A STUDY ON CAPITAL STRUCTURE WITH SPECIAL REFERENCE TO ID NEEDS IN CHENNAI

PROJECT REPORT Submitted by

MOHANRAJ.M Register No: 088001614047

in partial fulfillment for the award of the degree Of

MASTER OF BUSINESS ADMINISTRATION

In

DEPARTMENT OF MANAGEMENT STUDIES

SSM COLLEGE OF ENGINEERING

KOMARAPALAYAM-638183

MAY 2010

SSM COLLEGE OF ENGINEERING

KOMARAPALAYAM-638183 Department of Management studies
PROJECT WORK MAY 2010

This is to certify that the project entitled A STUDY ON CAPITAL STRUCTURE WITH SPECIAL REFERENCE TO ID NEEDS IN CHENNAI is the bonafide record of project work done by MOHANRAJ.M Register No: 088001614047 of MBA (DEPARTMENT OF MANAGEMENT STUDIES) during the year 2009-2010.
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Project Guide

Head of the Department

Submitted for the Project Viva-Voce examination held on__________

------------------------------------------Internal Examiner External Examiner

DECLARATION I affirm that the project work title A STUDY ON CAPITAL STRUCTURE WITH SPECIAL REFERENCE TO ID NEEDS IN CHENNAI being submitted in partial fulfillment for the award of MASTER OF BUSINESS ADMINISTRATION is the original work carried out by me. It has not formed the part of any other project work submitted for award of any degree or diploma, either in this or any other University.

MOHANRAJ.M 088001614047

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

Miss.K.Kalaivani, MBA Lecturer, Department of MBA, SSM College of Engineering.

ACKNOWLEDGEMENT With great pleasure, I am presenting this project entitled A Study on Capital Structure with Special Reference to Id Needs in Chennai. A project of this dimension would not have been possible without the sincere help and earnest support provided to me from all sources that was approached. I feel great pleasure to thank our beloved CAVALIER Dr.M.S.MATHIVANAN, M.A, M.Com, M.Phil, F.T.A., HGDM (Lon), AIBM, PhD, Chairman and Correspondent S.S.M. College of Engineering, Komarapalayam, for the encouragement he rendered me in doing the project well. Words are insufficient when we endeavor to express our heartfelt thankfulness to Dr.SUBRAMANIAN Ph.D., Principal, who provides us all facilities during the course of study. I express a deep sense of gratitude and hearty thanks to Mr. P.KRISHNA KUMAR, B.E., MBA, MCSD, M.Phil., Ph.D Director of MBA Department, and Mrs. J. Esther Gnanapoo, MBA, M.Phil, Ph.D, Head of Department of MBA, SSM College of Engineering, Komarapalayam for making all necessary arrangements for the successful completion of this project. The project has been made possible by the greatest efforts and dedicated support extended to me by my guide Miss. K. Kalaivani, MBA, Department of MBA, SSM College of Engineering. I extend my sincere thanks to Mr.E.C.Ramesh, General Manager, Id needs, for providing the opportunity to do this project. I also thank to Mr.V.Kalaiarasu, Assistant manager for his guidance in the company to collect the information needed for the work. Above all, I thank, God Almighty for his entire blessing

CONTENTS

Description List of Tables List of Charts Executive Summary 1. Introduction 1.1 About the study 1.2 About the Industry 1.3 About the company 2. Main theme of the project 2.1 Objectives of the study 2.2 Need/Scope of the study 2.3 Research Methodology 2.4 Limitations of the study 2.5 Review of Literature 3. Analysis & Interpretation 4. Findings, Recommendations and Conclusion 4.1 Findings 4.2 Recommendations 4.3 Conclusion Bibliography

Page No. i ii iii 1 14 16 18 19 20 21 22 24 54 56 57 58

LIST OF TABLES

TABLE NO 3.1.1 3.1.2 3.1.3 3.1.4 3.1.5 3.1.6 3.1.7 3.1.8 3.1.9 3.2.1 3.2.2 3.3.1 3.3.2 3.3.3 3.4.1 3.4.2

LIST OF TABLE Table showing current ratio Table showing liquid ratio Table showing inventory turnover ratio Table showing debtors turnover ratio Table showing debt equity ratio Table showing fixed assets turnover ratio Table showing working capital turnover ratio Table showing gross profit ratio Table showing net profit ratio Table showing cost of equity capital Table showing cost of debt capital Table showing operating leverage Table showing financial leverage Table showing combined leverage Table showing cost of equity and earnings per share Table showing cost of debt and earnings per share

PAGE NO 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 53

LIST OF CHARTS

TABLE NO 3.1.1 3.1.2 3.1.3 3.1.4 3.1.5 3.1.6

LIST OF CHARTS Chart showing current ratio Chart showing liquid ratio Chart showing inventory turnover ratio Chart showing debtors turnover ratio Chart showing debt equity ratio Chart showing fixed assets turnover ratio

PAGE NO 25 27 29 31 33 35

3.1.7 3.1.8 3.1.9 3.2.1 3.2.2 3.3.1 3.3.2 3.3.3

Chart showing working capital turnover ratio Chart showing gross profit ratio Chart showing net profit ratio Chart showing cost of equity capital Chart showing cost of debt capital Chart showing operating leverage Chart showing financial leverage Chart showing combined leverage

37 39 41 43 45 47 49 51

EXECUTIVE SUMMARY The project work entitled A STUDY ON CAPITAL STRUCTURE WITH SPECIAL REFERENCE TO ID NEEDS IN CHENNAI This study highlights the concepts of capital structure, its components and the trend n the capital structure based on past five years data. This study also points out the problem faced by the company in maintaining a proper capital structure level. This study also helps the company to analyze the financial strength and weakness and to take proper corrective measures. First chapter includes the introduction to the study of working and its significance in the introduction to capital structure. The company profile explains the various features of the company like its present status in the market, the history and product details.

