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A Project Report On

CAPITAL STRUCTURE-(EBIT-EPS ANALYSIS)


OF

RAJ CLASSIC FOODS LIMITED


Project Report submitted to Osmania University, Hyderabad In Partial fulfillment of the requirement for the award of Degree of

MASTER OF BUSINESS ADMINISTRATION


Submitted by
Mrs.B.SABITHA HT.NO:228011672003

Under the guidance of Mr. HARI KRISHNA Asso. Professor ST.FRANCIS INSTITITE OF TECHNOLOGY AND MANAGEMENT (Affiliated to Osmania University) HYDERABAD (2011-13)

CERTIFICATE
This is to certify that the project work titled Sources of Funds is a bonofied work done by Mrs.SABITHA (HT.NO.228011672003) of St.Francis Institute of Management .under my supervision and guidance, and this project has been submitted for the award of the MASTER OF BUSINESS ADMINISTRATION

(Mr. Hari Krishna)

Hyderabad

Date:

COMPANY CERTIFICATE

COLLEGE CERTIFICATE

DECLARATION
I hereby declare that the project report entitled SOURCES OF FUNDS with special reference to R.C.F.L has been prepared by me as a part of the requirement for obtaining the degree of MASTER OF BUSINESS ADMINISTRATION, submitted to the St. Francis Institute of Technology & Management (Affiliated to OSMANIA UNIVERSITY) is of my own and it is not submitted to any other University.

(B.SABITHA)

Place: HYDERABAD Date:

ACKNOWLEDGEMENT
I am thankful to Mr. Rajendar Kumar, Managing Director of M/S RAJ CLASSIC FOODS LIMITED, Hyderabad for giving me an excellent opportunity to undertake this project study. It has turned out to be an interesting, educating and rewarding experience. I would like to thank, Mr.Rajeshwar Rao Technical Director, for sparing his valuable time in discussion with us regarding of my project work.

I also thank Mr. Basavaiah the head of production department and Mrs. Sirisha

(Accountant) for extending their co-operation during the course of study for the project.

I express my sincere thanks to principal of Institute of Technology and Management

for giving me the permission to carry out the project work.

I would like to express my immense pleasure and satisfaction expressing thanks to my

guide & Associate Professor Mr. Hari Krishna giving me a proper guidance and co-operation in completion of my project work within the time.

I thank my lecturers for their valuable support and encouragement throughout the

course of the project work in its proper outcome.

(B.SABITHA)

Contents
CHAPTER
I II INTRODUCTION REVIEW OF LITERATURE THEORETICAL FRAMEWORK OF CAPITAL STRUCTURE III IV INTERPRETATION V FINDINGS, SUGGGESTIONS, and CONCLUSIONS COMPANY PROFILE DATA ANALYSIS and

Bibliography Annexure

CHAPTER-I
INTRODUCTION SIGNIFINACE OBJECTIVES OF STUDY METHODOLOGY
Data Sources Tools and Techniques SCOPE

LIMITATIONS

INTRODUCTION
Money, in broader terms funds, is one of the 7Ms of management. It is also one of the factors of production without which we cannot assume any business whether it is small or medium or big. The amount required by the firm in accounting terminology is called capital, rather finance. It is life-blood of every business. Adequate funds are necessary for formulation, expansion of business, without which it cannot achieve its objectives. The required funds can be classified into two categories: I. Long-term funds- required for an investment on fixed assets II. Short-term funds-required to carry out day-to-day operations

SIGNIFICANCE:
In this ever-changing economic environment, money or fund or finance is the key factor to establish an enterprise and to run the business. So finance is an essential and the basic need of every business. Finance is one and only source to procure the other three important factors of production. Finance manager is highly responsible for the procurement of funds in order to keep the firm at optimum level. Therefore, he should be very wary in selecting such a finance mix or capital structure which maximizes shareholders wealth. Capital structure of a firm is a reflection of the overall investment and financing strategy of the firm. Therefore every entrepreneur should be aware of all existing and new sources in mobilizing the required funds.

OBJECTIVES OF THE STUDY:


This project is an attempt to seek an insight into the aspects that are involved in studying the sources of funds and the fund mixing of RAJ CLASSIC FOODS LIMITED. This project endeavors to achieve the following objectives: Studying the various sources available to procure the funds for the new as well as existing enterprises from the financial markets. Scrutinizing different sources approached by R.C.F.L in obtaining the funds required for fixed capital as well as working capital. Examine the changes made in funding mix of R.C.F.L over the period of study. Learning how financial leverage impacts the Earnings per Share of the firm To analyze the trend position of the funds of R.C.F.L. Finally, concluding the financial efficacy of the firm in terms earnings its.

RESEARCH METHODOLOGY:
Data relating to RCFL has been collected through primary sources as well as secondary sources. The primary source of data involves formal discussions with the companys managing director and other department heads. The secondary source of data involves published documents pertaining to the organization, textbooks, journals and information available in various websites. Tools used: Tables and graphs showing the inclination in capital mix over the period of study, and EBIT-EPS analytical tool.

SCOPE OF THE STUDY:


The project is a study of various aspects related with R.C.F.L particularly, pooling of funds from for capital formation from different sources. In addition, the affect of funding mix on earning per share through financial leverage tool. The study also continues by making analysis of the funds required for its future expansion plan. Understanding results of the study following a few suggestions. However, the scope of the study is confined to the sources that R.C.F.L tapped over the years FY2007 to FY2011.

LIMITATIONS OF THE STUDY:


o As per the standing instructions and as the company norms the complete data is not being disclosed for the individuals to look into. o The study is limited to the financial statements provided by the company (Profit and Loss account, Balance Sheet) with a short discussion with the management. o Required additional information was not provided regarding the unsecured loans in the annual reports of the company. o Information about the interest percentages (%) on different loans taken by RCFL is not given. o Very few good previous project reports are available in the library for future reference. o Couldnt spend much time in speaking to the management, as they were busy in abroad operations.

CHPATER-II

REVIEW OF LITERATURE THEORETICAL FRAMEWORK OF SOURCES OF FUNDS

Review of Literature
A research study by Lisa A. Keister on Capital Structure in Transition: Financial Strategy in China's Emerging Economy, The Ohio State University published on October 2000. During economic transition, firms must dramatically reduce their financial dependence on the state and begin to borrow from non-state capital sources. This paper draws on organizational theory to examine this fundamental transformation of firm capital structure during China's transition. I propose that managers borrowed from external sources even when internal funds were available because retained earnings were considered state assets. Firms used retained earnings to signal financial health but borrowed externally to reduce dependence on the state. The research also identified typical trajectories followed by firms as they began to reduce their dependence on state capital and to acquire finance from banks, other firms, public debt, and foreign sources. The results suggested that firms used retained earnings to signal financial well-being to creditors in order to increase autonomy from the state. Contrary to research done almost exclusively in the West, retained earnings did not decrease external borrowing, rather firms were more likely to borrow from all external sources as retained earnings increased. The results also showed that firm financial strategy was influenced in important ways by the strategies used by a firm's peers and by the level of market development in a region. Firms imitated the behavior of other firms in their regions, particularly if those firms were large or profitable. The results demonstrated that market development shaped firm borrowing in the early stages of reform. Firms in less developed areas borrowed more from banks, a relatively low risk source of credit, and less from other external sources. Finally, the results demonstrated that the most typical firm borrowed first from banks and then gradually made a transition to other forms of external credit. A study by Jan Bartholdy, Aarhus School of Business - Department of Business Studies and Cesario Mateus University of Greenwich Business School, on Financing of SME's: An Asset Side Story published on February 26, 2008. This study explains that, the main sources of financing for small and medium sized enterprises (SMEs) are equity (internally generated cash), trade credit paid on time, long and short term bank credits, delayed payment on trade credit and other debt. The

marginal costs of each financing instrument are driven by asymmetric information (cost of gathering and analyzing information) and transactions costs associated with nonpayment (costs of collecting and selling collateral). In this paper, it was mentioned that the marginal costs are dependent of the use of the funds, and the asset side of the balance sheet primarily determines the financing source for an additional Euro. An empirical analysis on a unique dataset of Portuguese SMEs confirms that the composition of the asset side of the balance sheet has an impact of the type of financing used. So the main conclusion is that the composition of the asset side of the balance sheet influences the composition of the liability side of the balance sheet in terms of the different types of debt used to finance the firm, or that the use of the funds is important in deciding the type of financing available. A research by Armen Hovakimian, Baruch College - Zicklin School of Business, Milos Vulanovic, Western New England University; on Corporate Financing of Maturing Long-Term Debt published on April 30, 2010. The study tests the pecking order theory by examining how firms finance maturing long-term debt. The results offer support for the predictions of the pecking order theory regarding the use of internal funds and debt financing. Managers first finance their maturing long-term debt with internal funds and then turn to new debt issuance. It found that firms use internal funds before they issue new debt to refinance maturing long-term debt. Firms with more cash on hand are less likely to issue new debt to refinance. On average, each marginal dollar of maturing long-term debt is fully financed with new debt issuance. These findings are confirmed over different periods of time, across firms of different sizes, with different access to credit markets, and with different levels of internal funds. In contrast to the earlier literature, we find very strong support for the pecking order theory among small high growth firms as well as among debt capacity constrained firms. Our results also show that the fraction of new debt used to refinance the marginal dollar of maturing debt declines with the extent to which the firm is close to its debt capacity. However, regardless of their spare debt capacity, firms always prefer internal funds to external debt.

