m.mohanraj

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A STUDY ON CAPITAL STRUCTURE WITH

SPECIAL REFERENCE TO ID NEEDS IN

CHENNAI

PROJECT REPORT

Submitted by

MOHANRAJ.M

Register No: 088001614047

in partial fulfillment for the award of the degree

Of

MASTER OF BUSINESS ADMINISTRATION

In

DEPARTMENT OF MANAGEMENT STUDIES

SSM COLLEGE OF ENGINEERING

KOMARAPALAYAM-638183

MAY 2010


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SSM COLLEGE OF ENGINEERING

KOMARAPALAYAM-638183

Department of Management studies

PROJECT WORK

MAY 2010

This is to certify that the project entitled

A STUDY ON CAPITAL STRUCTURE WITH SPECIAL

REFERENCE TO ID NEEDS IN CHENNAI

is the bonafide record of project work done by

MOHANRAJ.M

Register No: 088001614047

of MBA (DEPARTMENT OF MANAGEMENT STUDIES)

during the year 2009-2010.--------------------- -------------------------

Project Guide Head of the Department

Submitted for the Project Viva-Voce examination held

on__________

---------------------------

----------------Internal Examiner

External Examiner


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DECLARATION

I affirm that the project work title A STUDY ON CAPITAL

STRUCTURE WITH SPECIAL REFERENCE TO ID NEEDS IN

CHENNAI being submitted in partial fulfillment for the award of MASTER

OF BUSINESS ADMINISTRATION is the original work carried out by me.

It has not formed the part of any other project work submitted for award of

any degree or diploma, either in this or any other University.

MOHANRAJ.M

088001614047

I certify that the declaration made above by the candidate is true

Miss.K.Kalaivani, MBA

Lecturer,

Department of MBA,

SSM College of Engineering.


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ACKNOWLEDGEMENT

With great pleasure, I am presenting this project entitled A Study on

Capital Structure with Special Reference to Id Needs in Chennai. A

project of this dimension would not have been possible without the sincere

help and earnest support provided to me from all sources that was approached.

I feel great pleasure to thank our beloved CAVALIER

Dr.M.S.MATHIVANAN, M.A, M.Com, M.Phil, F.T.A., HGDM (Lon),

AIBM, PhD, Chairman and Correspondent S.S.M. College of Engineering,

Komarapalayam, for the encouragement he rendered me in doing the project

well. Words are insufficient when we endeavor to express our heartfelt

thankfulness to Dr.SUBRAMANIAN Ph.D., Principal, who provides us all

facilities during the course of study.

I express a deep sense of gratitude and hearty thanks to

Mr. P.KRISHNA KUMAR, B.E., MBA, MCSD, M.Phil., Ph.D Director of

MBA Department, and Mrs. J. Esther Gnanapoo, MBA, M.Phil, Ph.D,

Head of Department of MBA, SSMCollege of Engineering, Komarapalayam

for making all necessary arrangements for the successful completion of this

project.

The project has been made possible by the greatest efforts and

dedicated support extended to me by my guide Miss. K. Kalaivani, MBA,

Department of MBA, SSM College of Engineering.

I extend my sincere thanks to Mr.E.C.Ramesh, General Manager, Id

needs, for providing the opportunity to do this project. I also thank to

Mr.V.Kalaiarasu, Assistant manager for his guidance in the company to

collect the information needed for the work.

Above all, I thank, God Almighty for his entire blessing


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CONTENTS

Description Page No.

List of Tables i

List of Charts ii

Executive Summary iii

1. Introduction

1.1 About the study

1.2 About the Industry

1.3 About the company

1

14

16

2. Main theme of the project

2.1 Objectives of the study

2.2 Need/Scope of the study

2.3 Research Methodology

2.4 Limitations of the study

2.5 Review of Literature

18

19

20

21

223. Analysis & Interpretation 24

4. Findings, Recommendations and Conclusion

4.1 Findings

4.2 Recommendations

4.3 Conclusion

54

56

57

Bibliography 58

LIST OF TABLES


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TABLE NO LIST OF TABLE PAGE NO

3.1.1 Table showing current ratio 24

3.1.2 Table showing liquid ratio 26

3.1.3 Table showing inventory turnover ratio 28

3.1.4 Table showing debtors turnover ratio 303.1.5 Table showing debt equity ratio 32

3.1.6 Table showing fixed assets turnover ratio 34

3.1.7 Table showing working capital turnover ratio 36

3.1.8 Table showing gross profit ratio 38

3.1.9 Table showing net profit ratio 40

3.2.1 Table showing cost of equity capital 42

3.2.2 Table showing cost of debt capital 44

3.3.1 Table showing operating leverage 46

3.3.2 Table showing financial leverage 48

3.3.3 Table showing combined leverage 503.4.1 Table showing cost of equity and earnings per

share

52

3.4.2 Table showing cost of debt and earnings per

share

53

LIST OF CHARTS

TABLE NO LIST OF CHARTS PAGE NO

3.1.1 Chart showing current ratio 25

3.1.2 Chart showing liquid ratio 27

3.1.3 Chart showing inventory turnover ratio 29

3.1.4 Chart showing debtors turnover ratio 31

3.1.5 Chart showing debt equity ratio 33

3.1.6 Chart showing fixed assets turnover ratio 35


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3.1.7 Chart showing working capital turnover ratio 37

3.1.8 Chart showing gross profit ratio 39

3.1.9 Chart showing net profit ratio 41

3.2.1 Chart showing cost of equity capital 43

3.2.2 Chart showing cost of debt capital 45

3.3.1 Chart showing operating leverage 473.3.2 Chart showing financial leverage 49

3.3.3 Chart showing combined leverage 51

EXECUTIVE SUMMARY

The project work entitled A STUDY ON CAPITAL STRUCTURE

WITH SPECIAL REFERENCE TO ID NEEDS IN CHENNAI This

study highlights the concepts of capital structure, its components and the trend

n the capital structure based on past five years data. This study also points out

the problem faced by the company in maintaining a proper capital structure

level. This study also helps the company to analyze the financial strength and

weakness and to take proper corrective measures.