The second chapter includes objectives, need/scope, limitations, research methodology and review of literature. The study is conducted for some specific purpose termed as objectives. This chapter contains the scope and limitations of the study. The research methodology part contains the research design and the tools used for analysis. The research is of analytical type with the secondary data as data type. The third chapter includes Analysis & interpretation part is done with the help of tools like Ratio analysis, cost of capital, leverage and correlation. From the statement of capital structure, it is found that capital structure shows an increasing trend. It is clear from the statement that in the year 2009, there is a good hike in capital structure. It is suggested that the company has outsiders fund to reduce risk. The owners fund also needed to finance fixed asset. So, the owners or shareholders of the company has to concentrate in their investment and have to increase their capital. It is suggested that the company should short term financial position of the company has not been satisfied in the existing level. So, the company has to take necessary steps to improve their financial position. In the year 2008-09 the companys equity and debt both are equal. So, the company has to increase their equity capital and reduce their debt to improve the overall performance of the company. It can be concluded capital structure of the company was satisfactory and debt of the company must be reduced for improving the company. The company must maintain good liquidity position to improve their profit. So that the company should concentrate in deviated areas in the future.

CHAPTER - I INTRODUCTION 1.1 ABOUT THE STUDY a. Introduction Capital structure refers to mix of long term sources of funds, such as debentures, long term debt, preference shares capital and equity share capital including reserves and surpluses some companies do not plan their capital structure, and it develops as a result of the financial decisions taken by the financial manager without any formal planning. These companies may prosper in the short run, but ultimately they may face considerable difficulties in raising funds to finance their activities with unplanned capital structure, these companies may also fail to economies the use of their funds.

Consequently, it is being increasingly realized that a company should plan its capital structure to maximize the use of the funds and to be able to adapt more easily to the changing conditions. b. Meaning Capital represents the proportionate relationship between debt and equity refers to permanent financing of the firm. Capital structure influence the shareholders return and risk. Whenever funds have to be raised to finance investment, a capital structure decision is involved. The financing decision may affect the companies debt-equity ruin, which has implications for the shareholders earnings and risk, which in turn will affect market value of the firm. It the value of the firm can be capital structure which maximizes the market value of the firm.

c. Definition According to Geri Stenberg Capital structure of a company refers to the composition of make up of its capitalization and it includes all long Term capital resources viz..,loans, reserves ,shares and bonds. d. Importance of capital structure The term capital structure refers to the relationship between the various long-form of financing such as debentures, preference share capital and equity share capital. Financing the firms assets is very crucial problem in every business and as a general rule there should be a proper mix of debt and equity capital in financing firms assets. The use of long term fixed interest bearing debt and preference share capital along Financial Leverage or Trading on Equity. with equity share is called

The long term fixed interest bearing debt is employed by a firm to earn more from the use of these sources than their cost so as to increase the return on owners equity. It is true that capital stricture can not affect the total earning of a firm, but it can affect the share of earnings available or equity share holds. e. Features of Capital Structure @ Return The Capital structure of a company should be most advantages. Subject to other considerations it should generate maximum returns to the share holds without adding additional lost to them. @ Risk The use of excessive debt threatens the solvency of he company. To the point debt does not add significant rise it should be used, otherwise its use should be avoided. @ Flexibility The capital structure should be flexible. It should be possible for a company to adapt its capital structure with a minimum cost and delay it warranted by a changed situation. It should also be possible for the company to provide funds whenever needed to finance its profitable actives. @Capacity The capital structure should be determined wit h in the debt capacity of the company, and this capacity should not be exceeded. The debt capacity of a company depends on its ability to generate future cash flows. It should have enough cash to pay creditors fixed changes and principal sum. @ Control

The capital structure should involve minimum risk of loss of control of the company. The owners of closely held companies particularly concerned about dilution of control. f. Factors influencing capital structure The current and future cost of each potential source of capital should be estimated and compared. A company can borrow only if investors are willing to lend. Few companies can afford the luxury of the capital structure which is unacceptable to financial institutions. Many companies put their securities for quotation on the stock exchange quotations and improve the transferability of shares. A firm generally maintains a balance to ensure future flexibility in the capital structure. The availability of funds in the money market affects a firms ability to offer debt and equity securities. Although each management makes its own decisions on its capital sources, there are certain general factors which seem to influence the overall capital structure. The overall level of business activity is rising a firm would want to expand its operations. Profits of the owners can be increased by relying more and more on debt financing. Ordinarily, debt securities increase risk, while equity securities reduce it. Risk can be measured to some extant by

the use of ratio, measuring gearing up and times interest earned. The following are the tools analysis the capital structure of the company.., 1. Ratio analysis 2. Cost of capital 3. Leverages 4. Correlation 1. RATIO ANALYSIS a. Meaning of Ratio Analysis A ratio is simple arithmetical expression of the relationship of one number with another. It may be defined as the indicated of two mathematical expressions.

b. Definition According to kell and Bedfore, A ratio is an expression of the quantitative relationship between two numbers c. Nature of Ratio Ratio analysis is a technique of analysis and interpretation of financial statement. It is the process of establishing and interpreting various ratios for helping in means of better understanding of financial strengths and weaknesses of a firm. The following Four steps are involved in the Ratio analysis

Selection of relevant data from the financial statements depending upon the objectives of the analysis.

Calculation of appropriate ratio from the data. Comparison of the calculated ratio with the ratio of the same firm in the past or the ratios developed from projected financial statements.

Interpretation of the ratios.

d. Significance of Ratio Analysis 1. Helps in Decision-making Financial statements are prepared primarily for decision-making. But the information provided in financial statements is not an end in it self and meaning the conclusion can be drawn from these statements alone. Ratio analysis helps in making decision from the information provided in these financial statements.

2. Helps in Financial forecasting and planning Ratio analysis of much help in financial forecasting and planning. Planning is looking a head and the ratios calculated for a years. Work as a guide for the future. 3. Helps in Communicating The financial strength and weakness of a firm are communicated in a more easy and understandable manner by the use of ratios. The information in the financial statements in conveyed in a meaningful manner to the one for whom it is meant.

4. Helps in co-ordination Ratio analysis even helps in making effective control of the business standard ratio can be found by comparing the actual with the standards as to take a corrective action at the right time. 5. Helps in control Ratio analysis even helps in making effective control of the business. The weakness or otherwise, if any come to the knowledge of the management which helps in effective control of the business. 6. Other Uses There are so many other uses of the ratio analysis. It is an essential part of the budgetary control and standard costing ratios are of immense importance in the analysis and interpretation of financial statements us they bring the strength or weakness of a firm.

e. Limitations of Ratio Analysis 1. Lack of Adequate Standards There are no well accepted standards or rules of thumb for all ratios which can be accepted as norms. It renders interpretations of the ratios difficult. 2. Inherent limitations of accounting Like financial statements, ratio also suffers from the inherent weakness of accounting records such as their historical nature. Ratios of the past are not necessarily true indicators of the future.