A study by Colin Mayer Sad Business School, University of Oxford and CEPR, Koen Schoors University of Ghent, Yishay Yafeh Hebrew University of Jerusalem on Sources of Funds and Investment Activities of Venture Capital Funds: Evidence from Germany, Israel, Japan and the UK. The purpose of this article has been to examine the financing of the Venture Capital (VC) industry in four countries where VC funds are important or growing and to establish how institutional differences in the financing of VC firms relate to the types of activities in which they invest. The research explains that there are substantial differences across countries in the sources of funds used to finance VC investment and substantial differences in the activities in which they invest. It found that the sources of finance are significantly related to the differences in VC activities within countries. In particular, financial intermediary-backed funds are associated with late stage investments in relatively low technology industries. In contrast, individual and corporate backed funds invest in early stage, higher technology industries. Their investment is also more globally focused than that of financial intermediary backed funds. It is observed that these observations are consistent with theories that emphasize the different information collected by financial intermediaries and market participants. They are also in line with patterns of relations that would be expected of funds operating in countries with different bank-firm relations and opportunities for risk spreading through financial markets and instruments. Consistent with a role for government in correcting market failures, public sector funding is associated with investment in domestic early stage activities. However, it also found that sources of finance only account for a portion of the differences in VC activities across countries. A range of other factors including demand for funds (i.e. supply of entrepreneurs), alternative sources of entrepreneurial finance (for example, business angels) and different corporate organization of entrepreneurial activities may also be relevant.

A research by Brian M. Lucey, Trinity College, University of Dublin, Ciaran Mac an Bhaird Dublin City University. on capital Structure and the Financing of Smes: Empirical Evidence From an Irish Survey. This paper presents an empirical description of the capital structures of a sample of 299 Irish small and medium sized enterprises (SMEs hereafter). The sources of finance used by respondents are delineated by internal and external sources and viewed through a life cycle model. Analysis emphasizes the role of the personal resources of the SME owner in the early years of the firm, both in the supply of capital and the provision of personal assets to secure debt financing for the firm. Over time, firms rely increasingly on retained profits and short term debt financing for their investment needs. Long term debt financing is positively related to asset structure, and negatively related to age. This result suggests that small firms with a high level of fixed assets overcome the asymmetric information problem by providing collateral for debt finance. The negative association of long term debt and age is consistent with the life cycle model, whereby firms borrowing requirements decline over time as retained earnings are accumulated. Firms with more growth options use higher levels of external equity and lower levels of internal equity. Provision of collateral to secure debt financing in our sample appears to follow a life cycle pattern, as smaller and younger firms are more dependent on the personal assets of the SME owner. This source of collateral also performs an important signalling role for younger firms. Larger firms have a greater reliance on the fixed assets of the enterprise to overcome the problem of information asymmetry and to secure their debt financing. These findings suggest that the capital structures of Irish SMEs follow a life cycle model as developed in the literature. A qualitative analysis reveals that the underlying motives for these preferences are a desire for independence and control and a perception of a lack of information asymmetries in debt markets.

SOURCES OF FINANCE
One of the most important considerations of an entrepreneur-company in implementing a new project or undertaking expansion, diversification, and modernization and rehabilitation scheme is ascertaining the cost and the means of finance. As finance is the life blood of business, it is of vital significance for business which requires huge capital. The business cannot run efficiently if it does not have adequate finance to meet its requirements. So the financing decisions should have two components: (i) decide as to how much of total funds are needed and (ii) process of procuring the decided combination of sources of funds or the capital structure, as it helps in the process of wealth maximization. Capital structure refers to the mix of sources from where the long term funds required in a business may be raised i.e., what should be the proportions of equity share capital, preference share capital, internal sources, debentures, and other sources of funds in the total amount of capital. It reflects the firms strategy. It acts as an indicator of the risk profile of the firm and tax management tool. Capital structure is affected by the corporate strategy, nature of the industry and previous capital structures. It helps in minimizing the risk, maximizing the profit and maintains control of the firm. There are various sources from where the different types of finance can be raised in India. Each and every source of fund has some advantages as well as disadvantages. The different sources can be classified according to period, ownership, source of generation etc. All the sources of finance available for a business may be grouped into the following three categories: Long term financial needs: There are different sources of funds available to meet long term financial needs of the business. These sources may be broadly classified into share capital and debt. In recent times in India, many companies have raised long-term finance by offering various instruments to public like deep discount bonds, fully convertible debentures etc. These new instruments have characteristics of both equity and debt and it is still difficult to categorize these either as debt or equity. These needs generally refer to those requirements of funds which are for a period exceeding 5-10 years. All investments in plants, machinery, land, buildings, etc., are considered as long term needs. They are classified into:

1. Share Capital or Equity Share 2. Preference Shares 3. Retained Earnings 4. Debentures/Bonds of different types 5. Term Loans from Financial Institutions 6. Term Loans from Commercial Banks. 7. Venture Capital funding. 8. International Financing like Euro-Issues, Foreign currency loans. Medium term financial needs: Such requirements refer to those funds which are required for a period exceeding one year but not exceeding 5 years. Different types in this section are: 1. Preference Shares 2. Debentures/Bonds 3. Public deposits/ fixed deposits for duration of three years. 4. Commercial banks 5. Financial institutions 6. State Financial corporations 7. Lease financing/ Hire-Purchase financing. 8. External commercial borrowings 9. Euro-issues. 10. Foreign Currency Bonds Short-term financial needs: This type of financial needs arise to finance in current assets. An investment in these assets is known as meeting of working capital requirements of the concern. The main characteristic of short-term financial needs is that they arise for a short period of time not exceeding the accounting period i.e., one year. These are: 1. Indigenous Bankers 2. Trade credit 3. Commercial Banks 4. Fixed deposits for a period of 1year or less. 5. Advances received from the customers. 6. Various short-term Provisions.

It is evident from the above that funds can be raised from the same source or from different sources for meeting different types of financial requirements. The different sources can now be discussed here: SOURCES LONG-TERM FINANCIAL NEEDS 1. Owners Capital or Equity capital: These are issued to the general public. The holders of these shares are the owners of the business and undertake the risks of the business. Since equity shares can be paid off only in the event of liquidation, this source has the least risk involved. Further, the dividend payable on shares is an appropriation of profits and not a charge against profits. Advantages of raising funds by issue of equity shares are: It is a permanent source of finance The issue of new equity shares increases flexibility of the company The company can make further issue of share capital by making a right issue There is no mandatory payments to shareholders of equity shares. 2. Preference Shares: Preference shares are special kind of shares. The holders of such shares enjoy priority, both as regards to the payment of fixed amount of dividend and repayment of capital on winding up of the company. Most of the preference shares these days carry a stipulation of period and the funds have to be repaid at the end of the stipulation period. The advantages of taking the preference share capital route are: No dilution in EPS on enlarged capital base There is leveraging advantage as it bears a fixed charge. There is no risk of takeover. 3. Retained earnings or Ploughing back of profits: Companies set aside a part of their profits to meet future requirements of capital. Companies keep these savings in various accounts such as General Reserve, Debenture Redemption Reserve and Dividend Equalization Reserve etc. These reserves can be used to meet long term financial requirements. The portion of the profit which is not distributed among the shareholders is retained and is used in business is called retained earnings or

ploughing back of profits. Such funds belong to the ordinary shareholders and increase the net worth of the company. As per Indian Companies Act., companies are required to transfer a part of their profits in reserves. The amount so kept in reserve may be used to buy fixed assets. This is called internal financing.

4. Debentures/Bonds of different types: These are also issued to the general public. The holders of debentures are the creditors of the company. Normally, debentures are issued on the basis of a debenture trust deed which lists the terms and conditions on which the debentures are floated. Debentures are normally issued in different denominations ranging from Rs. 100 to Rs. 1000 and carry different rates of interest. Debentures are generally secured against the assets of the company. It has lower interest rate and also tax-deductible. Public issue of debentures and private placement to mutual funds now require that the issue be rated by a credit rating agency like CRISIL (Credit Rating and Information Services of India Ltd.) The credit rating is given after evaluating factors like track record of the company, profitability, debt servicing capacity, credit worthiness and the perceived risk of lending. They do not result in dilution of control but they are obligatory payments and increases the financial risk associated with the firm. Broadly there were 13 types of bonds, such as: a) Unsecured/simple-naked, b) Secured/ mortgage-debt, c) Registered, d) Bearer, e) Redeemable, f) Irredeemable, g) Convertible, h) Zero interest bonds, i) Zero coupon bonds, j) First debentures/ second debentures, k) Guaranteed, l) Collateral and other innovative instruments. 5. Loans from Specialized financial institutions: Term loans represent secured borrowing and at present it is the most important source of finance for new projects. There are many specialized financial institutions established by the Central and State governments which give long term loans at reasonable rate of interest. Some of these institutions are: Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), Unit Trust of India (UTI), and State Finance Corporations (SFC) etc.