First chapter includes the introduction to the study of working and its

significance in the introduction to capital structure. The company profile

explains the various features of the company like its present status in the

market, the history and product details.


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The second chapter includes objectives, need/scope, limitations,

research methodology and review of literature. The study is conducted for

some specific purpose termed as objectives. This chapter contains the scope

and limitations of the study. The research methodology part contains the

research design and the tools used for analysis. The research is of analytical

type with the secondary data as data type.

The third chapter includes Analysis & interpretation part is done with

the help of tools like Ratio analysis, cost of capital, leverage and correlation.

From the statement of capital structure, it is found that capital structure shows

an increasing trend. It is clear from the statement that in the year 2009, there

is a good hike in capital structure.

It is suggested that the company has outsiders fund to reduce risk. The

owners fund also needed to finance fixed asset. So, the owners or shareholders

of the company has to concentrate in their investment and have to increase

their capital.

It is suggested that the company should short term financial position of

the company has not been satisfied in the existing level. So, the company has

to take necessary steps to improve their financial position. In the year 2008-09

the companys equity and debt both are equal. So, the company has to increase

their equity capital and reduce their debt to improve the overall performance

of the company.

It can be concluded capital structure of the company was satisfactory

and debt of the company must be reduced for improving the company. The

company must maintain good liquidity position to improve their profit. So that

the company should concentrate in deviated areas in the future.


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CHAPTER - I

INTRODUCTION

1.1 ABOUT THE STUDY

a. Introduction

Capital structure refers to mix of long term sources of funds, such as

debentures, long term debt, preference shares capital and equity share capital

including reserves and surpluses some companies do not plan their capital

structure, and it develops as a result of the financial decisions taken by the

financial manager without any formal planning. These companies may prosper

in the short run, but ultimately they may face considerable difficulties in

raising funds to finance their activities with unplanned capital structure, these

companies may also fail to economies the use of their funds.


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Consequently, it is being increasingly realized that a company should

plan its capital structure to maximize the use of the funds and to be able to

adapt more easily to the changing conditions.

b. Meaning

Capital represents the proportionate relationship between debt and

equity refers to permanent financing of the firm.

Capital structure influence the shareholders return and risk. Whenever

funds have to be raised to finance investment, a capital structure decision is

involved. The financing decision may affect the companies debt-equity ruin,

which has implications for the shareholders earnings and risk, which in turn

will affect market value of the firm. It the value of the firm can be capital

structure which maximizes the market value of the firm.

c. Definition

According to Geri Stenberg Capital structure of a company refers to

the composition of make up of its capitalization and it includes all long Term

capital resources viz..,loans, reserves ,shares and bonds.

d. Importance of capital structure

The term capital structure refers to the relationship between the

various long-form of financing such as debentures, preference share capital

and equity share capital. Financing the firms assets is very crucial problem in

every business and as a general rule there should be a proper mix of debt and

equity capital in financing firms assets. The use of long term fixed interest

bearing debt and preference share capital along with equity share is called

Financial

Leverage orTrading on Equity.


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The long term fixed interest bearing debt is employed by a firm to earn

more from the use of these sources than their cost so as to increase the return

on owners equity. It is true that capital stricture can not affect the total

earning of a firm, but it can affect the share of earnings available or equity

share holds.

e. Features of Capital Structure

@ Return

The Capital structure of a company should be most advantages.

Subject to other considerations it should generate maximum returns to the

share holds without adding additional lost to them.

@ Risk

The use of excessive debt threatens the solvency of he company.

To the point debt does not add significant rise it should be used, otherwise its

use should be avoided.

@ Flexibility

The capital structure should be flexible. It should be possible for a

company to adapt its capital structure with a minimum cost and delay it

warranted by a changed situation. It should also be possible for the company

to provide funds whenever needed to finance its profitable actives.

@Capacity

The capital structure should be determined wit h in the debt

capacity of the company, and this capacity should not be exceeded. The debt

capacity of a company depends on its ability to generate future cash flows. It

should have enough cash to pay creditors fixed changes and principal sum.

@ Control


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The capital structure should involve minimum risk of loss of

control of the company. The owners of closely held companies particularly

concerned about dilution of control.

f. Factors influencing capital structure

The current and future cost of each potential source of

capital should be estimated and compared.

A company can borrow only if investors are willing to

lend. Few companies can afford the luxury of the capital

structure which is unacceptable to financial institutions.

Many companies put their securities for quotation on the

stock exchange quotations and improve the transferability of

shares.

A firm generally maintains a balance to ensure future

flexibility in the capital structure.

The availability of funds in the money market affects a

firms ability to offer debt and equity securities.

Although each management makes its own decisions on its

capital sources, there are certain general factors which seem

to influence the overall capital structure.

The overall level of business activity is rising a firm would

want to expand its operations.

Profits of the owners can be increased by relying more and

more on debt financing.

Ordinarily, debt securities increase risk, while equity

securities reduce it. Risk can be measured to some extant by


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the use of ratio, measuring gearing up and times interest

earned.

The following are the tools analysis the capital structure of the company..,

1. Ratio analysis

2. Cost of capital

3. Leverages

4. Correlation

1. RATIO ANALYSIS

a. Meaning of Ratio Analysis

A ratio is simple arithmetical expression of the relationship of one

number with another. It may be defined as the indicated of two mathematical

expressions.

b. Definition

According to kell and Bedfore, A ratio is an expression of the

quantitative relationship between two numbers

c. Nature of Ratio

Ratio analysis is a technique of analysis and interpretation of financial

statement. It is the process of establishing and interpreting various ratios for

helping in means of better understanding of financial strengths and

weaknesses of a firm.

The following Four steps are involved in the Ratio analysis


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Selection of relevant data from the financial statements

depending upon the objectives of the analysis.

Calculation of appropriate ratio from the data.

Comparison of the calculated ratio with the ratio of the same

firm in the past or the ratios developed from projected

financial statements.

