance
industry while business risk found a negative relationship with the leverage ratio of insurance

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companies. On the other hand, firm leverage and tangibility assets have shown a negative and
significant relationship with firm performance (ROA), whereas growth opportunities and firm
size have a positive and significant relationship with the performance of the firm in terms of
return on asset measurement. In general firm size and growth opportunity has a significant and
positive relationship with leverage and firm performance of insurance company in Ethiopia.

Fredrick Kangala Nakhaima 92016) the purpose of this study was to determine factors that
affect financial performance of small and medium enterprises (SMEs) in Kenya. The research
questions for this study were: What was the effect of corporate governance, human resource
capacity, access to finance on financial performance in the SMEs in Kenya? A descriptive
research design was adopted for this study. The target population of the study included the
4,560 SMEs in Nairobi County. Stratified sampling technique was used to determine a sample
size of 100 from the total population. For this study, data was collected using structured
questionnaires based on the research questions The findings of the study indicated that majority
(81.6%) of the respondents agreed that corporate governance affects financial performance.
Equally, the study findings revealed a positive relationship between corporate governance and
financial performance, (r= 0.491) p <0.05, majority (89.5%) of the respondents agreed that HR
department ensures that employees are conversant with new trends in technology adopted in
market and a strong positive relationship between human resource and financial performance,
r (0.414) p < 0.05, indicating the relationship was statistically significant. statistically
significant relationship to access to financing was important for growth of SMEs

Fazal Hussain et.al (2021) this paper examines the effect of cost of capital on firm’s
performance for the capital market of Pakistan using latest data and new evidence. We use
secondary data of 52 companies for the 11 years from 2010-2019. Firm performance is proxies
by Return on Assets (ROA), Return on Equity (ROE), while cost of capital is proxies by
Weighted Average Cost of Capital (WACC). Results show that firms in Pakistan rely on debt
that generating internal sources of capital. The results of the study show that there is a
significant negative association between cost of capital and firm performance.

Umair Khan Et.al (2020) did this study to explore and empirically analyze the factors affecting
the financial performance of Korean small- and medium-sized manufacturing companies,

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which are relatively insufficiently researched, in terms of human resource management (HRM).
This study reviews previous research and discussions on the human resource management
system, as well as the organization and job-related attitudes and financial performance of
workers, for the formulation of two hypotheses. Among the HCCP data, the hypothesis was
verified through reliability and correlation analysis and stepwise multiple regression analysis
for small- and medium-sized manufacturing enterprises. The results show, firstly, that human
resource systems and systems have the same effect, but there were differences in the degree of
impact. Secondly, job satisfaction has a statistically significant influence on financial
performance. Lastly, all worker/employee attitude determinants are statistically significant for
both job satisfaction and organizational commitment.

EHIEDU, Victor Chukwunweike (2014) the major indicators of the financial performance of
corporate entities are liquidity and profitability. The research design adopted for this study is
describtive research design and the quantitative research design approach. The population
consists of publicly quoted companies that make up the “industrial/Domestic products”
industry. The sampling technique adopted is the “non-probability” sampling technique of four
selected companies. The data used for the study was secondary data in the form of the “Annual
Reports and Accounts” of the selected companies. Simple correlation analysis was used to test
the hypothesis at 10% level of significance. The overall findings of this study indicate that:
There is a significant positive correlation between current ratio and profitability, (2) there is no
definite significant correlation between Acid-test ratio and profitability. (3) There is no
significant positive correlation between return on capital employed and profitability. The
researcher recommends that corporate entities should not pursue extreme liquidity policies at
the expense of their profitability, i.e. they should strike a balance between the two performance
indicators (Liquidity and profitability).

Calistus Wekesa Waswa et al (2018) Given the recurrences of liquidity management in sugar
industry this study sought to investigate the effect of liquidity management on firm performance
using a sample of five sugar firms over the period 30th June 2005 to 2016. We estimate a
random effects regression model where the results suggest that a negative relationship exists
between liquidity management on firm performance. Based on the study findings the following

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policy recommendations are proposed and if implemented will help resuscitate the overall
financial performance of factories in the sugar industry and hopefully reverse their financial
performance fortunes. The study recommends that careful consideration and planning of
funding liquidity management is one of the ways to financial performance and as such this study
recommends that there is need for the sugar industry firms to increase their operating cash flow,
to positively influence their financial performance.