Advantages of raising loans from the specialized financial institutions, such as: Availability of finance for development schemes. Reasonable security requirements. Availability of finance during periods of depression Easy repayment facility Underwriting facility Such institutions help in promoting new companies; expansion and development of existing companies and meeting the financial requirements of companies during economic depression. INDUSTRIAL FINANCIAL CORPORATION OF INDIA (IFCI) The corporation was setup in 1984 under the IFC Act to provide medium and long-term financial assistance to industrial concerns in India, particularly in circumstances where normal banking accommodation is inappropriate or recourse to capital issue methods is impracticable. The financial assistance of the corporation is available to limited companies or co-operative societies registered in India and engaged or proposing to engage in (a)Manufacture, preservation or processing of goods (b)The mining Industry (c)The shipping business (d)The hotel industry; and (e)The generation of distribution of electricity or any other form of power. IFCI offers the following wide range of products to the target customer segments to satisfy their specific financial needs.

Long-term Loans (more than eight years to up to 15 years) - Project Finance for new

industrial/infrastructure projects Takeout Finance, acquisition financing (as per extant RBI guidelines / Board approved policy), Corporate Loan, Securitization of debt.

Medium-term Loans (more than two years to eight years) for business expansion,

technology up-gradation, R&D expenditure, implementing early retirement scheme, Corporate Loan, supplementing working capital and repaying high cost debt.

Short-term Loans (up to two years) for different short term requirements including

bridge loan, Corporate Loan etc.

Structured Products: acquisition finance, pre-IPO investment, IPO finance, promoter Lease Financing Takeover of accounts from Banks / Financial Institutions / NBFCs Financing promoters contribution (private equity participation)/subscription to Purchase of Standard Assets and NPAs

funding, etc.

convertible warrants

INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI) The Industrial Development Bank of India was established under the Industrial Development Bank of India Act, 1964 as a wholly owned subsidiary of the Reserve Bank of India. The ownership of IDBI has since been transferred to Central Government from February 16, 1976. IDBI provides direct financial assistance to industrial units also to bring the gap between supply and demand of medium and long-term finance. The financial assistance by IDBI: To grant direct loans and advances to industrial concerns of Manufacture, preservation or processing of goods (b) The mining Industry (c) fishing, shipping, and transport business (d) The hotel industry; and (e) The generation and distribution of electricity or any other form of power. To co-ordinate the activities of other institutions providing terms finance to industry and to act as an apex institution. To provide refinance to financial institutions granting medium and long-term loans to industry. To provide refinance to scheduled banks or co-operative banks. To provide refinance for export credits granted by banks and financial institutions. To bank also assists research and development activities and it undertake market surveys and techno-economic studies for the development of industry. Recently, the bank has started MSME Finance, which takes care of the funding needs of Micro, Small and Medium enterprises. The Bank has the products that cater to all the stakeholders in a value-chain viz., the vendors, the manufacturers as well as the dealers. In addition there are tailor-made products for special category of borrowers such as Medical Practitioners, Transport Operators , Professionals & Self-employed, IT Service

Providers etc. With a view to make business easy for the Micro and Small Enterprises (MSEs), the Bank has introduced collateral free loans . The Bank not only offers finance to its MSME customers but also takes care of their all banking needs under one roof with full range of other banking products and services. IDBI Bank's total agriculture advance was Rs.1387 Cr for year ended March 2007. It has gone up by Rs.6924 Cr (around 500%) to Rs.8311 Cr as on March 31, 2009. IDBI Bank constantly emphasizes on lending to Agricultural sector. Bank has several Agri products viz. Loan against crop receivables, Warehouse receipt, Contract farming etc. to uplift the socioeconomic status of rural population. INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI) The ICICI was established in January 5 1995 for developing medium and small industries of private sector. It provides term loans in Indian and foreign currencies, underwrites issue of shares and debentures, make direct subscriptions to these issues and guarantees payments of credit made by others. Main financial assistance from ICICI to: Power: ICICI Bank is the first Indian bank to finance large hydro-power projects and thermal power plants being set-up by large infrastructure developers. Roads: The Infrastructure sector is a priority for the Bank, and has financed the first project for modernizing state border check posts. Ports / Airports: ICICI Bank has provided assistance to a number of container & liquid port terminals. The Bank has been a lead arranger for first private sector greenfield international airport. Manufacturing & Mining: The funding requirements of large brown field expansions and green field projects in the manufacturing sector viz. Steel, Aluminum, Cement, Auto, and Hotels have been arranged by the group. Oil & Gas: It provides financial assistance to refineries in the country and has financed the first oil securitization deal in the country. Additionally, funding of gas pipeline projects remains a key area for bank.

Furthermore, it also assists the Government of India in formulating policies relating to various segments of the infrastructure sector and funding of new vehicles, finance on used vehicles, top up on existing loans, working capital loans & other banking products.

STATE FINANCIAL CORPORATIONS (SFCs): The State Financial Corporations Act was passed by the Government of India in 1951 with a view to provide financial assistance to small and medium scale industries which were beyond the scope of IFCI. These corporations are expected to be complementary to the IFCI. While IFCI provides financial assistance only to large industrial concerns owned by public limited companies or co-operatives, the SFCs render assistance to all kinds of industries, may be in the form of private limited companies, partnership firms or soletrading concerns. However, SFC normally provide term loans to projects in the small scale sector, while for the medium and large industries term-loans are provided by state developmental institutions alone or in consortium with banks and state financial corporations. Financial supporting by SFC: Granting loans or advances to industrial concerns repayable within a period not exceeding 20 years. Guarantee loans raised by industrial concerns which are re- payable within a period not exceeding 20 years and which are floated in the public market. SFcs provide loans in foreign currency for the import of machinery and technical know how, under the IDA (International development association) and world bank tie up. Underwriting the issue stocks, shares, bonds or debentures by the industrial concerns subject to their being disposed off within seven years. Acting an agent of Central Government or state government or IFCI in respect of any business with an industrial concern in respect of loans sanctioned to them. 6. Loans from commercial banks: Traditionally, commercial banks in India do not grant long-term loans. They grant loans only for short period not extending one year. But recently they have started giving loans for a long period. Commercial banks give term-loans i.e. for more than one year and even can grant the loans for more than 5 years period. The period of repayment of short-term

loan is extended at intervals and in some cases loan is given directly for a long period. Commercial banks provide long-term finance to small-scale units in the priority sector.

7. Venture capital funding:


The venture capital financing refers to financing of new high risky venture promoted by qualified entrepreneurs who lack experience and funds to give shape to their ideas. In broad sense, under venture capital financing venture capitalist make investment to purchase equity or debt securities from inexperienced entrepreneurs who undertake highly risky ventures with a potential of success. Some common methods of venture capital financing are: (i) Equity financing: The equity contribution of venture capital firm does not exceed 49% of the total equity capital of venture capital undertakings so that the effective control and ownership remains with the entrepreneur. (ii) Conditional loan: A conditional loan is repayable in the form of a royalty after the venture is able to generate sales. No interest is paid on such loans, and royalty in India could be in the range of 2% and 15%; actual rate depends on other factors of the venture such as gestation period, cash flow patterns, riskiness and other factors of the enterprise. Some Venture Capital Financiers give a choice to the enterprise of paying high rate of interest instead of royalty. (iii) Income note: It is a hybrid security which combines the fatures of both conventional loan and conditional loan. The entrepreneur has to pay both interest and royalty on sales but at substantially lower rates. (iv) Participating debenture: Such security carries charges in three phases: In the start up phase no interest is charged. Next stage a low rate of interest is charge up to a particular level of operation. After that, a high rate of interest is required to be paid.

8. INTERNATIONAL FINANCING
The essence of financial management is to raise and utilize the funds raised effectively. There are various avenues for organizations to raise funds either through internal or external sources. The external sources include:

Commercial Banks: Like domestic loans, commercial banks all over the world extend foreign currency loans also for international operations. These banks also provide to overdraw over and above the loan amount. Development Banks: Development banks offer long and medium term loans including FC loans. Many agencies at the national level offer a number of concessions to foreign companies to invest within their country and to finance exports from their countries. International Agencies: A number of international agencies have emerged over the years to finance international trade and business. The more notable among them include The International Finance Corporation(IFC), The International Bank for Reconstruction and Development (IBRD), The Asian Development Bank(ADB), The International Monetary Fund(IMF) etc. International Capital Markets: Today, modern organizations including MNCs depend upon sizeable borrowings in Rupees as well as Foreign Currency. In order to cater to the needs of such organizations, international capital markets have spring all over the globe such as in London.

Financial Instruments
Some of the various financial instruments dealt with in the international market are briefly described below: Euro bonds: Euro bonds are debt instruments denominated in a currency issued outside the country of that currency. Foreign bonds: These are debt instruments denominated in a currency which is foreign to the borrower and is sold in the country of that currency. Fully Hedged Bonds: In foreign bonds, the risk of currency fluctuations exists. Fully hedged bonds eliminate the risk by selling in forward markets the entire stream of principal and interest payments. Floating Rate Notes: these are issued up to seven\years maturity. Interest rates are adjusted to reflect the prevailing exchange rates. They provide cheaper money than the foreign loans. Euro Commercial Paper: ECPs are short term money market instruments. They are for maturities less than one year. They are usually designated in US Dollars.