Interpretation of the ratios.

d. Significance of Ratio Analysis

1. Helps in Decision-making

Financial statements are prepared primarily for decision-making. But

the information provided in financial statements is not an end in it self and

meaning the conclusion can be drawn from these statements alone. Ratio

analysis helps in making decision from the information provided in these

financial statements.

2. Helps in Financial forecasting and planning

Ratio analysis of much help in financial forecasting and planning.

Planning is looking a head and the ratios calculated for a years. Work as a

guide for the future.

3. Helps in Communicating

The financial strength and weakness of a firm are communicated in a

more easy and understandable manner by the use of ratios. The information in

the financial statements in conveyed in a meaningful manner to the one for

whom it is meant.


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3. Personal Bias

Ratio is only means of financial analysis and not an end in itself.

Ratios have to be interpreted and different people may interpret the same ratio

in different way.

4. Price Level Changes

No consideration is made to the changes in price and this makes the

interpretation of ratios invalid.

5. Absolute Figure Decorative

Ratios devoid of absolute figures may prove distortive as ratio analysis

is primarily a quantitative analysis and not a qualitative analysis.

6. Ratio No Substitutes

Ratio analysis is merely a tool of financial statements. Hence ratios

become useless if separated from the statements from which they are

computed.

7. Incomparable

Not only industries differ in their nature, but also the firms of the

similar business widely differ in their size and accounting procedures etc.., It

makes comparisons are made difficult due to differences in definitions of

various financial terms used in the ratio analysis.

2. COST OF CAPITAL

a. Meaning

The Cost of Capital of a firm is the minimum rate of return expected

by its investors. It is the weighted average cost of various sources of finance


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used by a firm. The Capital used by a firm may be in the form of debt,

preference capital, retained earnings and equity shares.

b. Definition

Hampton, John.J. Defines

Cost of Capital as the rate of return the firm requires from investment

in order to increase the value of the firm in the market place.

c. Concept of Cost of Capital

# Cost of Capital is not a cost as such. Infact, it is the rate of

return that a firm requires to earn from its project.

# It is the minimum rate if return. Cost of Capital of a firm is that

minimum rate of return which will at least maintain the market value of the

shares.

# It comprises Three components

* The expected normal rate of return at zero risk level.

* The premium for business risk.

* The premium for financial risk on account of pattern of

capital structure.

d. Significance of Cost of Capital

1. As an Acceptance Criterion in Capital Budgeting


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Capital budgeting decisions can be made by considering the cost of

capital. According to the present value method of capital budgeting, if the

present value of expected returns from investment is greater than or equal to

the cost of investment. The project may be accepted. Otherwise, the project

will be rejected.

2. As a Determinant of Capital Mix in Capital Structure Decisions

Financing the firms assets is a very crucial problem in every business

and as a general rule there should be a proper mix of debt and equity capital in

financial a firms assets. While designing an optimal capital structure, the

management has to keep in mind the objective of maximizing the value of the

firm and minimizing the cost of capital.

3. As a Basis For Evaluating the Financing Performance

The concept of cost of capital can be used to evaluate the financial

performance of top management. The actual profitability of the project is

compared to the projected overall cost of capital and the actual cost of capital

of funds raised to finance the project. If the actual profitability of the project is

more than the projected and the actual coat of capital, the performance may be

said to be satisfactory.

4. As Basis For Taking other Financial Decisions

The cost of capital is also used in making other financial decisions

such as dividend policy, Capitalisation of profits, making the rights issue and

working capital.

e. Determination of Cost of Capital

1. Conceptual Controversies Regarding Relationship between the Cost of

Capital and the Capital Structure


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Cost of capital and the capital structure have a direct relationship with

the method and level of financing. The firm can minimize the weighted

average cost of capital and increase the value of the firm by using debt

financing.

2. Historic Cost and Future Cost

Historic costs are book costs which are related to the past and are

irrelevant in the decision making process. In their opinion, future estimated

costs are more relevant for decision making.

3. Problems in Computation of Cost of Equity

The Computation of cost of equity capital depends upon the expected

rate of return by its investors. But the quantification of the expectations of

equity shareholders is a very difficult task because there are many factors

which influence their valuation about a firm.

4. Problems in Computation of Cost of Retained Earnings

Different shareholders may have different opportunities for investingtheir dividends. It becomes very difficult to compute the cost of retained

earnings.

5. Problems in Assigning Weights

For determining the weighted average cost of capital. Weights have to

be assigned to the specific cost of individual sources of finance. The choice of

using the book value of the source or the market value of the source posses

another problem in the determination of cost of capital.

3. LEVERAGE

a. Meaning


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In financial management, the term Leverage is used to describe the

firms ability to use fixed cost assets or funds to increase the return to its

owners that is Equity shareholders.

b. Definition

James Horne has defined

Leverage as the employment of an asset or sources of funds for which

the firm has to pay a fixed cost or fixed return.

c. Types of Leverage

Leverage are classified into three types

Financial Leverage

Operating Leverage

Combined leverage

# Financial Leverage

Financing the firms assets is a very crucial problem in every business

and as a general rule there should be proper mix a debt and equity capital. The

use of long-term fixed interest bearing debt and preference share capital along

with equity share capital is called Financial Leverage.

# Operating Leverage

Operating leverage results from the presence of fixed costs that help in

managing net operations income fluctuations flowing from small variations in

revenue.

The changes in sales are related changes with the changes in sales any

increase in sales, fixed costs remaining the same, will magnify the operating

revenue the operating leverage occurs when a firm has fixed costs which must

be recovered irrespective of sales volume. The fixed cost remains same the


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percentage change in operating revenue will be more than the percentage

change in sales. The occurrence is known as operating leverage.

# Combined Leverage

Both financial and operating leverage magnify the revenue of the firm.

Operating leverage affect the income which is the results of production on the

other hand, the financial leverage is the result of financial decisions. The

composite leverage focuses attention on the entire income of the concern. The

risk factors should be properly assessed by the management before using the

composite leverage.