3. Personal Bias Ratio is only means of financial analysis and not an end in itself. Ratios have to be interpreted and different people may interpret the same ratio in different way. 4. Price Level Changes No consideration is made to the changes in price and this makes the interpretation of ratios invalid. 5. Absolute Figure Decorative Ratios devoid of absolute figures may prove distortive as ratio analysis is primarily a quantitative analysis and not a qualitative analysis. 6. Ratio No Substitutes Ratio analysis is merely a tool of financial statements. Hence ratios become useless if separated from the statements from which they are computed.

7. Incomparable Not only industries differ in their nature, but also the firms of the similar business widely differ in their size and accounting procedures etc.., It makes comparisons are made difficult due to differences in definitions of various financial terms used in the ratio analysis. 2. COST OF CAPITAL a. Meaning The Cost of Capital of a firm is the minimum rate of return expected by its investors. It is the weighted average cost of various sources of finance

used by a firm. The Capital used by a firm may be in the form of debt, preference capital, retained earnings and equity shares. b. Definition Hampton, John.J. Defines Cost of Capital as the rate of return the firm requires from investment in order to increase the value of the firm in the market place. c. Concept of Cost of Capital # Cost of Capital is not a cost as such. Infact, it is the rate of return that a firm requires to earn from its project. # It is the minimum rate if return. Cost of Capital of a firm is that minimum rate of return which will at least maintain the market value of the shares.

# It comprises Three components * The expected normal rate of return at zero risk level. * The premium for business risk. * The premium for financial risk on account of pattern of capital structure. d. Significance of Cost of Capital 1. As an Acceptance Criterion in Capital Budgeting

Capital budgeting decisions can be made by considering the cost of capital. According to the present value method of capital budgeting, if the present value of expected returns from investment is greater than or equal to the cost of investment. The project may be accepted. Otherwise, the project will be rejected. 2. As a Determinant of Capital Mix in Capital Structure Decisions Financing the firms assets is a very crucial problem in every business and as a general rule there should be a proper mix of debt and equity capital in financial a firms assets. While designing an optimal capital structure, the management has to keep in mind the objective of maximizing the value of the firm and minimizing the cost of capital. 3. As a Basis For Evaluating the Financing Performance The concept of cost of capital can be used to evaluate the financial performance of top management. The actual profitability of the project is compared to the projected overall cost of capital and the actual cost of capital of funds raised to finance the project. If the actual profitability of the project is more than the projected and the actual coat of capital, the performance may be said to be satisfactory.

4. As Basis For Taking other Financial Decisions The cost of capital is also used in making other financial decisions such as dividend policy, Capitalisation of profits, making the rights issue and working capital. e. Determination of Cost of Capital 1. Conceptual Controversies Regarding Relationship between the Cost of Capital and the Capital Structure

Cost of capital and the capital structure have a direct relationship with the method and level of financing. The firm can minimize the weighted average cost of capital and increase the value of the firm by using debt financing. 2. Historic Cost and Future Cost Historic costs are book costs which are related to the past and are irrelevant in the decision making process. In their opinion, future estimated costs are more relevant for decision making. 3. Problems in Computation of Cost of Equity The Computation of cost of equity capital depends upon the expected rate of return by its investors. But the quantification of the expectations of equity shareholders is a very difficult task because there are many factors which influence their valuation about a firm. 4. Problems in Computation of Cost of Retained Earnings Different shareholders may have different opportunities for investing their dividends. It becomes very difficult to compute the cost of retained earnings.

5. Problems in Assigning Weights For determining the weighted average cost of capital. Weights have to be assigned to the specific cost of individual sources of finance. The choice of using the book value of the source or the market value of the source posses another problem in the determination of cost of capital. 3. LEVERAGE a. Meaning

In financial management, the term Leverage is used to describe the firms ability to use fixed cost assets or funds to increase the return to its owners that is Equity shareholders. b. Definition James Horne has defined Leverage as the employment of an asset or sources of funds for which the firm has to pay a fixed cost or fixed return. c. Types of Leverage Leverage are classified into three types Financial Leverage Operating Leverage Combined leverage # Financial Leverage Financing the firms assets is a very crucial problem in every business and as a general rule there should be proper mix a debt and equity capital. The use of long-term fixed interest bearing debt and preference share capital along with equity share capital is called Financial Leverage. # Operating Leverage Operating leverage results from the presence of fixed costs that help in managing net operations income fluctuations flowing from small variations in revenue. The changes in sales are related changes with the changes in sales any increase in sales, fixed costs remaining the same, will magnify the operating revenue the operating leverage occurs when a firm has fixed costs which must be recovered irrespective of sales volume. The fixed cost remains same the

percentage change in operating revenue will be more than the percentage change in sales. The occurrence is known as operating leverage. # Combined Leverage Both financial and operating leverage magnify the revenue of the firm. Operating leverage affect the income which is the results of production on the other hand, the financial leverage is the result of financial decisions. The composite leverage focuses attention on the entire income of the concern. The risk factors should be properly assessed by the management before using the composite leverage. 4. CORRELATION Meaning Several sets of (x, y) points, with the correlation coefficient of x and y for each set. Note that the correlation reflects the noisiness and direction of a linear relationship (top row), but not the slope of that relationship (middle), nor many aspects of nonlinear relationships (bottom). N.B.: the figure in the center has a slope of 0 but in that case the correlation coefficient is undefined because the variance of Y is zero.

Formula:

Correlation (r) =

In statistics, correlation (often measured as a correlation coefficient, ) indicates the strength and direction of a linear relationship between two random variables. That is in contrast with the usage of the term in colloquial speech, which denotes any relationship, not necessarily linear. In general

statistical usage, correlation refers to the departure of two random variables from independence. In this broad sense there are several coefficients, measuring the degree of correlation, adapted to the nature of the data. Techniques in Determining Correlation There are several different correlation techniques. The Survey System's optional Statistics Module includes the most common type, called the Pearson or product-moment correlation. The module also includes a variation on this type called partial correlation. The latter is useful when you want to look at the relationship between two variables while removing the effect of one or two other variables. Like all statistical techniques, correlation is only appropriate for certain kinds of data. Correlation works for quantifiable data in which numbers are meaningful, usually quantities of some sort. It cannot be used for purely categorical data, such as gender, brands purchased, or favorite color. CORRELATION COEFFICIENT The main result of a correlation is called the correlation coefficient (or "r"). It ranges from -1.0 to +1.0. The closer r is to +1 or -1, the more closely the two variables are related.