Foreign Currency Option: A FC option is the right to buy or sell, spot, future, or forward, a specified foreign currency. IT provides a hedge against financial and economic risks. Foreign Currency Futures: FC Futures are obligations to buy or sell a specified currency in the present for settlement at a future date. Euro Issues: The term Euro issue in the Indian context denotes that the issue is listed on a European stock exchange. However, subscription can come from any part of the world, except India. Finance can be raised by Global Depository Receipts (GDRs), Foreign Currency Convertible Bonds (FCCB) and the pure debt bonds. However GDRs and FCCBs are more popular. Global Depository Receipts (GDRs): A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches. A financial instrument used by private markets to raise capital denominated in either U.S. dollars or Euros. GDRs with warrants are more attractive than plain GDRs in view of additional value of attached warrants. American Depository Receipts (ADRs): A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction. Foreign Currency Convertible Bonds (FCCB): The FCCB means bonds issued in accordance with the relative scheme and subscribed by a non-resident in foreign currency and convertible into depository receipts or ordinary shares of the issuing company in any manner, either in whole or in part, on the basis of any equity related warrants attached to debt instruments. FCCBs are generally denominated in U.S. $. FCCBs are unsecure; carry a fixed rate of interest and an option for conversion into a fixed number of equity shares of the issuer company. Essar Gujarat, Reliance, Jindal Strips, ICICI, and TISCO raised funds by issue of Euro convertible bonds.

MEDIUM-TERM FINANCIAL NEEDS:


Most of the sources like funds raising for medium-term financial needs from banking industry and financial institutions were already discussed along with long-term sources, here we provided other medium-term sources. 1. External commercial borrowings (ECB). 2. Lease financing/ Hire-Purchase financing. 1. External commercial borrowings (ECB). External commercial borrowings refer to raising of long-term as well as medium-term finance by Indian companies from international market except by issue of FCCB or DR. ECBs include commercial bank loans, buyer credit, seller credit, Floating Rate Notes, Fixed Rate Bonds, Borrowing from multinational financial institutions such as ADB, IFC, etc under the guidelines issued by the government. However, government review the guidelines periodically for financing the real sector, including infrastructure projects, which comes under Automatic Route, where RBI/Government approval is not required. Under Approval Route, banks and financial institutions require RBI approval. In yet another attempt to attract foreign capital into India and stem the fall of the rupee, the countrys central bank, the Reserve Bank of India or RBI allowed external commercial borrowings, or ECB, up to $500 million (Rs2,465 crore) per year under the automatic route for rupee or foreign currency expenditure by local firms. 2. Lease financing/ Hire-Purchase financing. A lease is a contractual arrangement whereby one party, i.e. the owner of an asset, grants the other party the right to use the asset in return for a periodic payment. A lease is essentially the renting of an asset for some specified period. The ownership and title to the assets remains with the lessor. In case of hire-purchase, the seller hand over the assets to the buyer but the title to goods is not transferred. The buyer becomes the owner of the goods and acquires the title to the goods only when he makes the payments of all the installments. SHORT-TERM FINANCIAL NEEDS: 1. Indigenous Bankers:

Private Money-lenders and other country bankers used to be the only sources of finance prior to the establishment of commercial banks, and used to charge very high rate of interest. However, with the evolution of commercial banks, they lost their monopoly, but even today, some business houses have to depend upon indigenous bankers for obtaining loans to meet their working capital requirements. 2. Trade Credit It represents credit granted by suppliers of goods, etc., as an incident of sale. The usual duration of such credit is 15 to 90 days. It generates automatically in the course of business and is common to almost all business operations. It can be in the form of open account or bills payable. Trade credit is preferred as a source of finance because it is without any explicit cost and till a business is a goring concern it keeps on rotating and enhances automatically with the increase in the volume of business. 3. Advances from Customers Manufacturers and contractors engaged in producing or constructing costly goods involving considerable length of manufacturing or construction time usually demand advance money from their customers at the time of accepting their orders for executing their contracts or supplying goods. This is a cost free source of finance and really useful. 4. Inter corporate deposits The companies can borrow funds for a short period say 6months from other companies which have surplus liquidity. The interest rate on inter corporate deposits varies depending upon the amount involved and time period. 5. Certificate of deposit The certificate of deposit is a document of title similar to a time deposit receipt issued by a bank except that there is no prescribed interest rate on such funds. The main advantage of CD is that banker is not required to encash the deposit before maturity period and the investor is assured of liquidity because he can sell the CD in secondary market. 6. Public Deposits Public deposits are very important source of short-term and medium-term finances particularly due to credit squeeze by the Reserve Bank of India. A company can accept

public deposits subject to the stipulation of Reserve Bank of India from time to time maximum up to 35 percent of its paid up capital and reserves, from the public and shareholders. These are unsecured loans and are accepted for a period of six months to three years. These are mainly used to finance working capital requirements.

7. Various short term provisions/ accruals accounts Accrual accounts are spontaneous source of financing as they are self-generating. The most common accrual accounts are wages and taxes. In both the cases, the amount becomes due but is not paid immediately. OTHER INNOVATIVE SOURCES OF FINANCE: 1. Seed capital assistance At the time of financing a project, financial institutions always insists that the promoter should contribute a minimum amount called promoters contribution towards the project. IDBI opened a scheme to provide such funds to the eligible entrepreneurs. There are two schemes in the operations: (i) Special seed capital assistance This is means for smaller projects where assistance is restricted to 20% of the project cost or 2,00,000 whichever is less. This scheme is managed by S.F.C. (ii) Seed capital assistance In this category of projects the assistance is restricted to 50% of the promoters contribution of Rs. 15,00,000 whichever is less. The total cost of the project should not extend 2crores under this scheme. IDBI may provide assistance or may be through SFC or SIDC. 2. Bridge financing: Bridge finance refers to loans taken by a company normally from the commercial banks for a short period, pending disbursement of loans sanctioned by financial institutions. Normally, it takes time for financial institutions to disburse loans to companies. Bridge loans are normally adjusted out of the term loans as and when disbursed by the concerned institutions. Bridge loans are secured by hypothecating movable assets, personal guarantees and demand promissory notes. Generally, the rate of interest on bridge finance is higher as compared with that on term loans.

3. Bonds
The new instruments that have been introduced since early 1990s as a source of finance is staging in their nature and diversity. These new instruments are following:

Deep discount bonds Deep discount bonds are a form of zero-interest bonds. These bonds are sold at a discounted value and on maturity face value is paid to the investors. In such bonds, there is no interest payout during lock in period. Secured Premium Notes These notes are issued along with a detachable warrant and are redeemable after a notified period of say 4 to 7 years. The conversion of detachable warrant into equity shares will have to be done within the time period notified by the company. Zero interest fully convertible debentures These are fully convertible debentures which do not carry any interest. The debentures are compulsorily and automatically converted after a specified period of time and holders thereof are entitled to new equity shares of the company at predetermined price. From the point of view of the company this kind of instrument is beneficial in the sense that no interest is to be paid on it, if the share price of the company in the market is very high then investors tend to get equity shares of the company at a lower rate. Zero coupon bonds A zero coupon bond does not carry any interest but it is sold by the issuing company at a discount. The difference between the discounted value and maturing or face value represents the interest to be earned by the investor on such bonds. Double option bonds These have been recently issued by the IDBI. The face value of each bond is Rs. 5,000. The bond carries interest at 15% per annum compounded half yearly from the date of allotment. The bond has maturity period of 10 years. Each bond has two parts in the form of two separate certificates, one for principal of Rs.5,000 and other for interest (including redemption premium) of Rs.16,500. Both are listed on the stock exchange and the investor has the facility of selling one or both parts anytime he likes. Option bonds

These are cumulative and non-cumulative bonds where interest is payable on maturity or periodically. Redemption premium is also offered to attract investors. These were recently issued by IDBI, ICICI etc. Inflation Bonds In these bonds interest rate is adjusted for inflation. Thus, the investor gets an interest free from the effects of inflation. For example, if the interest rate is 11 percent and the inflation is 5 percent, the investor will earn 16percent meaning thereby that the investor is protected against inflation. Floating Rate Bonds As the name suggests on these bonds the interest rate is not fixed and is allowed to float depending upon the market conditions. This is an ideal instrument which can be resorted to by the issuer to hedge themselves against the volatility in the interest rates. This has become more popular as a money market instrument and has been successfully issued by financial institutions like IDBI, ICICI. Despite all the differences among companies, there are only a few sources of funds available to all companies. They are: Profit: They make profit by selling a product for more than it costs to produce. This is the most basic source of funds for any company and hopefully the method that brings in the most money. Borrowings: Like individuals, companies can borrow money. This can be done privately through bank loans, or it can be done publicly through a debt issue. The drawback of borrowing money is the interest that must be paid to the lender. Equity: A company can generate money by selling part of itself in the form of shares to investors, which is known as equity funding. The benefit of this is that investors do not require interest payments like bondholders do. The drawback is that further profits are divided among all shareholders. However, in an ideal world, a company would bring in all of its cash simply by selling goods and services for a profit. But, every company has to raise funds at some point to develop products and expand into new markets. When evaluating companies, it is most important to look at the balance of the major sources of funding.