4. CORRELATION

Meaning

Several sets of (x,y) points, with the correlation coefficient ofx andy

for each set. Note that the correlation reflects the noisiness and direction of a

linear relationship (top row), but not the slope of that relationship (middle),

nor many aspects of nonlinear relationships (bottom). N.B.: the figure in the

center has a slope of 0 but in that case the correlation coefficient is undefined

because the variance ofYis zero.

Formula:

Correlation (r) =

In statistics, correlation (often measured as a correlation coefficient,

) indicates the strength and direction of a linear relationship between two

random variables. That is in contrast with the usage of the term in colloquial

speech, which denotes any relationship, not necessarily linear. In general
http://wiki/Statisticshttp://wiki/Statisticshttp://wiki/Random_variableshttp://wiki/Random_variableshttp://wiki/Statistics


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statistical usage, correlation refers to the departure of two random variables

from independence. In this broad sense there are several coefficients,

measuring the degree of correlation, adapted to the nature of the data.

Techniques in Determining Correlation

There are several different correlation techniques. The Survey System's

optional Statistics Module includes the most common type, called the Pearson

or product-moment correlation. The module also includes a variation on this

type called partial correlation. The latter is useful when you want to look at the

relationship between two variables while removing the effect of one or two

other variables.

Like all statistical techniques, correlation is only appropriate for certain

kinds of data. Correlation works for quantifiable data in which numbers are

meaningful, usually quantities of some sort. It cannot be used for purely

categorical data, such as gender, brands purchased, or favorite color.

CORRELATION COEFFICIENT

The main result of a correlation is called the correlation coefficient (or

"r"). It ranges from -1.0 to +1.0. The closer r is to +1 or -1, the more closely

the two variables are related.

If r is close to 0, it means there is no relationship between the variables. If

r is positive, it means that as one variable gets larger the other gets larger. If r

is negative it means that as one gets larger, the other gets smaller (often called

an "inverse" correlation).

While correlation coefficients are normally reported as r = (a value

between -1 and +1), squaring them makes then easier to understand. The

square of the coefficient (or r square) is equal to the percent of the variation in

one variable that is related to the variation in the other. After squaring r, ignore
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the decimal point. An r of .5 means 25% of the variation is related (.5 squared

=.25). An r value of .7 means 49% of the variance is related (.7 squared = .49).

A correlation report can also show a second result of each test -

statistical significance. In this case, the significance level will tell you how

likely it is that the correlations reported may be due to chance in the form of

random sampling error. If you are working with small sample sizes, choose a

report format that includes the significance level. This format also reports the

sample size.

A key thing to remember when working with correlations is never to

assume a correlation means that a change in one variable causes a change in

another. Sales of personal computers and athletic shoes have both risen

strongly in the last several years and there is a high correlation between them,

but you cannot assume that buying computers causes people to buy athletic

shoes (or vice versa).

1.2 ABOUT THE INDUSTRY:

MANUFACTURING INDUSTRY:

Manufacturing industry refers to those industries which involve in the

manufacturing and processing of items and indulge in either creation of new

commodities or in value addition. The manufacturing industry accounts for a

significant share of the industrial sector in developed countries. The final

products can either serves as a finished good for sale to customers or as

intermediate goods used in the production process.


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EVOLUTION OF THE MANUFACTURING INDUSTRY:

Manufacturing industries came into being with the occurrence of

technological and socio-economic transformations in the Western countries in

the 18th-19th century. This was widely known as industrial revolution. It

began in Britain and replaced the labor intensive textile production with

mechanization and use of fuels.

WORKING OF MANUFACTURING INDUSTRY:

Manufacturing industries are the chief wealth producing sectors of an

economy. These industries use various technologies and methods widely

known as manufacturing process management. Manufacturing industries are

broadly categorized into engineering industries, construction industries,

electronics industries, chemical industries, energy industries, textile industries,

food and beverage industries, metalworking industries, plastic industries,

transport and telecommunication industries.

Manufacturing industries are important for an economy as they employ

a huge share of the labor force and produce materials required by sectors of

strategic importance such as national infrastructure and defense. However, not

all manufacturing industries are beneficial to the nation as some of them

generate negative externalities with huge social costs. The cost of letting such

industries flourish may even exceed the benefits generated by them.

PLASTIC MANUFACTURING INDUSTRY

Plastic manufacturing industry ranks 3rd among all other

manufacturing industries in the United States of America. Employment

opportunities, real earnings, shipments etc have grown in the last 25 years of

the plastic manufacturing industry. The period between 1980 through 2005,

witnessed an increase in the plastic productivity by 2.1%. Growth rate was at

par with the growth manifested by other manufacturing sectors.
http://www.economywatch.com/world-industries/manufacturing/plastic.htmlhttp://www.economywatch.com/world-industries/manufacturing/plastic.htmlhttp://www.economywatch.com/world-industries/manufacturing/plastic.htmlhttp://www.economywatch.com/world-industries/manufacturing/plastic.html


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FACTS ABOUT PLASTIC MANUFACTURING INDUSTRY:

Plastic manufacturing industry in United States of America provided

employment to as many as 1.1 million people.

Shipments in the plastic manufacturing industry in America, accounted

for USD$341 million. The above statistical date related to plastic

manufacturing industry was observed as in 2005.

Rate of growth of employment in the plastic manufacturing industry

grew at 1.1% every year between 1980 through 2005.

The same period (from 1980 through 2005), witnessed the plasticindustry contribution to the real earnings of 118% which ranged from

USD$48 billion - USD$106 billion.

1980 to 2005 also witnessed the growth of plastic manufacturing

industry in terms of real earnings earned from shipments ranging

between USD$106 billion-USD$236 billion.

Plastic is inseparable as it is needed in every step of our lives. Plastichas contributed towards improving our lifestyles. Plastic manufacturing

industry plays a vital role in the improvement of the economy of USA.

United States of America has the maximum consumption of plastics in

the world. America is also the largest manufacturerof plastic in the world.

As many as 1.4 million workers were on the direct rolls of the plastic

manufacturing industry in the year 1996. The rate at which the plastic industryhas been growing over the two decades is commendable accounting for a

growth of 3% every year.

