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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
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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.
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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-Recorders7/29/2019 m.mohanraj
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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:
The value of correlations mentioned between two variables is
+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
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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The value of correlations mentioned between two variables is
+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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