CHAPTER-III

COMPANY PROFILE

A CHOCOLATE manufacturer, RAJ CLASSIC FOODS LIMITED was established in the year 1996 with an authorized capital of 60,00,000. The present paid up capital is 45, 23, 300. The land and building costed approximately 12 Lakhs. The company manufactures about more 1000 kgs wafers per day. The unit is operated 10 hours a day. Mr. K. Rajender Kumar Executive director and Managing director, B. Rajeshwar Rao Technical director, Mr.Basavaiah Production manager of the M/s. RAJCLASSIC FOODS LIMITED. The directors themselves designed and developed the company and modified as per the market requirement with new techniques and innovations. RAJCLASSIC FOODS LIMITED is an industry mainly concerned with the manufacturing of all chocolate products and fancy foods. The production, packaging the quality analysis is done in the factory where as the sales distribution of the finished product is done at secunderabad city. Raj classic foods ltd has a sister unit by name DELTA FOODS where chocolate wrapping, filling of water are done whereas Raj Classic Foods Ltd., dealt with the Wafer preparation, Creaming of wafers, Rice crisps; Khata Meetha, and Namkeens with a good quality. OBJECTIVES OF RAJCLASSIC FOODS LIMITED: The main objective of the industry is to fulfill the demand of consumers by maintaining quality, taste and cost of the products. The objective of the RCFL is to produce products at less cost and change the products according to tastes and preferences of consumers. To increase the product sales, the management modified the facilities as per market requirement with new techniques and innovations LOCATION OF ORGANISATION:

The factory is situated at Jeedimetla Industrial Development Area. The address of factory is 17-A, Phase-IV, IDA Jeedimetla, Hyderabad. The registered office is situtated at Secunderabad. The address of Regd. Office is Plot No: 14, Krishna Nagar Colony, P.G Road, Secunderabad.

PRODUCTS MANUFACTURED: 1) Cream wafers in different flavors. 2) Cocoa Crunches: Rice crispies coated with real chocolate and sugar. 3) Khatti-meeti digestive pills. 4) Chocolife 5) Crash. 6) Tuffz 7) Choco rap PROCUREMENT OF RAW MATERIALS: Sr No. Ingredients Source of Procurement Quality analysis Done 1 Flour Rajkumar fl.Mills, Sanmati flour mills 1)Moisture content 2)Gluten content 3)Ash content

Vanaspathi

Prestige Vanaspati Industries Ruchi Soya Industries

1)Acidity/FFA 2)Iodine Value 3)Peroxide Value 4)Melting point

Sugar

Bidar sahakari udyog

1)Moisture content 2)Color(visual

Malto dexrine & strach

Ridhi sidhi starch Co

1)Moisture content 2)Color(visual

Cocoa powder

Lotus Chocolate Co. Champco Chocolate Co.

1)Moisture content 2)Ash content 1)Moisture content

Salt

Local market

DETAILS OF MACHINERY: S.No NAME OF MACHINERY 1 FLOUR SIFTER COST (In Lakhs) 75 INDIA 500kg/hr Shifting of flour ,to remove foreign 2 3 SUGAR GRINDER ATCO Weighing Balance 4 Batter mixers (2 Nos) 0.75 INDIA 200kg 1.0 0.5 INDIA INDIA 500kg/hr 150kg particles To grind the sugar to 100 mesh size To weigh raw materials accurately For mixing all ingredients and preparation of 5 6 7 8 Creaming Mixer Wafer oven-1 Wafer oven-2 Cream spreading m/c-1 3.0 35.0 18.0 5.0 AUSTRIA AUSTRIA AUSTRIA AUSTRIA 100kg 30 plates 18 plates batter For preparation of different creams For baking of wafer sheets For baking of wafer sheets To apply the cream on sheet uniformly to make sandwich MADE IN CAPACITY USE

FACILITIES AVAILABLE AT RCFL: Land: The factory has a well spread out working area of about 4500 sq.yds. Building: 5400sft. Asbestos shed for wafer plant and 4000 sft RCC building for packaging products as per PFA procedures. Laboratory: Having equipment facilities required for testing samples, raw materials and finished products as per PFA procedures. Power: Connected with 150HP of electrical power and a genset of 125 KVA for standby. Water: Adequate water source from the bore well. Water is softened to reduce hardness below 50ppm, then being used for the process. LPG: LPG is used as a fuel in heating and baking of wafer sheets on conveyor system. Two LPG storage vessels each 10MT capacities are installed with all safety systems.

ORGANISATION CHART
CHAIRMAN

MANAGING DIRECTOR

EXECUTIVE DIRECTOR

TECHNICAL MANAGER

PRODUCTION MANAGER

Supervisor Supervisor (Prodn.) (Q.A)

Supervisor (Pckg)

Supervisor (Admn)

Supervisor Supervisor (Account) (Stores) Technicians

Operator

Operator

Worker Worker Worker

Key initiatives:

Recently, the company entered into an agreement with Nutrine Confectionery Company Ltd. Under which R.C.F.L makes Rice Crispies with chocolayer and deliver to Godrej Hershey Ltd for marketing on behalf of Nutrine Confectioneries.It is a kind of job work for R.C.F.L. The product name is CHOCOROCKO. The company is expanding its production capacities following the increasing demand for the products. Recently, the company took the initiative to buy the new machines and constructing the new building floor for its expansion. The company may soon enter into the local (Andhra Pradesh) market, as it is not tapped yet, if it finds a good distributor. Its products are largely sold in Maharashtra, Delhi, Bangalore, and Kolkata and exported to Arab, Dubai, Malasia, Srilanka and Oman. OUTLOOK for FY 2011 and FY2012: Raj Classic Foods limited is forecasting a 20% increase in its sales as well as in net income for the next two financial years. The company is witnessing a sales growth momentum for the last financial years.

CHAPTER-IV

DATA ANALYSIS AND INTERPRETATION

Raj Classic Foods Limited used two basic types of sources to meet its long term and short term financial requirements. The Life Blood of Raj Classic Foods Limited is in the form of Shareholders funds (Equity capital and Reserves & Surplus) and Loan funds (Secured and Unsecured Loans). Broadly, the sources of funds of RCFL are as follows: SHAREHOLDERSFUNDS Equity capital Reserves & Surplus LOAN FUNDS Secured Loans Unsecured Loans In the mobilization of share capital RCFL procured all the owned capital through the equity share capital only from the commencement of its business. Secondly, it has acquired funds mostly from the loan funds in form of secured and unsecured loans. Unsecured loan funds may be used for the working capital requirements. The secured loans of RCFL are: 1. Cash Credits and Bills from S.B.H. 2. S.B.H Term loans. 3. Loan from Kotak Mahendra Limited (till FY05). 4. Loan from ICICI (vehicle loans). 5. Loan from HDFC (vehicle Loans). All the above stated secured loans are secured by the way of hypothecation. The hypothecation was made on current assets & fixed assets of RCFL, including the personal guarantee of directors of the company. HYPOTHECATION: Under this agreement banks will provide working capital finance against the security of moveable property, usually inventories. But RCFL has hypothecated by the security of assets & guarantee of the directors. In this agreement the borrowers does not give any possession of the property to the bank. They remain with the borrower only and the

hypothecation is merely a charge against property for the amount of debt. If the Borrower fails to pay his dues to the bank, then the bank may file a case to realize his dues by the sale of assets or stock.

FLOW CHART OF RCFLs SOURCES OF FUNDS

SOURCES OF FUNDS

SHARE HOLDERS FUNDS

LOANS FUNDS

SECURED LOANS

UNSECURED LOANS

EQUITY CAPITAL

RESERVES & SURPLUS

1. CASH CREDIT and BILLS from PROFIT&LOSS ACCOUNT INVESTMENT SUBSIDY SBH 2. TERM LOAN from SBH 3. VEHICLE LOANS from ICICI/HDFC


I. II.

SHAREHOLDERS FUNDS
Under the head shareholders fund we have two sources: Share capital Reserves and surplus. (I) SHARE CAPITAL : RCFL has Authorized Capital of Rs.60,00,000 i.e., 6,00,000 shares worth Rs. 10 each as per schedule-1 of annual report of the company. It has Issued and Subscribed Capital of Rs.45,23,300 i.e., 4,52,330 shares worth Rs. 10 each fully paid. RCFL has never issued Preference shares for acquiring share capital from its inception. As per the observation it has a fixed capital till today contributed by the directors of the company who initiated RCFL. Presently, the company has no plans issue further capital for its expansion. However, it may approach the banks for financial assistance. (II) RESERVES &SURPLUS As per the schedule-2 of Annual Reports of RCFL, under Reserves and Surplus we find two options: (i) Investment subsidy (ii) Profit and loss Account. (An internal source of fund) (i) Investment subsidy: It is the loan amount or a financial assistance provided by the government or banks or financial institutions for the completion of production activity or for successful completion of certain project for a particular company. As per the information provided in the Balance Sheet this account showed an invariable balance for all the five years from the financial year 2007-08 to 2011-12. The balance in this account is Rs. 13,90,680. (ii)Profit and loss Account: In the preparation of the company final accounts, R.C.F.L. showed its profit and loss account under the head reserves and surplus in schedule-2. At the same time we can know the profit balances of every accounting period from P&L account along with the related expenses recorded in the schedules -8&9, which are

provided in its financial statements. As per schedule-10 Notes on Accounts, the company said that previous year figures re-grouped to match current years figures. The cumulative balances are presented in a table as well as in a graph. YEAR 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 Net profit 2045241 2057048 2190163 2907417 3050820 4164300 % change: growth/(decline) 0.6% 6.5% 32.7% 5% 36.5%

As per the schedule-10: Notes on Accounts, the company showed the balance in P/L account in a cumulative form. Consequently, it reported a growth trend in its accumulated profits, as it adds current year profits to previous year balance. The graphical presentation is as follows.