Since 1974, shipments in the plastic manufacturing industry saw a rise by

a yearly growth accounting for 4.1%. Shipments in the plastic industry

witnessed a rise accounting for a total $366.4 billion in the year 1996.

1.3 ABOUT THE COMPANY
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Plastic card printing

Related Categories

Attendance Recording

Barcode Reader

Computerized Attendance

Fingerprint Reader

Gate Attendance

Identity Cards

Thumb Impression Reader

Time Recorders

CHAPTER - II

MAIN THEME OF THE PROJECT

2.1 OBJECTIVES OF THE STUDY

PRIMARY OBJECTIVES:
http://www.plasticcardid.com/printed_plastic_cards.htmhttp://www.hotfrog.in/Products/Attendance-Recordinghttp://www.hotfrog.in/Products/Barcode-Readerhttp://www.hotfrog.in/Products/Computerised-Attendancehttp://www.hotfrog.in/Products/Fingerprint-Readerhttp://www.hotfrog.in/Products/Gate-Attendancehttp://www.hotfrog.in/Products/Identity-Cardshttp://www.hotfrog.in/Products/Thumb-Impression-Readerhttp://www.hotfrog.in/Products/Time-Recordershttp://www.plasticcardid.com/printed_plastic_cards.htmhttp://www.hotfrog.in/Products/Attendance-Recordinghttp://www.hotfrog.in/Products/Barcode-Readerhttp://www.hotfrog.in/Products/Computerised-Attendancehttp://www.hotfrog.in/Products/Fingerprint-Readerhttp://www.hotfrog.in/Products/Gate-Attendancehttp://www.hotfrog.in/Products/Identity-Cardshttp://www.hotfrog.in/Products/Thumb-Impression-Readerhttp://www.hotfrog.in/Products/Time-Recorders


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A study on capital structure with special reference to Id needs

in Chennai.

SECONDARY OBJECTIVES:

To study the composition and trends of share capital of the

company..,

To know the general function of the company.

To study the capital structure and the overall cost of capital.

To find out the efficiency in usage of capital during the periodof study.

To find out the factors which are influencing the capital

structure.

2.2 NEED/ SCOPE OF THE STUDY

The modern business world is based on money. The rapid growth of

transaction of money requires a heavy volume of investment to improve the

present economy.


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The study is conducted to ensure the proper mix of capital structure

and financial position of company.., for the period from 2004-2005 to 2008-

2009. And various financial tools were used to interpret the data such as ratio

analysis, cost of capital, and Leverages.

2.3 RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the research

problem. It may be understood as a science. It has many dimensions and

research methods to constitute a part of the research methodology.

a. Data Collection


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To collect the required information both primary and secondary data

has been used.

b. Primary Data

Primary data are the data collected for the first time and a fresh.

Primary data was collected from the secretary to accounts manager and other

officials by means of personal interviews.

c. Secondary Data

Those which have been already collected by some one else and which

have been presented through the statistical process.

The secondary data was collected from annual reports and unpublished

internal records.

d. Tools Applied

The major tools used for the analysis are

Ratio analysis

Cost of capital

Leverages

Correlation

2.4 LIMITATIONS OF THE STUDY

The time period of the study is to only 6 weeks.

The data are approximated where ever necessary.

Ratio analysis, which is calculated on the basis of financial

statement, so it is not enough to draw accurate conclusion.


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The limitations of the techniques used namely, Ratio

analysis, cost of capital and Leverages to analyze and

interpret the data are applicable to the study.

The data is taken on the basis of only 5 years .It is only 5

years financial information, so it limited up to the velocity

of company..,

2.5 REVIEW OF LITERATURE

Michael hemlers says that capital structure seek to

Recycle the equity growth in our portfolio through refinancing to

reduce cash investments and improve the equity returns.


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Actively manage our portfolio of mortgage debt in a continual effort to

reduce our borrowing costs and extend maturities.

Complement the diversity of our portfolio by minimizing risk through

the use of non-recourse, on-cross collateralized mortgage.

Use tax advantaged financing to reduce the over all cost of debt.

Xueqing zhang says that capital structure refer to

There are many methods for the firm to raise its required bonds. But

the most basic and important instruments are stocks or bonds. The firms mix

of different securities is known as its capital structure.

Financing instruments are assumed to take only two forms that is

Stocks and Bonds. The value of the firm is defined as

V = B + S

Where

B = Market value of the firms debt

S = Market value of the firms equity

Anjan v.Thakor

According to him capital structure that links risk, leverages and

value and is particularly applicable to large firms. Counter to conventional

wisdom, risker firms acquire more debt, pay higher interest rates, and have

higher values in equilibrium.


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3.1.1 Current Ratio

This ratio compares the current assets with the current

liabilities. It is also known as working capital ratio or solvency

ratio. It is expressed in the form of pure ratio.

Formula:

Current assetsCurrent Ratio = -------------------------------

Current Liabilities

TABLE SHOWING CURRENT RATIO

Year CurrentAssets

CurrentLiabilities

Ratio

2005 21399787.42 20313490.26 1.05

2006 26814854.59 35374419.75 0.75

2007 51816270.96 25931566.46 1.99

2008 100596714.72 55746578.14 1.84

2009 173250236.00 439963090.00 0.39

Interpretation: According to the rule of Thumb the standard

ratio is 2:1. The ratio of the company is 1.05%, 0.75%, 1.99%, 1.84% and

0.39% respectively during the period 2005, 2006, 2007, 2008 and 2009

respectively. The ratio of the company is below than the accepted standard, so

the companys current ratio was not in good position when compared to the

period 2007-08.

CHART 3.1.1

CHART SHOWING CURRENT RATIO


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1.05

0.75

1.991.84

0.39

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Ratio

2005 2006 2007 2008 2009

Year

3.1.2 Liquid Ratio

Meaning:


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Liquid ratio is also known as acid test ratio or quick ratio. Liquid ratio

compares the quick assets with the quick liabilities. It is expressed in the form

of pure ratio. The term quick assets refer to current assets, which can be

converted into, cash immediately or at a short notice without diminution of

value.