If r is close to 0, it means there is no relationship between the variables. If r is positive, it means that as one variable gets larger the other gets larger. If r is negative it means that as one gets larger, the other gets smaller (often called an "inverse" correlation). While correlation coefficients are normally reported as r = (a value between -1 and +1), squaring them makes then easier to understand. The square of the coefficient (or r square) is equal to the percent of the variation in one variable that is related to the variation in the other. After squaring r, ignore

the decimal point. An r of .5 means 25% of the variation is related (.5 squared =.25). An r value of .7 means 49% of the variance is related (.7 squared = .49). A correlation report can also show a second result of each test statistical significance. In this case, the significance level will tell you how likely it is that the correlations reported may be due to chance in the form of random sampling error. If you are working with small sample sizes, choose a report format that includes the significance level. This format also reports the sample size. A key thing to remember when working with correlations is never to assume a correlation means that a change in one variable causes a change in another. Sales of personal computers and athletic shoes have both risen strongly in the last several years and there is a high correlation between them, but you cannot assume that buying computers causes people to buy athletic shoes (or vice versa).

1.2 ABOUT THE INDUSTRY: MANUFACTURING INDUSTRY: Manufacturing industry refers to those industries which involve in the manufacturing and processing of items and indulge in either creation of new commodities or in value addition. The manufacturing industry accounts for a significant share of the industrial sector in developed countries. The final products can either serves as a finished good for sale to customers or as intermediate goods used in the production process.

EVOLUTION OF THE MANUFACTURING INDUSTRY: Manufacturing industries came into being with the occurrence of technological and socio-economic transformations in the Western countries in the 18th-19th century. This was widely known as industrial revolution. It began in Britain and replaced the labor intensive textile production with mechanization and use of fuels. WORKING OF MANUFACTURING INDUSTRY: Manufacturing industries are the chief wealth producing sectors of an economy. These industries use various technologies and methods widely known as manufacturing process management. Manufacturing industries are broadly categorized into engineering industries, construction industries, electronics industries, chemical industries, energy industries, textile industries, food and beverage industries, metalworking industries, plastic industries, transport and telecommunication industries. Manufacturing industries are important for an economy as they employ a huge share of the labor force and produce materials required by sectors of strategic importance such as national infrastructure and defense. However, not all manufacturing industries are beneficial to the nation as some of them generate negative externalities with huge social costs. The cost of letting such industries flourish may even exceed the benefits generated by them.

PLASTIC MANUFACTURING INDUSTRY Plastic manufacturing industry ranks 3rd among all other manufacturing industries in the United States of America. Employment opportunities, real earnings, shipments etc have grown in the last 25 years of the plastic manufacturing industry. The period between 1980 through 2005, witnessed an increase in the plastic productivity by 2.1%. Growth rate was at par with the growth manifested by other manufacturing sectors.

FACTS ABOUT PLASTIC MANUFACTURING INDUSTRY:

Plastic manufacturing industry in United States of America provided employment to as many as 1.1 million people.

Shipments in the plastic manufacturing industry in America, accounted for USD$341 million. The above statistical date related to plastic manufacturing industry was observed as in 2005.

Rate of growth of employment in the plastic manufacturing industry grew at 1.1% every year between 1980 through 2005.

The same period (from 1980 through 2005), witnessed the plastic industry contribution to the real earnings of 118% which ranged from USD$48 billion - USD$106 billion.

1980 to 2005 also witnessed the growth of plastic manufacturing industry in terms of real earnings earned from shipments ranging between USD$106 billion-USD$236 billion. Plastic is inseparable as it is needed in every step of our lives. Plastic

has contributed towards improving our lifestyles. Plastic manufacturing industry plays a vital role in the improvement of the economy of USA. United States of America has the maximum consumption of plastics in the world. America is also the largest manufacturer of plastic in the world. As many as 1.4 million workers were on the direct rolls of the plastic manufacturing industry in the year 1996. The rate at which the plastic industry has been growing over the two decades is commendable accounting for a growth of 3% every year. Since 1974, shipments in the plastic manufacturing industry saw a rise by a yearly growth accounting for 4.1%. Shipments in the plastic industry witnessed a rise accounting for a total $366.4 billion in the year 1996. 1.3 ABOUT THE COMPANY

COMPANY PROFILE A ID needs enables businesses to gain real-time visibility, control and information through the effective evaluation, implementation, integration and support of Automatic Identification & Data Capture (AIDC) technologies, RFID, Smart Cards and Point of Sale (POS) solutions. Our knowledge of products, technologies, implementation skills and understanding of the market place make us a dominant player in the domestic markets, and help us share exclusive relationships with many of the leading vendors in the world. We keep ourselves abreast with the latest advances of our partners for the benefit of our customers. Our total solution approach offers customers confidence in investing and initiating innovative business processes for prompt, accurate and secure data capture and mobile computing needs. Our ID card printers include: ID systems, ID badge systems, ID card systems, plastic card printers, plastic business card printers, ID card printers, school ID card printers, card printers, Eltron card printers, Fargo card printers, and gift card printers. Get an ID card printer or ID card system quote.ID card printer supplies include: Eltron color ribbon, Eltron i-series ribbons, Fargo printer ribbon, Fargo hologram print ribbon, ID card design software, Eltron print heads and Fargo print heads.

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CHAPTER - II MAIN THEME OF THE PROJECT

2.1 OBJECTIVES OF THE STUDY PRIMARY OBJECTIVES:

A study on capital structure with special reference to Id needs in Chennai.

SECONDARY OBJECTIVES: To study the composition and trends of share capital of the company.., To know the general function of the company. To study the capital structure and the overall cost of capital. To find out the efficiency in usage of capital during the period of study. To find out the factors which are influencing the capital structure.