Kartal Demirgüneş ((2016) did study to analyze the effect of liquidity on financial
performance in terms of profitability) by using a time series data of Turkish retail industry
(consisting of Bora Istanbul (listed retail merchandising firms) in the period of 1998.Q1
2015.Q3. The stationarity of series and the co integration relationship between them are tested
by the unit root test of Carrion Silvestre et al. (and the co integration test of Maki (respectively.
Co integration coefficients are estimated by Stock and Watson (dynamic OLS method. Finally,
causal relationships between the series are tested by Hacker and Hatemi (bootstrap causality
test. Results of Maki (test show that the series are co integrated in the long run. While long run
parameters estimated posit a significantly positive relationship between financial performance
and liquidity, causality test does not indicate any direction of causality between the series.

Meiryani et al. (2020) did study on the determinant effect of capital structure on firm’s
financial performance that is conducted on 55 manufacturing sector listed companies in
Indonesia Stock Exchange. The data analysis is conducted using R Studio software. Study is
used data panel analysis with random effect model. The result of this study are firm's size has
no effect on firm's financial performance which is proxies by return-on-assets and firm's size
has no effect on firm's financial performance which is proxies by market-to-book-value.

Ashraf Mohammad Salem et al (2017). This study examines the moderating effect of cost of
capital on the relationship between inventory types and firm performance. The data of 48 firms
for the period 2010–2016 which formed 279 firm-year observations were used in this study.
With the use of Pearson correlation and panel Generalized Method of Moments (GMM)
estimation, the findings show that inventory management with consideration of its types
influence firm performance in the long term. In addition, it is also found that cost of capital
moderates the relationship between inventory management and firm performance. However,

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the interaction between cost of capital and inventory types has different implications. It is
suggested that firms should consider cost of capital when making decision on inventory types
and align their inventory control to fit in to the changes in their business environment.

Lujing Li u (2021) did study to analyze the determinants of financial performance of

agricultural listed companies in China. Multiple regression approach is applied based on the
sample of 39 agricultural listed companies during the six year period (2013 - 2018). Financial
performance is measured by return on sales (ROS), return on assets (ROA), and return on equity
(ROE). Internal factors include firm size, current ratio, debt ratio, long term liability ratio, sales
growth rate, capital intensity, research and development (R&D) intensity, export intensity, and
ownership, and external factors include gross domestic product (GDP) growth rate and
consumer price index (CPI) growth rate. The results show that financial performance of China
s agricultural listed companies is positively related to firm size, long term liability ratio, and
sales growth rate and negatively related to debt ratio, capital intensity, and export intensity. In
addition, external factors have no significant impact on financial performance.

Abdullahi Hamu Ginbite (2017) this research aims to identify factors determining the financial
performance of MSEs with a special attention to manufacturing, service, construction and trade
sectors in Asella Town. Questionnaires are analyzed using statistical techniques such as
descriptive and inferential analyses. The information gleaned through the questionnaire from a
sample of 134 operators and face-to-face interviews were conducted with 12 operators of MSEs
and 2 respondents from officers; i.e. process owner and another from expert working at the
center of office of Asella Town Job Creation and Food Security. Furthermore the approach that
was followed in this particular study was quantitative and qualitative. The technique applied
was a standardized closed-ended questions and face-to-face interview. In addition, the data
those were collected and analyzed using a statistical package for social sciences where tables
were utilized for presentation of the results. The findings revealed that MSEs lacked financial
support, technological, customer relationship and marketing skills in order for them to be
competitive and well performed. The findings further revealed that the government was not
doing enough in terms of the financial performance of SMEs in Asella town as most of the
respondents were complaining about the stringency of the government support and regulations

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pertaining to MSEs. Hence the government bodies and other stake holders have to work in
collaboration in order to solve problems of finance, working place, marketing and government
support.

Priscilla Nyanchama Ombongi (2018) Small and Medium Enterprises (SMEs) do play a vital
role in various economies across the world. SMEs in Kenya not only have a share in Kenya’s
Gross Domestic Product (GDP) but also constitute a larger portion of Kenya’s employment
openings. For longevity of SMEs in Kenya, the financial aspect cannot be ignored. Technology
and human capital cannot be ignored either since it is out of well-trained work force that
Research and Development (R&D) can be conducted in support of innovation related activities
and outcomes which largely support the technological aspect of a firm. The study applies
Descriptive research design whereby data collected was analyzed using regression analysis that
confirmed econometric least square model of the study. The study has confirmed a direct
relationship between SMEs financial performance and the independent variables; bank credit,
technological costs, GDP, growth in number of SMEs and employee costs. The study is highly
recommended for use by stakeholders in SMEs and Government of Kenya in efforts to ensure
external financing is available to SMEs.