Formula:

Liquid assetsLiquid Ratio = --------------------------------

Current liabilities

TABLE SHOWING LIQUID RATIO

Year Liquid Assets CurrentLiabilities

Ratio

2005 778536625.42 20313490.26 0.38

2006 1784685.59 35374419.75 0.50

2007 23199745.46 25931566.46 0.89

2008 54215652.70 55746578.14 0.97

2009 100470256.00 439963090.00 0.24

Interpretation:

According to the rule of Thumb the standard

ratio is 1:1. The above table indicates that quick ratio during the period 2005,

2006, 2007, 2008and 2009 is 0.38%, 0.50%, 0.89%, 0.97% and 0.24%

respectively. The ratio is not equal to the rule of thumb. So the liquidity

position of the company is not good.

CHART 3.1.2


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CHART SHOWING LIQUID RATIO

0.38

0.5

0.89

0.97

0.24

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Ratio

2005 2006 2007 2008 2009

Year

3.1.3 Inventory Turnover Ratio


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CHART 3.1.3

CHART SHOWING INVENTORY TURNOVER RATIO

3.33

6.71

11.09

6.23

4.41

0

2

4

6

8

10

12

Ratio

2005 2006 2007 2008 2009

Year


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3.1.4 Debtors Turnover Ratio

Meaning:

It is calculated by dividing the net credit sales by average debtors

outstanding during the year. It measures the liquidity of a firm's debts. Net

credit sales are the gross credit sales minus returns, if any, from customers.

Average debtors are the average of debtors at the beginning and at the end of

the year. This ratio shows how rapidly debts are collected. The higher the

debtors turnover ratio the better it is for the organization.

Formula:

Total sales

Debtors Turnover Ratio = -------------------------Debtors

TABLE SHOWING DEBTORS TURNOVER RATIO

Year Total Sales Debtors Ratio

2005 44461429.00 4386464.03 10.13

2006 75624679.05 9967519.00 7.58

2007 178188777.00 9382894.93 18.99

2008 218745260.00 31710364.09 6.74

2009 221390640.00 32134846.00 6.66

Interpretation:

The above table indicates that the debtors turnover ratio during the

period 2005, 2006, and 2007 is 10.13%, 7.58%, and 18.99%, respectively. But

during the period 2008 and 2009 it is decreased to 6.74% and 6.66%

respectively. So, the companys debt collection period is good.


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CHART 3.1.4

CHART SHOWING DEBTORS TURNOVER RATIO

10.13

7.58

18.99

6.74 6.66

0

2

4

6

8

10

12

14

16

18

20

Ratio

2005 2006 2007 2008 2009

Year


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3.1.5 Debt Equity Ratio

This ratio compares the long-term debts with shareholders fund. The

relationship between borrowed funds & owners capital is a popular measure of

the long term financial solvency of a firm. This relationship is shown by debt

equity ratio. Alternatively, this ratio indicates the relative proportion of debt &

equity in financing the assets of the firm. It is usually expressed as a pure

ratio.

Formula:

Outsiders fundDebt Equity Ratio = ------------------------------

Share holders fund

TABLE SHOWING DEBT EQUITY RATIO

Year Outsiders

Fund

Share Holders

Fund

Ratio

2005 30785660.69 847246.94 36.33

2006 55308268.94 1178332.00 46.93

2007 101288713.10 57418466.57 1.76

2008 147334799.30 82604574.56 1.78

2009 344477995.00 351377321.00 0.98

Interpretation:

As a general rule, there must be an approximate mix of outsiders and

shareholder fund. The above table indicates the debt equity ratio during the

period 2005, 2006, 2007 and 2008 is 36.33%, 46.93%, 1.76% and 1.78%

respectively. So, here there is a high debt equity ratio. It indicates there was

greater outsiders fund than owners or share holders fund. But in the period

2009 it has been reduced to 0.98%. So, the debt of the company will be

reduced in the future years.


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3.1.6 Fixed Assets Turnover Ratio

This ratio measures the efficiency with which fixed assets are

employed. A high ratio indicates a high degree of efficiency in asset utilization

while a low ratio reflects an inefficient use of assets.

Formula:

Fixed assetsFixed Assets Turnover Ratio = ---------------------------------

Share holders fund

TABLE SHOWING FIXED ASSETS TURNOVER RATIO

Year Fixed Assets Share Holders

Fund

Ratio

2005 8868504.11 847246.94 10.46

2006 29671746.95 1178332.00 25.18

2007 106890908.68 57418466.57 1.86

2008 127329885.62 82604574.56 1.54

2009 260497305.00 351377321.00 0.74

Interpretation:

The ratio less than 100% implies that owners fund is more than fixed

assets. It implies that the owners fund is not sufficient to finance fixed assets.

The ratio 60-65% is satisfactory. So, here the company does not have

sufficient fund to finance fixed assets.


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CHART 3.1.6

CHART SHOWING FIXED ASSETS TURNOVER RATIO

10.46

25.18

1.86 1.540.74

0

5

10

15

20

25

30

Ratio

2005 2006 2007 2008 2009

Year


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3.1.7 Working Capital Turnover Ratio

The working capital turnover ratio is also referred to as

net sales to working capital. It indicates a companys effectiveness in using its

working capital. The working capital turnover ratio is calculated as follows:

net annual sales divided by the average amount of working capital during the

same 12 month period. As with most financial ratios, should compare the

working capital turnover ratio to other companies in the same industry and to

the same companys past and planned working capital turnover ratio.

Formula:

Cost of sales

Working Capital Turnover Ratio = ----------------------------Net working capital

TABLE SHOWING WORKING CAPITAL TURNOVER RATIO

Year Cost Of SalesNet Working

CapitalRatio

2005 44461429.00 1086297.16 40.92

2006 75624679.05 8559565.16 8.83

2007 178188777.00 25884704.50 6.88

2008 218745260.00 46861910.06 4.56

2009 221390640.00 124341783.00 1.78

Interpretation:

The above table indicates that the working

capital turnover ratio during the period 2005, 2006, 2007, 2008and 2009 is

40.92%, 8.83%, 6.88%, 4.56% and 1.78% is respectively. So, here the ratio is

not too low or too high. So the company has utilized their working capital

properly.