2.2 NEED/ SCOPE OF THE STUDY The modern business world is based on money. The rapid growth of transaction of money requires a heavy volume of investment to improve the present economy.

The study is conducted to ensure the proper mix of capital structure and financial position of company.., for the period from 2004-2005 to 20082009. And various financial tools were used to interpret the data such as ratio analysis, cost of capital, and Leverages.

2.3 RESEARCH METHODOLOGY Research methodology is a way to systematically solve the research problem. It may be understood as a science. It has many dimensions and research methods to constitute a part of the research methodology. a. Data Collection

To collect the required information both primary and secondary data has been used. b. Primary Data Primary data are the data collected for the first time and a fresh. Primary data was collected from the secretary to accounts manager and other officials by means of personal interviews. c. Secondary Data Those which have been already collected by some one else and which have been presented through the statistical process. The secondary data was collected from annual reports and unpublished internal records. d. Tools Applied The major tools used for the analysis are Ratio analysis Cost of capital Leverages Correlation

2.4 LIMITATIONS OF THE STUDY The time period of the study is to only 6 weeks. The data are approximated where ever necessary. Ratio analysis, which is calculated on the basis of financial statement, so it is not enough to draw accurate conclusion.

 The limitations of the techniques used namely, Ratio analysis, cost of capital and Leverages to analyze and interpret the data are applicable to the study. The data is taken on the basis of only 5 years .It is only 5 years financial information, so it limited up to the velocity of company..,

2.5 REVIEW OF LITERATURE Michael hemlers says that capital structure seek to Recycle the equity growth in our portfolio through refinancing to reduce cash investments and improve the equity returns.

 Actively manage our portfolio of mortgage debt in a continual effort to reduce our borrowing costs and extend maturities. Complement the diversity of our portfolio by minimizing risk through the use of non-recourse, on-cross collateralized mortgage. Use tax advantaged financing to reduce the over all cost of debt.

Xueqing zhang says that capital structure refer to There are many methods for the firm to raise its required bonds. But the most basic and important instruments are stocks or bonds. The firms mix of different securities is known as its capital structure. Financing instruments are assumed to take only two forms that is Stocks and Bonds. The value of the firm is defined as V=B+S Where B = Market value of the firms debt S = Market value of the firms equity

Anjan v.Thakor According to him capital structure that links risk, leverages and value and is particularly applicable to large firms. Counter to conventional wisdom, risker firms acquire more debt, pay higher interest rates, and have higher values in equilibrium.

The management of a company should set a capital structure and the subsequent financing decisions should be made with a view to achieve the target of the company. And also the capital structure will be planned initially when a company is incorporated.

CHAPTER III ANALYSIS AND INTERPRETATION 3.1 RATIO ANALYSIS

3.1.1 Current Ratio

This ratio compares the current assets with the current liabilities. It is also known as working capital ratio or solvency ratio. It is expressed in the form of pure ratio. Formula:
Current Ratio = Current assets ------------------------------Current Liabilities

TABLE SHOWING CURRENT RATIO Year 2005 2006 2007 2008 2009 Interpretation: According to the rule of Thumb the standard ratio is 2:1. The ratio of the company is 1.05%, 0.75%, 1.99%, 1.84% and 0.39% respectively during the period 2005, 2006, 2007, 2008 and 2009 respectively. The ratio of the company is below than the accepted standard, so the companys current ratio was not in good position when compared to the period 2007-08. Current Assets 21399787.42 26814854.59 51816270.96 100596714.72 173250236.00 Current Liabilities 20313490.26 35374419.75 25931566.46 55746578.14 439963090.00 Ratio 1.05 0.75 1.99 1.84 0.39

CHART 3.1.1 CHART SHOWING CURRENT RATIO

2 1.8 1.6 1.4 1.2

1.99 1.84

Ratio

1 0.8 0.6 0.4 0.2 0

1.05 0.75 0.39

2005

2006

2007

2008

2009

Year

3.1.2 Liquid Ratio Meaning:

Liquid ratio is also known as acid test ratio or quick ratio. Liquid ratio compares the quick assets with the quick liabilities. It is expressed in the form of pure ratio. The term quick assets refer to current assets, which can be converted into, cash immediately or at a short notice without diminution of value. Formula: Liquid Ratio = Liquid assets -------------------------------Current liabilities

TABLE SHOWING LIQUID RATIO Year 2005 2006 2007 2008 2009 Liquid Assets 778536625.42 1784685.59 23199745.46 54215652.70 100470256.00 Current Liabilities 20313490.26 35374419.75 25931566.46 55746578.14 439963090.00 Ratio 0.38 0.50 0.89 0.97 0.24

Interpretation: According to the rule of Thumb the standard ratio is 1:1. The above table indicates that quick ratio during the period 2005, 2006, 2007, 2008and 2009 is 0.38%, 0.50%, 0.89%, 0.97% and 0.24% respectively. The ratio is not equal to the rule of thumb. So the liquidity position of the company is not good.

CHART 3.1.2

CHART SHOWING LIQUID RATIO

1 0.9 0.8 0.7 0.6 Ratio 0.5 0.4 0.3 0.2 0.1 0 2005 2006 2007 Year 0.38 0.5 0.89

0.97

0.24

2008

2009

3.1.3 Inventory Turnover Ratio

It refers to the number of times the inventory is sold and replaced during the accounting period. It reflects the efficiency of inventory management. The higher the ratio, the more efficient is the management of inventories, and vice versa Formula: Inventory Turnover Ratio Average Inventory at Cost = Net sales = ---------------------------------Average inventory at cost Opening Stock + Closing Stock 2

TABLE SHOWING INVENTORY TURNOVER RATIO Year 2005 2006 2007 2008 2009 Net Sales 44461429.00 75624679.05 178188777.0 0 218745260.0 0 221390640.0 0 Average Inventory At Cost 13113736.50 11257115.50 16066044.00 34563627.50 50157818.00 Ratio 3.33 6.71 11.09 6.23 4.41

Interpretation: The above table indicates that the inventory turnover ratio during the period 2005, 2006, 2007, 2008 and 2009 is 3.33%, 6.71%, 11.09%, 6.23% and 4.41% respectively. The companys turnover keeps on changing. So, the inventory turnover ratio of the company was not static in nature.