2.5 Conceptual Framework

A conceptual framework is a visual representation of the theorized relationships between the
study's variables. The conceptualization of variables in academic research is crucial because it
serves as the foundation for testing hypotheses and developing generalizations from the study's
results. In this study, the theorized drivers of financial performance served as the independent
variables. The study's independent factors included access to finance, capital structure, and cost
of capital, firm size and liquidity. The conceptual framework demonstrates how factors such
as access to finance, firm size, liquidity, capital structure, and cost of capital all have an impact
on the financial performance of manufacturing companies. The fundamental justifications for
the conceptual framework in figure 2.1 are presented in the next section in order to particularly
address the emerging research gaps.

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 ACCESS TO FINANCE

CAPITAL STRUCTURE

COST OF CAPITAL FINANCIAL

PERFORMANCE

FIRM SIZE

LIQUIDITY

Figure 1.

Independent variable dependent variable

(Explanatory variable) (Explained variable)

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CHAPTER THREE

RESEARCH METHODOLOGY
3.1 Introduction
This chapter discusses the methodological approach for the study, and it comprises of the
following: description of the study area, research design, target population, sampling technique,
sample size, types of data, method of data analysis and chapter summary

3.2 Description of the Study Area

This study will be conduct in Wolaita zone. The zone is one of the zones in SNNPR, and it
borders with Gamo Gofa zone in the South, With Dawro Zone in the West, with Sidama region
in the East, with Kamabata & Tamabro, and Hadiya Zones in the North and with Oromia
regional state in the Northern East. The total area of the zone is 4,471.3 km² or 447130 hectares.
The zone is classed into 16 woredas and 6 towns. Located about 300 kilometers (190 mi) south
of Addis Ababa. The vegetation and climate of the large part of the region are conditioned by
an overall elevation of between 1,500 and 1,800 meters (5,900 ft) above the sea level. There
are, however, five mountains higher than 2,000 meters (6,600 ft), with Mount Damota at 3,000
meters at the center. Through undulating hills there are no large forests except in the Soddo
Zuriya, and Omo river basin, which is below 1,500 meters (4,900 ft) and a malaria zone. In the
local view, there are only two regions: the highlands (Geziyaa) and the lowlands (Garaa). In the
highlands, there are streams and small rivers. Several thermal hot springs are situated around
Lake Abaya, with boiling and steaming water. The soil of the Wolayta is of heavy red color
which becomes brown and black during the rains and has the fragility and the softness of sand.
The dry period makes the soil hard as brick, making ploughing and digging possible after the
rains. The layer of soil is very deep—an average of 30 meters—in both the plains and the hills,
as verified during the drilling of wells. The soil is fertile and produce two crops per year when
the rains are regular. Wolaita Zone is composed of sixteen woredas and six city administrations.
There are also different towns and cities in the Wolaita zone. Sodo town is administrative and
trading center it is located at the center of roads to and seven entering gates.

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3.2. Research design
Research design represents the methods to be adopted for collecting the data and the techniques
to be used in their analysis. Kothari (2012) states that research design is the arrangement of the
conditions for collection and analysis of data in a manner that aims to combine relevance to the
research purpose with economy in procedure. The study will be adopted both cross-sectional
research design and descriptive survey design. Cross-sectional studies are designed to collect
data once over the same period of time, the data is analyzed then reported while descriptive
survey design is designed to collect data from a sample with a view of analyzing them
statistically and generalizing the results to a population (Kihara, 2016). Using cross-sectional
design, the researcher will be able to obtain research data over the same period of time. While
descriptive research design will be use to establish the cause-and-effect relationship between
the dependent variable (Firm Performance) and the independent variables. The methodology
used in this study compared favorably with that of previous empirical studies (Ng’ang’a 2017,
Sasaka 2017). In all these studies, the quantitative approach by use of surveys done by
administration of questions will be the primary methodology employed in studying financial
performance. This study will be use similar approach to enhance comparability of findings

3.3 target population

A population is defined as total collection of elements about which we wish to make some
inferences (Kungu, 2015). Other scholars (Kilungu, 2015), define population as a large
collection of subjects from where a sample can be drawn. Kothari (2011) argues that a
population is all items in any field of inquiry which is also known as the universe. Sasaka
(2016), asserts that a target population is the group of individuals to whom the survey applies.
It is the collection of individuals about whom conclusions and inferences are made. Mugenda
& Mugenda (2012) term target population as that population to which a researcher wants to
generalize the results of his study. The study will be focus on manufacturing firms in wolaita
zone. The study’s target population will be 31 medium size manufacturing enterprise with five
year and more than five year experience in order to gain five year financial statement to see the
their performance. The respondents will be managers of manufacturing firms. The study will

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be focus exclusively on the manufacturing firms that have five year and greater experience.
Those have less than five years with medium rank will be omitted.

