Capital Structure - Bharati Cement
Capital Structure - Bharati Cement
Capital Structure - Bharati Cement
PROJECT REPORT
ON
CAPITAL STRUCTURE
AT
BHARATI CEMENT LIMITED
Submitted
By
B. BALAJI
H.T.NO: 1302-18-672-201
PROJECT SUBMITTED IN PARTIAL FULFILLMENT FOR THE AWARD OF DEGREE OF
The objective of the firm should be directed towards the maximization of the value of the
firm capital structure, or average, decision should be examined from the point of view of its
impact on the value of the firm
If the value of the firm can be affected by capital structure or financing decision a firm would
like to have a capital structure which maximizes the market value of the firm. The capital
structure decision can affect the value of the firm either by changing the expected earnings or
the cost of capital or both.
A mix of company’s longterm debt, a specific short-term debt, common equity and preferred
equity. The capital structure is how a firm finances its overall operations and growth by using
different souces of funds.
Debts comes in the forn of bond issues or long-term notes payable, while equity is classified
as common stock, preferred stock or retained earnings. Short-term debt such as working
capital requirements is also considered to be part of the capital structure.
The phrase “capital structure” can mean different things to different people. At its simplest,
capital structure reflects the equity and debt of the company. A privately held company that
plans to share equity with employees and raise outside capital generally as atleast two classes
of stock; common for founders and employees, and preferred for investors. A company has a
finite amount of equity to exchange for the financial and talent resources necessary to execute
your plan successfully. Great care should be taken when planning the allocation of equity.
The assets of a company can be financed either by increasing the owners claim or the
creditors claim. The owners claims increase when the form raises funds by issuing ordinary
shares or by retaining the earnings, the creditors’ claims increase by borrowing.
The various means of financing represents the “financial structure” of an enterprise .The
financial structure of an enterprise is shown by the left hand side (liabilities plus equity) of
the balance sheet. Traditionally, short-term borrowings are excluded from the list of methods
of financing the firm’s capital expenditure, and therefore, the long term claims are said to
form the capital structure of the enterprise .The capital structure is used to represent the
proportionate relationship between debt and equity .Equity includes paid-up share capital,
share premium and reserves and surplus.
The value of the firm depends upon its expected earnings stream and the rate used to
discount this stream. The rate used to discount earnings stream it’s the firm’s required rate of
return or the cost of capital. Thus, the capital structure decision can affect the value of the
firm either by changing the expected earnings of the firm, but it can affect the reside earnings
of the shareholders. The effect of leverage on the cost of capital is not very clear. Conflicting
opinions have been expressed on this issue. In fact, this issue is one of the most continuous
areas in the theory of finance, and perhaps more theoretical and empirical work has been
done on this subject than any other.
If leverage affects the cost of capital and the value of the firm, an optimum
capital structure would be obtained at that combination of debt and equity that maximizes the
total value of the firm or minimizes the weighted average cost of capital. The question of the
existence of optimum use of leverage has been put very succinctly by Ezra Solomon in the
following words.
Given that a firm has certain structure of assets, which offers net operating earnings of
given size and quality, and given a certain structure of rates in the capital markets, is there
some specific degree of financial leverage at which the market value of the firm’s securities
will be higher than at other degrees of leverage?
The existence of an optimum capital structure is not accepted by all. These exist two
extreme views and middle position. David Durand identified the two extreme views the net
income and net operating approaches.
1.3 SCOPE OF THE STUDY:
A study of the capital structure involves an examination of long term as well as short
term sources that a company taps in order to meet its requirements of finance. The scope of
the study is confined to the sources that BHARATI CEMENT LIMITED tapped over the
years under study i.e. 2015-2019.
1.4 OBJECTIVES OF THE STUDY:
The project is an attempt to seek an insight into the aspects that are involved in the capital
structuring and financial decisions of the company. This project endeavors to achieve the
following objectives.