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CHART 3.1.7

CHART SHOWING WORKING CAPITAL TURNOVER RATIO

40.92

8.836.88

4.56

1.78

0

5

10

15

20

25

30

35

40

45

Ratio

2005 2006 2007 2008 2009

Year


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3.1.8 Gross Profit Ratio

This ratio measures the relationship between gross profit and sales. It is

defined as the excess of the net sales over cost of goods sold or excess of

revenue over cost. This ratio shows the profit that remains after the

manufacturing costs have been met.

Formula:

Gross profitGross Profit Ratio = --------------------------- x 100

Net sales

TABLE SHOWING GROSS PROFIT RATIO

Year Gross Profit Net Sales Ratio

2005 4726664.17 44461429.00 10.63

2006 4688193.46 75624679.05 10.54

2007 10828369.17 178188777.00 14.31

2008 248094630.50 218745260.00 13.40

2009 42955066.60 221390640.00 19.40

Interpretation: The above table indicates that the gross profit

ratio during the period 2005, 2006, 2007, 2008and 2009 is 10.63%, 10.54%,

14.31%, 13.4%, and 19.40% respectively. A higher gross profit ratio indicates

a better result in the company. So here the gross profit ratio for the period

2009 is higher when compared to the previous year 2008. So the company is

running in a good condition.


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CHART 3.1.8

CHART SHOWING GROSS PROFIT RATIO

10.63 10.54

14.3113.4

19.4

0

2

4

6

8

10

12

14

16

18

20

Ratio

2005 2006 2007 2008 2009

Year


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CHART 3.1.9

CHART SHOWING NET PROFIT RATIO

-2.09

1.62

5.11

8.68

12.99

-4

-2

0

2

4

6

8

10

12

14

Ratio

2005 2006 2007 2008 2009

Year


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3.2. COST OF CAPITAL

3.2.1 Cost of Equity Capital

Cost of equity capital is expressed as the minimum rate of return that

should be earned on the equity capital firm. If the firm invests in projects

having an expected return less than the required return, the market price of the

stock will suffer over the long-run. Equity capital cost is not fixed. The

minimum rate of return expected by the shareholders will depend on the

earnings level of the company and management decision.

Formula:

Earning per share

Cost of equity capital =

Market value per share

TABLE SHOWING COST OF EQUITY CAPITAL

YearEarnings Per

ShareBook Value

Cost of

Equity

2005 -0.18 0.16 -1.12

2006 0.24 0.16 1.50

2007 2.57 16.20 0.16

2008 2.79 23.30 0.12

2009 3.09 26.60 0.12

INTERPRETATION:

The above table shows that the cost of equity is -1.12 in 2005 had

increased to 1.50 in the year 2006 and in the year 2007 is 0.16 and 2009 it has

been reduced to 0.12.


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CHART 3.2.1

CHART SHOWING COST OF EQUITY CAPITAL

-1.12

1.5

0.16 0.12 0.12

-1.5

-1

-0.5

0

0.5

1

1.5

Ratio

2005 2006 2007 2008 2009

Year


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3.2.2 Cost of Debt

Debt may be issued at par, at premium or discount. It may be perpetual

or redeemable."Debt" involves borrowing money to be repaid, plus interest.

Formula:

Financial charges (1- T)Cost of Debt = ---------------------------------

Debt

TABLE SHOWING COST OF DEBT CAPITAL

Year

Financial

charges Debt

(1-

tax)

Cost of

debt

2005 1784935.17 10475170.43 - 0.17

2006 2679202.87 19933849.19 0.63 0.082

2007 8042473.28 75357146.00 0.91 0.091

2008 9964831.59 91588221.14 0.89 0.089

2009 15417792.00 295569542.00

0.89 0.045

INTERPRETATION:

The above table shows that the cost of debt had been

increasing during the 5 years period of study. That is in the year 2004-05 the

firm does not paid tax due to loss. And during the period 2006-07 the debt has

been increased to 0.091 and had been decreased to 0.045 in the year 2008-09.


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CHART 3.2.2

CHART SHOWING COST OF DEBT

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

Ratio

2005 2006 2007 2008 2009

Year


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3.3. LEVERAGES

3.3.1 Operating Leverages

Operating leverages results from the presence of fixed costs. The fixedcost remaining same the percentage change in operating revenue will be more

than the percentage change in sales. It is mostly depends upon the amount of

fixed elements in cost structure. It is also determined by break even point

analysis.

Formula:

Sales Variable Cost

Operating Leverages =

EBIT

TABLE SHOWING OPERATING LEVERAGE

Year Sales -V.C EBIT Operating Leverages

2005 2,63,064 1,41,19,970 0.019

2006 21,98,616 1,22,34,773 0.1882007 53,97,509 1,40,14,644 0.385

2008 79,14,610 1,21,89,614 0.649

2009 8,29,672 10,68,792 0.785

Interpretation

The above table shows that the operating leverage of the bank for the

year ended 2004-2005, 2005-06, 2006-07, 2007-08 & 2008-09 are 1.019,

0.188, 0.385, 0.649 & 0.785 respectively. All the years the operating leverage

is fluctuating. During the period 2008-09 the ratio indicates a satisfactory

position when compared with other years.


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3.3.2 Financial Leverages

The use of long-term fixed interest bearing debt and preference share

capital along with equity share capital is called financial leverages. The long-term financial interest bearing debt is employed by a firm to earn more from

the use of these resources than their cost. So as to increase the return on

owners equity.