However, the actual funds generated for individual accounting periods of study in the form of profits to survival and expansion of business are as follows. YEAR 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 Net profit 45477 11807 133115 717254 143403 1113480 % change: growth/(decline) -74% 1027% 438% -80% 676%

Profits decreased by 74% in FY07 compared to last year. However, from FY08, the company started reporting notable profits. Therefore, we can say that there is a fluctuating trend in period of study.

In FY07, the turnover was very high compared with previous year, but higher tax provision and huge payment of intern dividend compared to FY06, led to 74% decline in the profits, which would have been used as funds for business purpose otherwise. For FY08, despite of fall in top-line, the companys internal fund source increased more than 10 times to 133115 from 11807 in FY07, on the back of lower proposed dividend. The complete absence of dividend payment and tax on that led the company to report a profit of 717254 for FY09. On the other hand, dividend is the cause for lower net profit for FY010. For FY11, the companys net profit increased many folds to 1113480 against 143403 in FY010, on the back of impressive sales growth, lower administration and selling expenses coupled with lower interest chargers.

LOAN FUNDS
As a source of loan funds enterprises and business will meet Debentures/ Bonds and Term Loans for the financial needs. RCFL dont have any debentures or bonds in all the five years of study, rather from the beginning itself. So RCFL took its debt funds in the form of term loans and other loan sources only. Under this head it has: i. Secured Loan

ii. Unsecured Loan SECURED LOANS: Under the head secured loans RCFL has five types of Loans. They are: 1. Cash Credits & Bills from SBH. 2. SBH Term Loans. 3. Loans from Kotak Mahendra Limited (till FY05). 4. Loans from ICICI. 5. Loans from HDFC. 1. CASH CREDIT & BILLS FROM SBH: Under the cash credit facility a borrower is allowed to withdraw funds from the bank up to the sanctioned credit limit. At the same time the borrower is not allowed to take the entire sanctioned credit ones, rather he can draw periodically to the extent of his requirements and repay by depositing surplus fund in his cash credit account. Therefore interest is payable on the amount actually utilized by the borrower. The discounting of bills (called hundis in Indian parlance) are a widely used source of short-term finance in the Indian corporate sector. This facility is provided by commercial banks as well as by private sector financial companies. The minimum charge for bill discounting tends to vary according to the credit-worthiness of the companies. The bill discounting limit for each company is part of its total working capital limit. Under the purchase or discounting of bills, a borrower optioned credit from the bank against his bills, which are deposited for discounting. The amount provided under this agreement is covered with in all the overall cash credit. RCFL has obtained this facility from STATE BANK OF HYDERABAD. The amounts for the period of study are as follows as depicted in table and graph: YEAR 2007-08 2008-09 2009-10 2010-11 2011-12 CASH CREDITS AND BILLS FROM SBH 4211705 5417838 3609913 3219653 2125028

There are considerable changes in the cash credits and bills from SBH; we can say there is a fluctuating trend from the above.

For FY07, the companys Cash Credits and Bills from SBH account balance stood at In FY08, the credit increased 28.6% to $5417838, as the company bought plant & In FY09, the company repaid 1807925 and continued the repayment of credit in next The repayment was done from the higher realization of sales proceeds as the company

421176. machinery and electric equipment with these raised funds. financial years. However, the balance by the end of FY10 is 2125028. witnessed in FY08. 2. SBH TERM LOAN: Term loans are also referred to as term finance, which represents a source of debt finance, generally payable in less than 10 years. They are employed to finance for acquisition of fixed assets and working capital margin. Currently, SBH is providing minimum loan amount of 50000, and maximum loan amount of 100 lacs, repayment to be made in 84 months, with an interest rate of 11.75%. However, as company is falling under MSME it can avail the loan at 15% up to Rs25 lacs. SBH term loans in RCFL were as follows for the following accounting periods: YEAR 2007-08 2008-09 2009-10 2010-11 2011-12 TERM LOAN FROM SBH 1578153 1760019 2075209 746040 0

T ermL oans fromS H B


2500000 2000000 1500000 Termloans 1000000 500000 0 2006-07 2007-08 2008-09 2009-10 2010-11

There are notable changes in the term loan account. In the year 2007 the company had amount of term loan from SBH equal to 1578153, showing 68% decline in from the year ago. This is because the company has paid off termloan taken from ICICI in this financial year, on the back of higher cash inflow from sales proceeds. Again in FY08, the company took an additional term- loan to support in funding the acquisition of plant & machinery. However, the loan balance by the end of financial year is 1760019. assets. loans. By the end of FY11, the company repaid whole amount and the balalnce was nil. 3.Vehicle Loans from ICICI and HDFC: ICICI has extended its banking products like funding of new vehicles, finance on used vehicles, top up on existing loans. Commercial Vehicle Loans by the banks are as folows

Like-wise, in FY09 also the company raised some more funds for acquisition of fixed However, it repaid the loan amount to the extent of 1329169 in FY010. The repayment

can be made from the impressive sales realization and amount raised by the way of unsecured

Funding for trucks, buses, tippers, light commercial vehicles and small commercial Products including funding for new vehicles, finance on used vehicles and top up on

vehicles.

existing loans.

The vehicle loan pattern is as follows: YEAR VEHICLE LOANS FROM ICICI & HDFC 2007-08 1054772 2008-09 585520 2009-10 491842 2010-11 1052380 2011-12 508713 The company took commercial vehicles loan from ICICI and HDFC to purchase the Cars and Two wheelers for its business purpose.

V h leL a sfro IC I a dH F e ic o n m IC n D C
150 0000 10 00000 50000 0 V ehicleloa ns 0 20 -07 06 2007 -08 2008 -09

200 -10 9

2010 -1 1

For FY07, the companys vehicle loans account had balance of 1054772. This loan has declined by 44% to 585520 in FY08, as the company repaid the amount, On the other hand, in FY010 the company raised an additional vehicle loan of 560538,

by raising funds other loan sources. Similarly it has paid the loan in FY09 also. representing a more than 100% increase from the year ago loan amount. They used this fund along with unsecured loan taken this year to buy the vehicles worth of 1543000. However, the company paid back 50% of loan amount in FY11, and the balance stood at 508713. UNSECURED LOANS: Banks and other financial institutions will not require any security to provide some shortterm loans & advances regarding the unsecured loans. There were no unsecured loans are recorded in the financial statements of the company till FY09-10. However, the company started pooling the funds from unsecured loan source from FY010. These funds may be used for working capital requirements, and to support the vehicle acquisition.

According to the information provided in the Balance sheet of RCFL the unsecured loans are as follows: YEAR 2007-08 2008-09 2009-10 2010-11 2011-12 UNSECURED LOANS 0 0 0 1832054 1298421

For FY010, the company raised the funds to the extent of 1832054, which was declined 29% to 1298421 in FY11. The company might have repaid the loan from inflow of cash from higher sales, as it witnessed sharp decline in cash account by 400000.

U s c re lo n neu d a s
1832054 1298421

0 2006 -07

0 2007 -08

0 2008 -09 U ecuredloa ns ns 2009-10 2010 -11

As shown in the above graph, unsecured loans were zero till FY09. But it raised in FY010 and has a decreasing trend from FY11. unsecured loans in its BalanceSheet. It has not provided complete details about

FUNDING MIX AND ITS IMPACT ON EARNINGS PER SHARE


Raj Classic Foods Limited has a funding mix with more of equity shares and fewer profits along with secured loans. Company issued only equity shares and did not rely on

preference shares and debentures. This type of capital structure is preferred when a companys business is risky and its earnings are highly unstable. Of course, it can raise additional capital through public deposits. All companies have to raise its basic capital by issue of equity shares. The main advantages of capital structure consisting of equity shares only are as follows: It is simple and understandable to all investors. All the necessary information about The directors of the company have greater discretion in declaration of dividends and management of business can be easily obtained. building up of reserve funds etc. This is because there are no fixed liabilities like dividend on preference shares and interest on debentures. The directors are free to deal with earnings as they like. Since there are no fixed charges, there is no danger to the existence of the company even in bad times. There is no possibility of the company being harassed by the creditors and debentures holders by resorting to low-courts to press payment for interest and principal. The credit standing of the company is enhanced, as it bears no burden of payment of fixed interest and dividends. The creditors are ready to lend money to companies having this type of capital structure. In the absence of debentures, there is no burden of fixed charges on the assets of the company. This helps company to raise debt capital in future by mortgaging its fixed assets, which it has done for taking secured loans. Some constraints are imposed on the management of the company when preference shares and debentures are issued. But when only equity shares are issued, management enjoys full freedom of decisions making. Long established companies can procure additional capital also through the issue of right shares. They need not make arrangement for underwriting, nor is much publicity needed for these equity shares. This reduces cost of raising capital. It is not compulsory for the company to return the equity shares during its existence.