CHART 3.1.3 CHART SHOWING INVENTORY TURNOVER RATIO

12 10 8 6.71 Ratio 6 4 2 0 2005 2006 3.33

11.09

6.23 4.41

2007 Year

2008

2009

3.1.4 Debtors Turnover Ratio Meaning: It is calculated by dividing the net credit sales by average debtors outstanding during the year. It measures the liquidity of a firm's debts. Net credit sales are the gross credit sales minus returns, if any, from customers. Average debtors are the average of debtors at the beginning and at the end of the year. This ratio shows how rapidly debts are collected. The higher the debtors turnover ratio the better it is for the organization.

Formula: Debtors Turnover Ratio = Total sales ------------------------Debtors

TABLE SHOWING DEBTORS TURNOVER RATIO Year 2005 2006 2007 2008 2009 Interpretation: The above table indicates that the debtors turnover ratio during the period 2005, 2006, and 2007 is 10.13%, 7.58%, and 18.99%, respectively. But during the period 2008 and 2009 it is decreased to 6.74% and 6.66% respectively. So, the companys debt collection period is good. Total Sales 44461429.00 75624679.05 178188777.00 218745260.00 221390640.00 Debtors 4386464.03 9967519.00 9382894.93 31710364.09 32134846.00 Ratio 10.13 7.58 18.99 6.74 6.66

CHART 3.1.4 CHART SHOWING DEBTORS TURNOVER RATIO

20 18 16 14 12 Ratio 10 8 6 4 2 0 2005 2006

18.99

10.13 7.58 6.74 6.66

2007 Year

2008

2009

3.1.5 Debt Equity Ratio This ratio compares the long-term debts with shareholders fund. The relationship between borrowed funds & owners capital is a popular measure of the long term financial solvency of a firm. This relationship is shown by debt equity ratio. Alternatively, this ratio indicates the relative proportion of debt & equity in financing the assets of the firm. It is usually expressed as a pure ratio. Formula: Debt Equity Ratio = Outsiders fund -----------------------------Share holders fund

TABLE SHOWING DEBT EQUITY RATIO Year 2005 2006 2007 2008 2009 Interpretation: As a general rule, there must be an approximate mix of outsiders and shareholder fund. The above table indicates the debt equity ratio during the period 2005, 2006, 2007 and 2008 is 36.33%, 46.93%, 1.76% and 1.78% respectively. So, here there is a high debt equity ratio. It indicates there was greater outsiders fund than owners or share holders fund. But in the period 2009 it has been reduced to 0.98%. So, the debt of the company will be reduced in the future years. Outsiders Fund 30785660.69 55308268.94 101288713.10 147334799.30 344477995.00 Share Holders Fund 847246.94 1178332.00 57418466.57 82604574.56 351377321.00 Ratio 36.33 46.93 1.76 1.78 0.98

CHART 3.1.5 CHART SHOWING DEBT EQUITY RATIO

50 45 40 35 30 Ratio 25 20 15 10 5 0

46.93 36.33

1.76 2005 2006 2007 Year

1.78 2008

0.98 2009

3.1.6 Fixed Assets Turnover Ratio This ratio measures the efficiency with which fixed assets are employed. A high ratio indicates a high degree of efficiency in asset utilization while a low ratio reflects an inefficient use of assets. Formula: Fixed Assets Turnover Ratio Fixed assets = --------------------------------Share holders fund

TABLE SHOWING FIXED ASSETS TURNOVER RATIO Year 2005 2006 2007 2008 2009 Interpretation: The ratio less than 100% implies that owners fund is more than fixed assets. It implies that the owners fund is not sufficient to finance fixed assets. The ratio 60-65% is satisfactory. So, here the company does not have sufficient fund to finance fixed assets. Fixed Assets 8868504.11 29671746.95 106890908.68 127329885.62 260497305.00 Share Holders Fund 847246.94 1178332.00 57418466.57 82604574.56 351377321.00 Ratio 10.46 25.18 1.86 1.54 0.74

CHART 3.1.6 CHART SHOWING FIXED ASSETS TURNOVER RATIO

30 25 20 Ratio 15 10 5 1.86 0 2005 2006 2007 Year 2008 1.54 0.74 2009 10.46 25.18

3.1.7 Working Capital Turnover Ratio The working capital turnover ratio is also referred to as net sales to working capital. It indicates a companys effectiveness in using its working capital. The working capital turnover ratio is calculated as follows: net annual sales divided by the average amount of working capital during the same 12 month period. As with most financial ratios, should compare the working capital turnover ratio to other companies in the same industry and to the same companys past and planned working capital turnover ratio. Formula: Cost of sales Working Capital Turnover Ratio = ---------------------------Net working capital TABLE SHOWING WORKING CAPITAL TURNOVER RATIO Year 2005 2006 2007 2008 2009 Interpretation: The above table indicates that the working capital turnover ratio during the period 2005, 2006, 2007, 2008and 2009 is 40.92%, 8.83%, 6.88%, 4.56% and 1.78% is respectively. So, here the ratio is not too low or too high. So the company has utilized their working capital properly. Cost Of Sales 44461429.00 75624679.05 178188777.00 218745260.00 221390640.00 Net Working Capital 1086297.16 8559565.16 25884704.50 46861910.06 124341783.00 Ratio 40.92 8.83 6.88 4.56 1.78

CHART 3.1.7 CHART SHOWING WORKING CAPITAL TURNOVER RATIO

45 40 35 30 Ratio 25 20 15 10 5 0 2005 2006 2007 Year 2008 8.83 6.88 40.92

4.56

1.78 2009

3.1.8 Gross Profit Ratio This ratio measures the relationship between gross profit and sales. It is defined as the excess of the net sales over cost of goods sold or excess of revenue over cost. This ratio shows the profit that remains after the manufacturing costs have been met. Formula: Gross Profit Ratio Gross profit = --------------------------Net sales x 100

TABLE SHOWING GROSS PROFIT RATIO Year 2005 2006 2007 2008 2009 Interpretation: The above table indicates that the gross profit ratio during the period 2005, 2006, 2007, 2008and 2009 is 10.63%, 10.54%, 14.31%, 13.4%, and 19.40% respectively. A higher gross profit ratio indicates a better result in the company. So here the gross profit ratio for the period 2009 is higher when compared to the previous year 2008. So the company is running in a good condition. Gross Profit 4726664.17 4688193.46 10828369.17 248094630.50 42955066.60 Net Sales 44461429.00 75624679.05 178188777.00 218745260.00 221390640.00 Ratio 10.63 10.54 14.31 13.40 19.40