Formula:

EBIT

Financial Leverages =

EBIT Interest

TABLE SHOWING FINANCIAL LEVERAGE

Year EBIT EBIT- Interest Financial Leverages

2005 1,41,19,970 -27,26,822 -2.47

2006 1,22,34,773 -36,53,610 -3.35

2007 1,40,14,644 17,84,400 7.85

2008 1,21,89,614 19,43,034 6.27

2009 10,68,792 1,28,922 8.29

Interpretation

The above table shows financial leverages of the bank for the year

ended 2004-2005, 2005-06, 2006-07, 2007-08 & 2008-09 are 2.47, -3.35,

7.85, 6.27 & 8.29 respectively. In the year 2005 and 2006 are net loss only.

So the financial leverage of these two years is 2.47 & -3.35. In 2006-07 it

was increased to 7.85 because the bank gets the profit more than the previous

years.

CHART NO 3.3.2


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CHART SHOWING FINANCIAL LEVERAGES

-2.47

-3.35

7.85

6.27

8.29

-4

-2

0

2

4

6

8

10

Ratio

2005 2006 2007 2008 2009

Year

3.3.3 Combined Leverages


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CHART SHOWING COMBINED LEVERAGES

-0.046

-0.629

3.022

4.029

6.5

-1

0

1

2

3

4

5

6

7

Ratio

2005 2006 2007 2008 2009

Ye ar

3.4. CORRELATION

Table 3.4.1


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The following table presents the data relating to cost of equity and

earnings per share:

Correlation (r) =

Year Cost

of

equit

y(x)

Earning

per

share(y)XY

2005 -1.12 -0.18 0.202

1.254

0.0324 0.0406

2006 1.50 0.24 0.360

2.250

0.0576 0.1296

2007 0.16 2.57 0.411

0.026

6.6049 0.1717

2008 0.12 2.79 0.335

0.014

7.7841 0.1089

2009 0.12 3.09 0.371

0.014

9.5481 0.1336

Total 1.67

9

3.55

8

24.027

1

0.584

6

r = 1.679/

r = 2.19

INTERPRETATION:

The value of correlations mentioned between two variables is

+2.19. So, there is a high positive correlation between cost of equity and

earnings per share.


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Table 3.4.2

The following table presents the data relating to cost of Debt and earnings

per share:

Year Cost

of

debt(

x)

Earning

per

share(y)XY

2005 0.17 -0.18 -0.0306 0.0289 0.0324 0.000884

2006 0.082

0.24 0.01968

0.00672

0.0576 0.000132

2007 0.091

2.57 0.23387

0.00828

6.6049 0.001937

2008 0.089

2.79 0.24831

0.00792

7.7841 0.001967

2009 0.082

3.09 0.25338

0.00672

9.5481 0.001704

Total 0.7552

4

0.0585

5

24.027

1

0.00662

4

r = 0.75524/

r = 9.28

INTERPRETATION:


+9.28. So, there is a high positive correlation between cost of debt and

earnings per share.


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CHAPTER IV

FINDINGS, RECOMMENDATIONS AND CONCLUSION

4.1 FINDINGS

Ratio Analysis

Current Ratio of the company was not satisfactory in the year 2007-08,

when compared to the previous years.

Absolute liquid Ratio of the company does not have sufficient short

term financial position.

The inventory turnover ratio of the company was not static in nature.

So, it may increase or decrease.

The Debtors turnover ratio had decreased in the year 2008-09. So, the

company had collected their debt amount within a short period of time.

Outsiders fund had been reduced in the year 2008-09 when compared

to the previous years. So the debt had been reduced slowly.

The gross profit of the company also increased in the year 2009, when

compared to previous years 2008.

The net profit ratio of the company has been increasing slowly in the

year 2006-09.


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Cost of Capital

The cost of equity is -1.12 in 2005 had increased to 1.50 in the

year 2006 and in the year 2007 is 0.16 and 2009 it has been

reduced to 0.12.

The cost of debt in the year 2004-05 the firm does not paid tax

due to loss. And during the period 2006-07 the debt has been increased

to 0.091 and had been decreased to 0.045 in the year 2008-09.

Leverage

The operating leverage is high in 2008-09 when compared to

the previous years. Therefore, the company is in a satisfactory position

in 2008-09.

Financial leverage is not much satisfactory. Because, the

earnings is not sufficient for paying the interest, Tax, Dividends.

The combined leverage shows that a satisfactory financial

decision has been made by the company. However, both operating and

financial leverage are not favorable to the company.

Correlation


+2.19. So, there is a high positive correlation between cost of equity

and earnings per share.


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+9.28. So, there is a high positive correlation between cost of debt and

earnings per share.

4.2 SUGGESTIONS

The liquidity position of the company has to be increased to meet theircurrent obligations.

Even though the company has outsiders fund to reduce their risk. Theowners fund also needed to finance fixed asset. So, the owners or

shareholders of the company has to concentrate in their investment and

have to increase their capital.

The short term financial position of the company has not beensatisfied in the existing level. So, the company has to take necessarysteps to improve their financial position.

In the year 2008-09 the companys equity and debt both are equal. So,the company has to increase their equity capital and reduce their debt

to improve the overall performance of the company.


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4.3CONCLUSION

The study reveals the capital structure of the company for the past 5 years

starting from 2004-05 to 2008-09. The study will enable the company to plan

for its future capital requirements.

From the study, it is concluded that the capital structure of the company

was satisfactory and debt of the company must be reduced for improving the

company. The company must maintain good liquidity position to improve

their profit.

So, I conclude that the companys capital structure was fine even though

there is an improvement in equity to achieve better position and also the share

holders of the company must concentrate on their capital investment. So that

the company should concentrate in deviated areas in the future.


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BIBILIOGRAPHY

1. SHARMA R.K., SHASHI GUPTA A.K., Management

Accounting principles and practice, kalyani publisher, SeventhRevised Edition.

2. KHAN M.Y. AND JAIN P.K., Financial Management, New

Delhi, Tata Mc Graw Hill Publishing Company Ltd., Second

Edition.

3. PANDEY I.M., Financial Management, Vikas Publishing

House Pvt. Ltd., Seventh Revised Edition.

4. www.wikipedia.com

5. www.Google.com

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