3.4 Sampling Frame

Ng’ang’a (2017) refer to a sampling frame as the technical name for the list of the elements
from which the sample is chosen from while Mugenda (2009) and Kothari (2012) define the
term sampling frame as a list that contains the names of all the elements in a universe. The study
will be restricted to medium manufacturing firms within wolaita zone. The manufacturing firms
were stratified into: furniture, metal works, agro process, yegenbata gebeat and construction.

3.5 Sampling Technique

Due to the small size of the population, all medium manufacturing firms in wolaita zone will
be take part in the study as Bryman and Bell (2003) opine that when the target population is
small, all the elements in the population take part in the study. Thus, all the thirty-one firms
will be takes part in the study. In this regard, the study will be use census sampling technique.
Due to this all member of the population will be takes part in the study.

3.6 Sample size

Data was collected from all the 31 medium manufacturing enterprise in wolaita zone. All the
31-manufacturing enterprise will be taken part in this study due to the small number of the
target population since there were only 31 medium manufacturing firms in wolaita zone.

3.7 Types of data

Both primary and secondary data will be use in this study.

3.8 Data Collection Methods

Data collection methods in this study will be include both primary and secondary data.

Primary Data
The primary data will be collected through a self-administered semi-structured questionnaire.
The questionnaire contained closed-ended questions and a customized five-part Likert scale
which will be use to collect data on the variables from the departmental heads. Respondents
will be asked to indicate agreement with each item. Each item had a five-point scale ranging

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from1 = strongly disagree, 2 = disagree, 3 = indifferent, 4 = agree, and 5 = strongly agree. A
structured questionnaire is a list of questions to be answered by the respondents. The
questionnaire will be created with the purpose of understanding manufacturing firm’s behavior
and analysis of the interaction between independent and dependent variables which served the
research objective. The questionnaires will be preferred because it had standard questions which
could be administered to a large number of respondents in Kenya within a short time and at a
minimal cost. The questionnaire will be divided into four main sections. The first section
included the demographic information of the respondents, while the second part covered
respondent’s characteristics including experience in manufacturing, proportion of investment
in manufacturing, and investment knowledge. The remaining sections covered the independent
variables factors. The extent to which each variable, among the five broad categories, influences
the financial performance was measured using a response scale of 5 for very high to 1 for very
low.
Secondary Data
Secondary data will be acquired through analysis of companies published accounts, from
manufacturing firms’ offices and from the registrar of companies. The data will be collected for
span a period of five years covering 2010 to 2014. The reason to restrict the period of the study
to five years is that the latest data will be readily available for this period.
3.7 Data Collection Procedures
The data will be collected by use of a questionnaire. The research instrument will be conveyed
to the respondents through the drop and pick technique. A covering letter with each
questionnaire explained the objectives of the study and assured respondents’ confidentiality and
urged them to participate in the study. The respondents will be requested on their willingness
to participate in the survey and provide the data. The questionnaire will be administered to
individuals of diverse characteristics, spread across various sectors in the economy, who have
manufacturing firms in wolaita zone. The questionnaire will be used to obtain primary data
from the sampled respondents.
Secondary data will be collected from financial statements using a secondary data collection
sheet as. The purpose for collecting secondary data will be to cross validate of the primary data
will be collected. The data will be extracted from annual reports of manufacturing firms for the

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period 2010 to 2014. Important figures from statements of comprehensive income and financial
position were recorded to facilitate computation of parameters of financial performance such
as return on assets and profitability. To supplement published annual financial statements, other
important quarterly business journals, manuals and in-house magazines will be used.
3.9 Data Analysis and Presentation
Data analysis refers to the application of reasoning to understand the data that has been gathered
with the aim of determining consistent patterns and summarizing the relevant details revealed
in the investigation (Kiaritha, 2015). To determine the patterns revealed in the data collected
regarding the selected variables, data analysis was guided by the aims and objectives of the
research and the measurement of the data collected. The data collected was quantified and
coded. The statistical analysis to be employed in the study included descriptive statistics,
correlation analysis and multiple regressions.

