Capital structure It refers to the way a corporation finances its assets through some combination of debt and equity.

So the challenge for finance managers is that they should design the capital in such a way so as to lead the objective of maximization of shareholder wealth. The exact optimal capital structure may be impossible so effort should be made to achieve the best approximation to the optimal capital structure. In practice firms differ from one another in respect of size, earnings, cost of funds, competitive conditions, market expectation, risk. So there is no hard and fast rule or a general principle that this capital structure is the best. It entirely depends on the nature and kind of financial and economic conditions prevailing in the firm. A financial manager however, should go considering a whole lot of factors, qualitative and quantitative and subjective which should be considered and factored in the process of planning and designing a capital structure for a firm. Besides, these considerations, care should be taken that the capital structure should be evaluated in its totality and a finance manager should find out as to which capital structure is most advantageous to the firm. The interest of the shareholders, debt holders and also that of management is to be suitably taken care of. Above all, the legal provisions if any regarding the capital structure should also be considered. So there are certain factors that determine the capital structure 1. Minimization of Risk : A firms capital structure must be developed with an eye towards risk because it has direct link with the value. Risk may be factored for two considerations: (a) the capital structure must be consistent with the business risk, and (b) the capital structure results in a certain level of financial risk. A capital structure may be called an efficient capital structure if it keeps the total risk of the firm to the minimum level. The long term solvency and financial risk of a firm should be assessed for a given capital structure. Since, increase in debt financing affects the solvency as well as the financial risk of the firm, the excessive use of debt financing should be avoided. It may be noted that the balancing of both the financial and business risk is implied so that the total risk of the firm is kept within desirable limits.

2. Control : The ultimate decision making power of the firm lies in the hands of equity shareholders, the issue of additional shares can affect who controls the firm. A management concerned about control may prefer to issue debt rather than equity shares to raise funds. A capital structure of a firm should be one which reflects the managements philosophy of control over the firm. 3. Flexibility : The flexibility of a capital structure refers to the ability of the firm to raise additional capital funds whenever needed to finance profitable and viable investment opportunities. The capital structure should be one which enables the firm to meet the requirements of the changing situations. More precisely, flexibility means that the capital structure should always have an untapped borrowing powers which can be used in conditions which may arise any time in future due to uncertainty of capital market, Government policies etc. If the capital market conditions are conducive to the issue of capital then the preference may be given to issue of capital rather than issue of debt. 4. Profitability : A capital structure should be most profitable from the point of view of equity shareholders, therefore within the given constraints maximum debt financing should be opted to increase the returns available to equity shareholders. TATA TEA Tata tea limited is an Indian multinational non alcoholic beverage company headquartered in Kolkata. It is the world second largest manufacturer and distributer of tea. The company was rechristened as Tata Global Beverages to include the range of health and nutritional beverages it wants to enter into. Via subsidiary companies, Tata Global Beverages manufactures 70 million kilograms of tea in India, controls 54 tea estates, ten tea blending and packaging factories and employs around 59,000 people. The company owns 51 tea estates in India and Sri Lanka, especially in Assam, West Bengal in eastern India and Kerala in the south. The company is the largest manufacturer of Assam tea and Darjeeling tea and the second-largest manufacturer of Ceylon tea. In spite of a global presence, the brands are distributed differently depending on the location. As Tata tea is far better

known in India and a powerful brand there, it is pushed on this market and countries with a large Indian population. Therefore, Tetley is the company's global face and the largest markets focus on the Tetley brand. Where both brands co-exist in one market, Tetley is positioned as the premium brand JAYASHREE TEA Jay Shree Tea & Industries Ltd. is an outstanding crescendo in the composition that is the Birla Group. Besides tea, the Company is also actively involved in chemicals & fertilizers,sugar and education. Jay Shree Tea has gardens spread all over the tea growing regions of India, some nestled in the frosty slopes of Darjeeling, a sprinkling of them rolling languidly over the hot and humid valleys of Assam and Cachar, yet others tucked away in the lower Himalayan reaches of the Dooars and the Terai and a few dotting the undulating Annamalai hills. From Darjeeling comes the Champagne of teas, teasing the connoisseur with their rich-yet-subtle essence, with flavors and aromas so rich that one of our Darjeeling gardens fetched a record price of Rs.10,000 a kg. From Assam comes the hearty, full-bodied teas, invigorating the sipper with their smooth malt pungency. The Blue Mountains of the Nilgiris down South yield brisk liquors, with their tantalizing fragrance and fine flavors. Jay Shree Tea also specializes in packaged tea, sold under the umbrella Birla Tea. It also offers customized packaging as well as designs to meet the needs of various clients, at home and abroad. Today, not only is it a leading producer, trader and exporter, but it is also one of the biggest producer of speciality teas, and a proud member of the Specialty Tea Institute, USA. Jay Shree Tea packs its teas right in the gardens to preserve their fresh aromas. Its gardens have constantly won accolades in terms of price and productivity and several awards over the years for quality. Instant acceptance across the globe in countries like Australia, Japan, Pakistan, Russia, Ukraine, Kazakhistan, Iran, Saudi Arabia, UAE, Egypt, Tunis, Germany, Netherland, Ireland, UK, USA, Canada and in even tea producing countries like China and Sri Lanka. The well-diversified company has been enjoying the unwavering trust of a faithful customer base for the last three decades. At the root of its success lies its commitment to achieve 100 percent customer satisfaction