CHART 3.1.8 CHART SHOWING GROSS PROFIT RATIO

20 18 16 14 12 Ratio 10 8 6 4 2 0 2005 2006 2007 Year 2008 10.63 10.54 14.31 13.4

19.4

2009

3.1.9 Net Profit Ratio Net Profit ratio indicates the relationship between the net profit & the sales it is usually expressed in the form of a percentage. This ratio shows the net earnings (to be distributed to both equity and preference shareholders) as a percentage of net sales. Formula: Net Profit Ratio = Net profit --------------------Net sales x 100

TABLE SHOWING NET PROFIT RATIO Year 2005 2006 2007 2008 2009 Interpretation: The above table indicates the net profit ratio for the period 2005, 2006, 2007, 2008and 2009 is -2.09% 1.62%, 5.11%, 8.68% and 12.99% respectively. In the 2005 there is a loss. But the company has slowly increased their profit in these years. Net Profit -930250.97 1228818.32 9105950.57 19007950.56 28780697.00 Net Sales 44461429.00 75624679.05 178188777.00 218745260.00 221390640.00 Ratio -2.09 1.62 5.11 8.68 12.99

CHART 3.1.9 CHART SHOWING NET PROFIT RATIO

14 12 10 8 Ratio 6 4 2 0 -2 -4 2005 2006 2007 Year 2008 -2.09 1.62 5.11 8.68

12.99

2009

3.2. COST OF CAPITAL 3.2.1 Cost of Equity Capital Cost of equity capital is expressed as the minimum rate of return that should be earned on the equity capital firm. If the firm invests in projects having an expected return less than the required return, the market price of the stock will suffer over the long-run. Equity capital cost is not fixed. The minimum rate of return expected by the shareholders will depend on the earnings level of the company and management decision. Formula: Earning per share Cost of equity capital = Market value per share TABLE SHOWING COST OF EQUITY CAPITAL Earnings Per Share -0.18 0.24 2.57 2.79 3.09 Cost of Equity -1.12 1.50 0.16 0.12 0.12

Year 2005 2006 2007 2008 2009 INTERPRETATION:

Book Value 0.16 0.16 16.20 23.30 26.60

The above table shows that the cost of equity is -1.12 in 2005 had increased to 1.50 in the year 2006 and in the year 2007 is 0.16 and 2009 it has been reduced to 0.12.

CHART 3.2.1 CHART SHOWING COST OF EQUITY CAPITAL

1.5 1 0.5 Ratio

1.5

0.16 0 -0.5 -1 -1.5 -1.12 2005 2006 2007 Year

0.12

0.12

2008

2009

3.2.2 Cost of Debt Debt may be issued at par, at premium or discount. It may be perpetual or redeemable. "Debt" involves borrowing money to be repaid, plus interest. Formula: Financial charges (1- T) --------------------------------Debt

Cost of Debt

TABLE SHOWING COST OF DEBT CAPITAL Year 2005 2006 2007 2008 2009 Financial charges 1784935.17 2679202.87 8042473.28 9964831.59 15417792.00 Debt 10475170.43 19933849.19 75357146.00 91588221.14 295569542.0 0 (1tax) 0.63 0.91 0.89 0.89 Cost of debt 0.17 0.082 0.091 0.089 0.045

INTERPRETATION: The above table shows that the cost of debt had been increasing during the 5 years period of study. That is in the year 2004-05 the firm does not paid tax due to loss. And during the period 2006-07 the debt has been increased to 0.091 and had been decreased to 0.045 in the year 2008-09.

CHART 3.2.2 CHART SHOWING COST OF DEBT

0.18 0.16 0.14 0.12 Ratio 0.1 0.08 0.06 0.04 0.02 0 2005 2006 2007 Year 2008 2009

3.3. LEVERAGES 3.3.1 Operating Leverages Operating leverages results from the presence of fixed costs. The fixed cost remaining same the percentage change in operating revenue will be more than the percentage change in sales. It is mostly depends upon the amount of fixed elements in cost structure. It is also determined by break even point analysis. Formula: Sales Variable Cost Operating Leverages = EBIT TABLE SHOWING OPERATING LEVERAGE Year 2005 2006 2007 2008 2009 Sales -V.C 2,63,064 21,98,616 53,97,509 79,14,610 8,29,672 EBIT 1,41,19,970 1,22,34,773 1,40,14,644 1,21,89,614 10,68,792 Operating Leverages 0.019 0.188 0.385 0.649 0.785

Interpretation The above table shows that the operating leverage of the bank for the year ended 2004-2005, 2005-06, 2006-07, 2007-08 & 2008-09 are 1.019, 0.188, 0.385, 0.649 & 0.785 respectively. All the years the operating leverage is fluctuating. During the period 2008-09 the ratio indicates a satisfactory position when compared with other years.

CHART NO 3.3.1 CHART SHOWING OPERATING LEVERAGES

0.8 0.7 0.6 0.5 Ratio 0.4 0.3 0.2 0.1 0 0.019 2005 2006 2007 Year 2008 0.188 0.385 0.649

0.785

2009

3.3.2 Financial Leverages The use of long-term fixed interest bearing debt and preference share capital along with equity share capital is called financial leverages. The longterm financial interest bearing debt is employed by a firm to earn more from the use of these resources than their cost. So as to increase the return on owners equity. Formula: EBIT Financial Leverages = EBIT Interest

TABLE SHOWING FINANCIAL LEVERAGE

Year 2005 2006 2007 2008 2009

EBIT 1,41,19,970 1,22,34,773 1,40,14,644 1,21,89,614 10,68,792

EBIT- Interest -27,26,822 -36,53,610 17,84,400 19,43,034 1,28,922

Financial Leverages -2.47 -3.35 7.85 6.27 8.29

Interpretation The above table shows financial leverages of the bank for the year ended 2004-2005, 2005-06, 2006-07, 2007-08 & 2008-09 are 2.47, -3.35, 7.85, 6.27 & 8.29 respectively. In the year 2005 and 2006 are net loss only. So the financial leverage of these two years is 2.47 & -3.35. In 2006-07 it was increased to 7.85 because the bank gets the profit more than the previous years. CHART NO 3.3.2