Qualitative Analysis
Qualitative research was used to provide deep interpretation of the research problem by
exploring causal relationships among the variables selected in the study. Semi-structured
interview was used to collect data with an interviewer-administered questionnaire. Qualitative
data collected through interviews was first edited and response rate calculated. Descriptive
statistics such as mean, standard deviation and frequency distribution was used to analyze the
data. Descriptive statistics were used to summarize the data generated by the survey in terms of
the distribution of responses for each variable and the relationships between variables. Such
statistics measures the point about which items have a tendency to cluster and also describes
the characteristics of the data collected. Data was presented in form of tables (Kothari, 2012).
Analysis of Variance (ANOVA-F test) which determines the effect of independent variable on
the dependent variable was carried out based on which the set hypothesis was accepted or
rejected. The ANOVA test was chosen as the study presumes that the population being tested
was normally distributed, have equal variances and the samples were independent of each other.
The decision to accept or reject the research hypothesis was based on the p-values.

Quantitative Analysis

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Quantitative research was used to describe, explain and quantify relationships between different
variables. The aim of researcher will be to study the relationship between an independent
variable and a dependent variable in the population. The data analysis will be done using
Statistical Package for Social Scientists (SPSS) version 24 to facilitate computation of
descriptive statistics, multiple regression and Pearson correlation to get answers to the study
questions. Normality tests preceded data analysis. Normality tests are used to determine if a
data set is well-modeled by a normal distribution (Rotich, 2016). There are various tests for
assessing normality such as skewness and kurtosis, Shapiro-Wilk, Kolmogorov-Smirnov
(Monari, 2016). This study used Shapiro-Wilk test to check the normality of the distribution
because it is a good indicator of the normality of the data (Kiaritha, 2015)). Factor analysis was
employed in order to identify the constructs that would then be regressed against the dependent
variable (Uzel, 2015). Factor analysis was used to analyze groups of related variables to reduce
them into a small number of factors or components. Three main steps were followed in
conducting factor analysis namely; assessment of the suitability of the data; factor extraction,
and factor rotation and interpretation (Kilungu, 2015).

To test the hypothesis for this study, the independent variables will be regressed against
financial performance as the dependent variable. Multiple regression model will be used to
model the relationship between the dependent variable Y and independent variables X. The
dependent variable, Y, is a discrete variable that represents a category, from a set of mutually
exclusive categories. Multiple regression measures the relationship between a categorical
dependent variable and one or more independent variables by using predicted values of the
dependent variable. The variable financial performance is a measure of the total contribution of
all the independent variables used in the model. The probability of a particular outcome is linked
to the linear predictor function. In terms of expected values, this model is expressed as follows:

Y = βo + β1X1 + β2X2 + β3X3 + β4X4 + β5X5 + ε

Where:

Y= Financial Performance of Manufacturing Firms

31 | P a g e
β0 = coefficient of the constant variable

β1– β5 = Regression coefficients to be estimated.

X1 = Access to Finance.

X2 = Capital Structure

X3 = Cost of Capital

X4 = Firm size

X5= liquidity

Ε = Stochastic or disturbance term or error term.

This model is based on the assumption that the disturbance terms are uncorrelated across firms, meaning
that financial performance change only as a reaction to a specific factor. A positive regression coefficient
means that the explanatory variable increases the probability of the outcome, while a negative regression
coefficient means that the variable decreases the probability of that outcome, a large regression
coefficient mean that the independent variable strongly influences the probability of that outcome, while
a near-zero regression coefficient means that independent variable has little influence on the probability
of that outcome. The basic idea of multiple regression is to use the mechanism for linear regression by
modeling the linear combination of the explanatory variables and a set of regression coefficients that are
specific to the model at hand but the same for all trials.

32 | P a g e
WORK PLAN AND BUDGET BREAKDOWN

33 | P a g e
Table 1

34 | P a g e
4.2 Budget Breakdown
Table 2. Budget

S/N Item Unit Quantity Unit price Total price ETB

1 Research proposal Page 40 3 120
2 Mock document Page 75 3 225
3 Thesis document Page 85 3 255
4 Thesis binding Cover 3 900 2700
5 Binder / Binding Pcs 9 20 180
6 Note book Pcs 4 100 400
7 Bag Pcs 1 900 900
8 Transportation Km 4 900 3200
9 Data collector training Data 10 400 4000
10 Mobile card Pcs 50 50 2500
11 Flash driver (32 GB) Pcs 2 500 1000
12 Pen Pcs 10 20 100
12 Contingency 5% 779
Total cost Birr 16,359

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