NESTLE Nestle is a swiss company , the headquarter is situated in Switzerland. It is the largest food company in the world by revenues. Nestl's products include baby food, bottled water, breakfast cereals, coffee, confectionery, dairy products, ice cream, pet foods and snacks. 29 of Nestl's brands have annual sales of over 1 billion Swiss francs (about $ 1.1 billion), including Nespresso, Nescaf, KitKat, Smarties, Nesquik, Stouffer's, Vittel, and Maggi. Nestl has around 450 factories, operates in 86 countries, and employs around 328,000 people. It is one of the main shareholders of L'Oral, the world's largest cosmetics company. Nestl was formed in 1905 by the merger of the Anglo-Swiss Milk Company, established in 1866 by brothers George Page and Charles Page, and Farine Lacte Henri Nestl, founded in 1866 by Henri Nestl. The company grew significantly during the First World War and again following the Second World War, expanding its offerings beyond its early condensed milk and infant formula products. The company has made a number of corporate acquisitions, including Crosse & Blackwell in 1950, Findus in 1963, Libby's in 1971, Rowntree Mackintosh in 1988 and Gerber in 2007. Nestl has a primary listing on the SIX Swiss Exchange and is a constituent of the Swiss Market Index. It has a secondary listing on Euronext. In 2011, Nestl was listed No. 1 in the Fortune Global 500 as the world's most profitable corporation. With a market capitalization of $ 200 billion, Nestl ranked No. 13 in the FT Global 2011

TATA TEA TATA Tea is a levered firm. It has combination of both equity and debt. There is a financial risk to the company. Judicious and successful use of leverage will provide a higher return than is possible without leverage Advantages Borrowing additional capital, whether from banks, investors or other lenders, permits a company to take advantage of opportunities that it may not otherwise be able to participate in. If these opportunities result in revenues exceeding the cost of the loans, then that use of leverage has increased the value of the company. The primary consideration for all leverage is whether the potential additional return justifies the additional risk. In the case of a company's overall status, a leveraged company will likely be more volatile, with both more potential upside and downside. Disadvantages Leveraged companies come with an additional level of risk. Whereas a company without leverage risks only the capital invested in any specific project or activity, the leveraged company risks not only the invested capital, but the amount of money required to repay the loan. Thus, wrong decisions and losses are amplified in a leveraged company, which can make their performance more volatile.

The capital structure of the company had been constant having only equity share capital from the past 5 years i.e. 2007-12. In 2010 the company converted its 9.40% debentures into 3% debentures. They had redeemed their 4% debentures in 2008 and in 2009 they redeemed all of their 4%debentures and 7% debentures.

Capital structure of TATA Tea (in crores) Particulars equity share capital 9.40% debentures 3% debentures 4% debentures 7% debentures 325 325 255 268.5 502.5 268.5 2011-12 61.84 2010-11 61.84 2009-10 61.84 325 2008-09 61.84 325 2007-08 61.84 325

Cost of capital structure of TATA Tea Particulars cost of equity cost of debt 9.4% debentures 3% debentures 4% debentures 7% debentures 2.37% 2.47% 3.36% 5.89% 2.53% 4.43% 7.57% 7.91% 5.94% 2011-12 2.15% 2010-11 2% 2009-10 2% 2008-09 1.75% 2007-08 3.50%

Other Details Particulars dividend per share interest in cr tax in % net proceeds (rs) Cost of capital of TATA tea 2011-12 2.15 27.04 20.7 100 2010-11 2 38.97 17.86 100 2009-10 20 56.34 19.45 1000 2008-09 17.5 83.56 15.84 1000 2007-08 35 65.68 36.78 1000

Particulars cost of capital value of the firm(in cr)