CHART SHOWING FINANCIAL LEVERAGES

10 8 6 4 Ratio 2 0 -2 -4 2005 -2.47 7.85 6.27 8.29

-3.35 2006 2007 Year 2008 2009

3.3.3 Combined Leverages

The combined leverage represents the effects of given change in the sales revenue on the earnings per share. It affects the total risk of the firm. If keep a risk with a manageable limit, the firm which has high degree of operating leverage should have low financial leverage and vice versa. Formula: Combined Leverages = Degree of operating leverage x Degree of financial leverage

TABLE SHOWING COMBINED LEVERAGE

Year 2005 2006 2007 2008 2009

Operating Leverage 0.019 0.188 0.385 0.649 0.785

Financial Leverage -2.47 -3.35 7.85 6.27 8.29

Combined Leverage -0.046 -0.629 3.022 4.069 6.50

Interpretation The above table shows that the 5 years of combined leverages. Except 2005 & 2006 the combined leverage in the year is positive. So the performance of combined leverage is not satisfactory, because the financial leverage shows negative position of 2 years. So the overall combined leverage indicated the not bad financial decision making in its implementation and results.

CHART NO 3.3.3

CHART SHOWING COMBINED LEVERAGES

7 6 5 4
Ratio 3

6.5

4.029 3.022

2 1 0 -1 2005 -0.046 -0.629 2006 2007

Year

2008

2009

3.4. CORRELATION Table 3.4.1

The following table presents the data relating to cost of equity and earnings per share:

Correlation (r) = Year Cost of equit y(x) -1.12 1.50 0.16 0.12 0.12 Total Earning per share(y) -0.18 0.24 2.57 2.79 3.09

XY 0.20 2 0.36 0 0.41 1 0.33 5 0.37 1 1.67 9 1.25 4 2.25 0 0.02 6 0.01 4 0.01 4 3.55 8 0.0324 0.0576 6.6049 7.7841 9.5481 24.027 1 0.040 6 0.129 6 0.171 7 0.108 9 0.133 6 0.584 6

2005 2006 2007 2008 2009

r = 1.679/ r = 2.19 INTERPRETATION: The value of correlations mentioned between two variables is +2.19. So, there is a high positive correlation between cost of equity and earnings per share.

Table 3.4.2 The following table presents the data relating to cost of Debt and earnings per share: Year Cost of debt( x) 0.17 0.08 2 0.09 1 0.08 9 0.08 2 Total Earning per share(y) -0.18 0.24 2.57 2.79 3.09

XY -0.0306 0.0196 8 0.2338 7 0.2483 1 0.2533 8 0.7552 4 0.0289 0.0067 2 0.0082 8 0.0079 2 0.0067 2 0.0585 5 0.0324 0.0576 6.6049 7.7841 9.5481 24.027 1 0.00088 4 0.00013 2 0.00193 7 0.00196 7 0.00170 4 0.00662 4

2005 2006 2007 2008 2009

r = 0.75524/ r = 9.28 INTERPRETATION: The value of correlations mentioned between two variables is +9.28. So, there is a high positive correlation between cost of debt and earnings per share.

CHAPTER IV FINDINGS, RECOMMENDATIONS AND CONCLUSION 4.1 FINDINGS Ratio Analysis Current Ratio of the company was not satisfactory in the year 2007-08, when compared to the previous years. Absolute liquid Ratio of the company does not have sufficient short term financial position. The inventory turnover ratio of the company was not static in nature. So, it may increase or decrease. The Debtors turnover ratio had decreased in the year 2008-09. So, the company had collected their debt amount within a short period of time. Outsiders fund had been reduced in the year 2008-09 when compared to the previous years. So the debt had been reduced slowly. The gross profit of the company also increased in the year 2009, when compared to previous years 2008. The net profit ratio of the company has been increasing slowly in the year 2006-09.

Cost of Capital The cost of equity is -1.12 in 2005 had increased to 1.50 in the the year 2007 is 0.16 and 2009 it has been

year 2006 and in reduced to 0.12.

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

due to loss. And during the period 2006-07 the debt has been increased to 0.091 and had been decreased to 0.045 in the year 2008-09. Leverage The operating leverage is high in 2008-09 when compared to

the previous years. Therefore, the company is in a satisfactory position in 2008-09. Financial leverage is not much satisfactory. Because, the

earnings is not sufficient for paying the interest, Tax, Dividends. The combined leverage shows that a satisfactory financial

decision has been made by the company. However, both operating and financial leverage are not favorable to the company. Correlation The value of correlations mentioned between two variables is

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

The value of correlations mentioned between two variables is

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

4.2 SUGGESTIONS The liquidity position of the company has to be increased to meet their current obligations. Even though the company has outsiders fund to reduce their risk. The owners fund also needed to finance fixed asset. So, the owners or shareholders of the company has to concentrate in their investment and have to increase their capital. The short term financial position of the company has not been satisfied in the existing level. So, the company has to take necessary steps to improve their financial position. In the year 2008-09 the companys equity and debt both are equal. So, the company has to increase their equity capital and reduce their debt to improve the overall performance of the company.

4.3 CONCLUSION The study reveals the capital structure of the company for the past 5 years starting from 2004-05 to 2008-09. The study will enable the company to plan for its future capital requirements. From the study, it is concluded that the capital structure of the company was satisfactory and debt of the company must be reduced for improving the company. The company must maintain good liquidity position to improve their profit. So, I conclude that the companys capital structure was fine even though there is an improvement in equity to achieve better position and also the share holders of the company must concentrate on their capital investment. So that the company should concentrate in deviated areas in the future.

BIBILIOGRAPHY 1. SHARMA R.K., SHASHI GUPTA A.K., Management Accounting principles and practice, kalyani publisher, Seventh Revised Edition. 2. KHAN M.Y. AND JAIN P.K., Financial Management, New Delhi, Tata Mc Graw Hill Publishing Company Ltd., Second Edition.

3. PANDEY I.M., Financial Management, Vikas Publishing House Pvt. Ltd., Seventh Revised Edition. 4. www.wikipedia.com 5. www.Google.com