SECONDARY SOURCES:
Drawn from the annual reports of the company during the period of 2015-2019
Discussions with the finance manager and other members of the finance department
RESEARCH DESIGN
The collected data has been processed using the tools of
Ratio Analysis
Graphical Analysis
Year-Year Analysis
These tools access in the interpretation and understanding of the Existing scenario of the
Capital Structure.
LITERATURE REVIEW
FINANCIAL LEVERAGE AND THE SHAREHOLDERS RISK
Financial leverage magnifies the shareholders earnings we also find that the
variability of EBIT causes EPS to fluctuate within wider ranges with debt in the capital
structure that is with more debt EPS raises and falls faster than the rise and fall in EBIT. Thus
financial leverage not only magnifies EPS but also increases its variability.
The variability of EBIT and EPs distinguish between two types of risk-
operating risk and financial risk. The distinction between operating and financial risk was
OPERATING RISK: -
Operating risk can be defined as the variability of EBIT (or return on total assets). The
environment internal and external in which a firm operates determines the variability of
EBIT. So long as the environment is given to the firm, operating risk is an unavoidable risk.
A firm is better placed to face such risk if it can predict it with a fair degree of accuracy
2. Variability of expenses
1. VARIABILITY OF SALES:
3. Interest coverage: the ration of net operating income (or EBIT) to interest charges, i.e.,
The first two measures of financial leverage can be expressed in terms of book or
market values. The market value to financial leverage is the erotically more appropriate
because market values reflect the current altitude of investors. But, it is difficult to get
reliable information on market values in practice. The market values of securities fluctuate
quite frequently.
These relationships indicate that both these measures of financial leverage will rank
companies in the same order. However, the first measure (i.e., D/V) is more specific as its
value ranges between zeros to one. The value of the second measure (i.e., D/S) may vary
from zero to any large number. The debt-equity ratio, as a measure of financial leverage, is
more popular in practice. There is usually an accepted industry standard to which the
company’s debt-equity ratio is compared. The company will be considered risky if its debt-
equity ratio exceeds the industry-standard. Financial institutions and banks in India also focus
on debt-equity ratio in their lending decisions.
The first two measures of financial leverage are also measures of capital gearing.
They are static in nature as they show the borrowing position of the company at a point of
time. These measures thus fail to reflect the level of financial risk, which inherent in the
possible failure of the company to pay interest repay debt.
ARTICLES:
Article : 1
Abstract : There have always be controversies among finance scholars when it comes to
the subject of the capital structure. So far, researches have not at reached a consensus in
the optimal structure of firms by simultaneously dealing with the agency problem.
Article : 2
Title :Dynamic capital structure. A comparative analysis between ICT and NON ICT
firms
Abstract :This paper develops a model of dynamic capital structure based on a simple of
NASDAQ listed firms and estimated the unobservable optimal capital structure using a
wide range of observable determinants.
Article : 3
Abstract : In this paper an attempt has been made to examine the determinants of capital
Structure size, business risk growth rate, earnings rate, dividend payout, debt service
capacity and degree of operating leverage of the companies listed to Nepal Stock
Exchange Ltd. As of July-16-2003.
BIBLIOGRAPHY
BOOKS REFERED:
Khan, M Y and P K Jain, Financial Management, Tata McGraw-Hill Publishing Co.,
New Delhi, 2007.
I M Pandey, Essentials of Financial Management, Vikas Publishing House Private
Ltd, New Delhi, 1995.
Ramesh, S and A Gupta, Venture Capital and the Indian Financial Sector, Oxford
university press, New Delhi, 1995.
Anthony, R N and J S Reece, Management Accounting Principles, Taraporewala,
Bombay.
JOURNALS
The journal of finance
International journal of finance & policy analysis
Journal of finance education.
NEWS PAPERS
Financial Express(December 2018)
Economic Times (December 2018)
WEB SITES
www.google.com
www.yahoo.com
www.theindiacement.com
Www.Bharathicement.Com