It has certain disadvantages such as: Cost of financing is relatively more especially for the new or weak companies because they will have to bear additional costs in from of underwriting commission and brokerage, advertisement etc.

In weak companies, the interests of the existing shareholders are adversely affected if

additional capital is continuously obtained through the issue of equity shares only. The dividend rate and market prices of shares may decline if profit of the company does not increase in proportion to its equity capital. When the company issues additional equity shares, it has to grant to the existing shareholders a right to purchase them on a priority basis. Hence managerial control may get concentrated into a few hands. Of course, the existing shareholders will have to purchase majority of the additional equity shares to strengthen their control over the company. But if additional capital is raised through the issue of debentures, the can maintain their control without extra investment.

A-Earnings Per Share


The profitability of a firm from the point of view of ordinary shareholders can be measured in terms of earnings per share. It is calculated as follows: It is obvious that higher the EPS volatility, greater would be the risk attached to the company. EPS fluctuates with fluctuations is sales volume and the operating leverage. This effect may be heightened by the financial leverage. EPS = Net profit available to equity shareholders / number of ordinary shares outstanding Therefore the EPS of Raj classic foods limited can be seen in a table and graph considering interest charges of loan funds: YEAR 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 NET INCOME 1301230 662318 717254 934568 2165187 NO OF EQUITY SHARES 452330 452330 452330 452330 452330 EPS 2.876727 1.464236 1.585687 2.06612 4.786742

EarningsPer S hare

5 4 EPS 3 2 1 0 2006 -2007 2007 -2008 2008 -2009 2009 -2010 2010 -2011

RCFLs EPS was showing a growing trend except for FY08, as the company witnessed

good profits for the period of study. In the year 2007 the company earned huge profits, so the EPS of the company increased to 2.87 from 1.9 in last year. In the next year, EPS has decreased to 1.46, owing to lower profits and higher interest

charges, as the company raised more loan funds in this financial years. Ahter that, the company started reporting growth in EPS to 1.58 and 2.06 for FY09 and

FY010, rspectively. The growth was boosted by higher sales, despite of higher interest charges. The growth in sales offset the increase in interest charges due to increase in loan funds. However, for FY11, the company reported EPS of 4.78 on the back of impressive sales

realization and lower interest charges. Lower interest charges were the result of complete repayment SBH term loan during the year. Thus always composition of funds will have mpact on the companys earnings per share.

B-FINANCIAL LEVERAGE
Financial leverage is defined as the ability of a firm to use fixed financial charges to magnify the effects of changes in E.B.I.T/Operating profits, on the firms earnings per share. It helps in designing appropriae fundig sources to build a optimal capital structure.

One of the objectives of planning an appropriate capital structure is to maximise the return on equity shareholdersfunds or maximise the earnings per share. On one hand it increases earnings per share and on the other hand it increases financial risk. A high financial leverage means high fixed financial costs and high financial risk i.e., as the debt component in capital structure increases, the financial leverage increases and at the same time the financial risk also increases i.e., risk of insolvency increases. Financial leverage is calculated as follows: Degree of Financial leverage = E.B.I.T/E.B.T Calculation of EBIT & EBT: EBIT= PAT+TAX+INTEREST CHARGES EBT=PAT+TAX

YEAR-1 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

PAT-2 1301230 662318 717254 934568 2165187

TAX-3 966613 568517 852005 578392 1010182

EBT-4=2+3 2267843 1230835 1569259 1512960 3175369

INTEREST CHARGES-5 785082 873807 741481 967905 774689

EBIT-6=4+5 3052925 2104642 2310740 2480865 3950058

Therefore financial leverage equals to: YEAR 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 EBIT 3052925 2104642 2310740 2480865 3950058 EBT 2267843 1230835 1569259 1512960 3175369 F.L 1.35 1.71 1.47 1.64 1.24

D reeof F eg inancial L erag ev e


1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

F.L

There is a fluctuating trend in the financial leverage of RCFL in all-financial years of study, due to variable profits and interest payments. The F.L 1.35 indicates that for every one-rupee change in EBIT, there will be a 1.35 On positive side, for FY08 and FY09, the company had a F.L of 1.71 and 1.64 change in EBT for FY07. representing a favorable trend compared to FY07. But in FY10, it has come down to 1.24, as the company paid the term-loan. The company can gain good earnings for its shareholders by using the fixed cost funds like debentures and preference capital, only when it has increasing operating profits, because fixed charges remain fixed from one period to another. However, the company is raising the loan funds as and when it requires, consequently that led to pay higher interest payments, due to urgency for funds from banks. In addition, higher interest rates due to inflation, changing RBI guidelines will further deteriorate the fund rates. This adhoc policy of raising loans will eat away the benefits from maintaining the fixed cots funds, in maximizing the RCFL earnings to its shareholders, while the company is experiencing growing trend in the operating profit or EBIT. However, if the company is able to earn more than that of using fixed cost funds, it can proceed with the present adhoc policy. But now it has the business expansion plan on account of rising demand for the products, it may require funds for next 3 to 5 years. Therefore, it would be better to opt for fixed cost funds to maximize returns while sales/earnings are expected to augment. Funds Composition in capital structure for FY2006 and FY2010 through a table and pie diagram:

YEAR 2007-08 2011-12 For FY06-07:

CAPITAL 4523300 4523300

RESERVES & SURPLUS 3447728 5554980

SECURED LOANS 6844630 2633741

UNSECURED LOANS 0 1298421

FY 2006 - Fund sources UNSECURED -07


LOANS 0%

CAPITAL RESERVES & SURPLUS SECURED LOANS UNSECURED LOANS SECURED LOANS 46%

CAPITAL 31%

RESERVES & SURPLUS 23%

The above diagrams represents the capital composition of RCFL from each sources namely Equity capital, Reserves & Surplus, and Secured Loans for FY07. The Company had equity capital base of 31% (i.e. 4523300), while Reserves & Surplus accounts for 23% (i.e.3447728). Therefore, shareholders funds in total capital employed are equal to 54%, i.e. 7971028 (i.e. share capital + reserves & surplus), and while secured loans from various banks accounted for 46% (6844630). However, the unsecured loans were zero, as company has not borrowed anything from this source of finance.

For FY2011-2012 the funding mix is as follows:

FY2010 - Fund S -11 ources


UNSECURED LOANS 9% CAPITAL 32% CAPITAL RESERVES & SURPLUS SECURED LOANS RESERVES & SURPLUS 40% UNSECURED LOANS

SECURED LOANS 19%

In FY11, the company raised the funds in the form of unsecured loans, so there is new loan element in its capital composition. Similarly, the Company had equity capital base of 32% (i.e. 4523300), while Reserves & Surplus accounts for 40% (i.e. 5554980). Therefore, shareholders funds in total capital employed is equal to 72% showing the balance of 10078280, secured loans from various banks accounted for 19% representing 2633741, while unsecured loans represented 9% i.e. 1298421 of total funds composition. However, this composition may change for FY2012-2013, as the company started its expansion plan which requires additional funds. The company may opt for more debt finance to support its expansion plan rather equity in coming years, as debt composition is very less in the present period of study.

INTERPRETATION

SHAREHOLDERS FUNDS

1. Equity share capital Raj Classic Foods Limited used two basic types of sources to meet its long term and short term financial requirements. They are in the form of Shareholders funds and Loan funds. Shareholders funds consist of Equity share capital and Reserves and Surplus. The company has issued and Subscribed Capital of Rs.4523300 i.e., 452330 shares worth Rs. 10 each fully paid. RCFL has never issued Preference shares and debentures for acquiring share capital from its establishment. 2. Reserves & Surplus: Reserves and Surplus consists of Investment subsidy and Profit and loss Account. Here P&L A/C used as an internal source of funds. Investment Subsidy is a low interest loan given by the government at the time of starting a production unit, particularly for the entrepreneurs in the SME (Small and Medium Enterprises) sector. Investment subsidy account has the balance of Rs. 1390680, which is remain equal for all the five years of period of study. Profit & Loss account as an internal source of finance had a balance of 11807 in FY07. This low profit transferred to balance sheet is because of higher tax provision and huge payment of interim dividend, which led to 74% decline in the profits from FY06. Otherwise, the funds would have been used for business purpose. However, after the fluctuations in profits for the next three financial years, FY11 net profit increased many folds to 1113480 following impressive sales growth, lower administration and selling expenses and lower interest chargers.

LOAN FUNDS

1. Secured Loans: RCFL raised loan funds in the form of Secured Loans and Unsecured Loans sources only. Secured loans are in the form of Cash Credits & Bills from SBH, SBH Term Loans, Loans from ICICI, and Loans from HDFC.

Cash Credits and Bills from SBH: For FY07, the companys Cash Credits and Bills from SBH account balance stood at 4211705. In FY08, RCFL further increased the loan by 28.6% to $5417838 to buy plant & machinery. On positive side, in FY09, the company repaid 1807925 and continued the repayment of credit in next financial years also. However, the balance by the end of FY11 stood at 2125028. Term Loans from SBH: The companys another source of debt fund is Term loan from SBH, was 1578153 Again in FY08, the company took an additional term- loan to support in funding the acquisition of plant & machinery. However, the loan balance by the end of the financial year is 1760019. However, it repaid the loan amount to the extent of 1329169 in FY010, from the impressive sales realization and amount raised by the way of unsecured loans. Consequently, the by the end of FY11, the company repaid whole amount. Vehicle Loans The company took commercial vehicles loan from ICICI and HDFC to purchase the Cars and Two wheelers for its business purpose. For FY07, the companys vehicle loans account had balance of 1054772. This loan has declined by 44% to 585520 in FY08, as the company repaid the amount, by raising funds from other loan sources. On the other hand, the company raised an additional vehicle loan of 560538 in FY010, representing a more than 100% increase from the year ago loan amount. They used this fund along with unsecured loan taken in this year to buy the vehicles worth of 1543000. However, the company paid back 50% of loan amount in FY11. 2. Unsecured loans: There were no funds in the form of unsecured loans till FY09-10. However, the company started pooling the funds from unsecured loan source from FY010. These funds may be used for working capital requirements, and to support the vehicle acquisition. For FY010, the company raised the funds to the extent of 1832054, which was declined 29% to 1298421 in FY11. The company might have repaid the loan from inflow of cash inflows from higher sales, as it witnessed sharp decline in cash account by 400000. Financial Leverage as a technique in measuring the funding mix impact on EPS:

The F.L 1.35 in FY07 indicates that for every one-rupee change in EBIT, there will be a 1.35 change in EBT. On positive side, for FY08 and FY09, the company had a F.L of 1.71 and 1.64 representing a favorable trend compared to FY07. But in FY11, it has come down to 1.24, as the company repaid the term-loan. The company can gain good earnings for its shareholders by using the fixed cost funds like debentures and preference capital, when it has increasing operating profits, because fixed charges remain fixed from one period to another. Although, the companys operating profits were increasing, absence of fixed cost funds couldnt gain much to equity shareholders. The composition of sources of funds through which the company pooled the funds is as follows. For FY07, the Company had equity capital base of 31% i.e. 4523300, while Reserves & Surplus accounts for 23% (i.e.3447728) in total shareholders funds. Therefore, shareholders funds in total capital employed are equal to 54%, i.e. 7971028 (i.e. share capital + reserves & surplus), and while secured loans from various banks accounted for 46% (6844630). However, the unsecured loans were zero, as company has not borrowed anything from this source of finance. For FY11, the company raised the funds in the form of unsecured loans, so there is new loan element in its capital composition. Similarly, the Company had equity capital base of 32% (i.e. 4523300), while Reserves & Surplus accounts for 40% (i.e. 5554980). Secured loans from various banks accounted for 19% representing 2633741, while unsecured loans represented 9% i.e. 1298421 of total funds composition. The company may opt for more debt finance to support its expansion plan rather equity in coming years, as debt composition is very less in the present course of study.

CHAPTER-V

FINDINGS, SUGGESTIONS, AND CONCLUSIONS

FINDINGS
R.C.F.L procured all the funds needed for its long-term and short-term capital needs in the form of equity share capital, secured loans and unsecured loans. At the end of FY11, the company held 4523300 in the form of equity share capital. The company did not raise funds through preference share capital from its initiation. The another source of finance, rather internal source of funds, Reserves & Surplus and P&L account had a balance of 5554980 for FY11. Although, the investment subsidy is showing constant balance for the period of study, impressive sales growth added huge profits, which can be used for business expansion. Being a public limited company, R.C.F.L neither issued debentures nor accepted any public deposits, as a part of its debt capital in its capital formation. However, R.C.F.Ls secured loans are secured by way of hypothecation of fixed assets as well as current assets of the company including personal guarantee of Directors. The company mobilized the funds through secured loans, which are in the form of Cash Credit and Bills from SBH, Term-loans, and Vehicle Loans. Cash Credit and Bills from SBH account has balance of 2125028 in FY10. On positive side, RCFL repaid the whole Term-Loan, while Vehicle loans stood at 508713, after repaying a considerable amount during FY10. There were no funds in the form of unsecured loans till FY08-09. During, FY09 RCFL raised the funds to the extent of 1832054. This loan proceeds may be used for the acquisition of fixed assets. However, after repaying around 540000, unsecured balance was 1298421. For FY11, the companys Earnings Per Share was 4.78 on account of impressive sales realization and lower interest charges. Lower interest charges were the result of complete repayment SBH term loan during the year. Thus always composition of different sources funds will have impact on the companys earnings per share.

FY11, Financial leverage stood at 1.24 which depicts that every one rupee change in EBIT will bring 1.24 changes in EBT. This moderate FL was down from 1.64 in last year, representing an unfavorable sign. Higher the risk, higher will be the reward; therefore decline in FL downgraded the companys efficacy in financial management. The company could not enjoy synergy of using fixed cost funds like debentures and preference capital while operating profits were growing. Because fixed charges are remain fixed from one period to another, irrespective of profit earned, so that extra profit would have been enjoyed by shareholders. The same is represented in financial leverage analysis, where EBIT/operating profit was increasing but interest charges were fluctuating. For FY11, the Companys equity capital base, Reserves & Surplus, Secured loans and unsecured loans accounted for 32%, 40%, 19% and 9% out of total sources used in raising funds. The company may opt for more debt finance to support its expansion plan rather equity in coming years, as debt composition is very less in the present course of study. Finally firms financial position in terms of its earnings and managing the funds is found satisfactory.

SUGGESTIONS

If the company is willing to raise debt capital in future, it would be better to take a fixed cost bearing funds from financial institutions, banks or it can issue debentures. Particularly, having cost of capital at fixed rate, when the companys profits are improving will maximize the shareholders wealth. The company has to control its manufacturing, administration and selling costs and it should minimize its wastages in manufacturing process. Along with that, the company can adopt new technology in manufacturing process and various marketing strategies in promoting the production in to sales. The companys products are marketed only for selected places like Delhi Chennai, Bombay and Bangalore. They are not very much promoted in A.P and some other States. Company can take initiative steps to launch its existing and new products in new markets. As the products rates are reasonable, in a short period it can reach the consumer base. Instead of depending on the private transport agents to get the raw material and sending finished goods, company can buy its own carriage vehicles. The company is almost ordering the material once in 10days or a week, and need to deliver to customers. Therefore, using own carrier will be a cost advantage and the products will reach the customers on right time. Most of the companys products were in reach of middle income and lower income segment. It is not yet targeted rich segment, so it can make an attempt to produce high range products with more nutritious contents, can compete with global brands.

CONCLUSIONS

A brief introduction about the concept SOURCES OF FUNDS, as it is a life blood of any organization is written. Objectives of the study, Significance, Scope of study and the limitations on fulfillment of project work were mentioned in first chapter. In addition, data collection sources and tools used such as Financial Leverage in testing the impact of fixed cost funds in earnings per share were discussed. Various sources opened to get the required funds in this ever-changing economic environment were studied. Along with the traditional methods for the infusion of funds like equity, & preference capital, term loans and debentures, new innovative sources like venture capital, seed financing, external commercial borrowings, and Euro issues were also discussed. The third chapter contains the companys profile. Company profile consists of history of company, its objectives, nature of business and its products; Machinery used in making chocolates, structure of organization, present scenario, and key initiatives under taken in enhancing its wings and its future plans also revealed. Complete analysis and interpretation of the study that is sources of funds of R.C.F.L. Analysis part contains different sources used by the company in pooling required funds, and clear-cut changes in all the sources year-over-year along with the changes in fixed assets were studied. Mainly, company used shareholders funds and loan funds used in obtaining the funds. In fifth chapter, the results of the study were made. Complete analysis is written in ten points under the heading Findings. I have given some suggestions to improve its capital base, profitability, and sales position. Finally, I made conclusion regarding of my contents in every chapter of project work.

BIBILIOGRAPHY

1. MANAGEMENT ACCOUNTING
R.K. SHARMA & SHASHI K.GUPTA

2. FINANCIAL MANAGEMENT
R.P. RUSTAGI

3. FINANCIAL MANAGEMENT
G.SUDARSHAN REDDY

4. FINANCIAL MANAGEMENT
I.M PANDEY

5. FINANCIAL ACCOUNTING
S.P. JAIN & K.L.NARANG 6. FINANCIAL MANAGEMENT ICAI PUBLISHED 7. FINANCIAL MANAGEMNT S.N MAHESHWARI SOME PREVIOUS PROJECT RECORDS
www.investopedia.com www.ssrn.com www.investorwords.com

ANNEXURE:

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