2011-12 2.905 14078.1

2010-11 2.9 9354.5

2009-10 2.81 19898.5

2008-09 3.15 9937.5

2007-08 4.56 10043.85

JAYSHREE TEA LIMITED

Jayshree is a unlevered firm. It has only equity in its capital structure and no debt. The financial risk to the firm is low. But due to non-presence of debt the cost of capital would be high. The company should have the combination of both equity and debt. They should not be dependent on raising of funds through equity only. Due the introduction of more equity capital in 2011 2012 the overall cost of capital of the firm has increased and the value of the firm has also declined. Therefore the availability of debt should be there in capital structure. ADVANTAGE TO THE JAYSHREE TEA LTD. (UNLEVERED FIRM): No Debt Repayment Risk: Debt capital requires a business to make periodic payments to a lender. So, financial risk is there. These payments might include interest, principal or both. If a

company is unable to make these payments, it risks losing assets it pledged as collateral and might be forced into bankruptcy. For example, if you put up business equipment as collateral for a small-business loan and miss your monthly payments, the lender might take the equipment to satisfy the loan or you might be forced to file bankruptcy. Whereas raising funds through equity does not make company liable to pay fixed amount of interest. Risk of Being Underfunded: Presence of debt in capital structure might restrict a companys ability to raise additional capital, which can prevent a company from getting the cash it needs if it gets into a bind. An existing lender might restrict a business from taking on more debt. Or, potential new lenders and investors might refrain from providing capital to an over-leveraged company. For example, if your small business has too much existing debt, new investors and lenders might deny your request for more money, which might limit your ability to operate. DISADVANTAGE TO THE JAYSHREE TEA LTD; Loss of Ownership: If a business raises too much equity capital, it risks losing control of the company. Equity investors are typically entitled to vote on certain company matters. If you sell a large equity stake to one investor or a group of investors, they might try to influence the company in a way with which you dont agree. For example, if your small business sells a 60 percent stake in the company to an investor, he might try to take over the company if he is unsatisfied with your performance. Missing Growth Opportunities: Depending on the agreement between a business and its investors, the business might be required to periodically distribute a portion of its profits to shareholders in the form of dividends. A small business in a growth phase typically wants to reinvest all of its profits into its business. If a company distributes too much of its profits to investors, it risks missing out on growth opportunities. For example, if your small business generates $50,000 in quarterly profit, but distributes $40,000 to investors, your growth potential might be limited.

Increase in cost of capital : Too much equity in the capital structure leads to increase in the overall cost of capital. This is because debt is a cheap source of raising funds because interest paid on debt financing is tax deductible.

Decrease in the value of firm : Too much equity in the capital structure leads to decrease in the value of firm. Due to the presence of debt the value of the firm increases This means that a firm that is financed with debt will have greater tax savings than a firm that is financed with equity. As a result, increasing debt will actually increase firm value.

CAPITAL STRUCTURE OF JAYSHREE TEA Particulars equity share capital 2011 - 2010 - 2009 - 2008 - 2007 12 11 10 09 08 14.44 11.17 11.17 10.68 10.67

COST OF CAPITAL STRUCTURE Particulars Cost of equity DETAILS Particulars Divident per share Net proceeds COST OF CAPITAL Particulars Value of the firm Overall cost of capital 2011 2010 2009 2008 2007 12 11 10 09 08 31.82 77.18 102.83 46.27 45.8 2.26% 1.10% 0.85% 0.85% 0.59% 2011 2010 2009 2008 2007 12 11 10 09 08 2.25 3 6 3 2.5 500 500 1000 1000 1000 2011 2010 2009 2008 2007 12 11 10 09 08 45% 60% 60% 30% 25%

NESCAFE The company had zero debt structure. This means that the company has no outside obligation (external) but some amount of debt is good for the company because it provides you tax benefits. The company has lately realized that debt is important source of Capital so total debt to owner fund came 2.76 in the year 2011-2012. The companys EPS has been increasing and its dividend payouts ratio is decreasing. But, the dividend per share has been constant for past 3 years. The company is using its earnings for retention. 1) Preference Share is equal to zero 2) Capital Structure of the company has been constant comprising only equity share capital. This means that the company is risk averse and is not taking any external liabilities. Therefore, overall cost of capital is equal to cost of equity. CAPITAL STRUCTURE OF NESTLE` Particulars Equity Share Capital Mar'12 96.42 Mar'11 96.42 Mar'10 96.42 Mar'09 96.42 Mar'10 96.42

COST OF CAPITAL STRUCTURE Particulars Cost Of Equity DETAILS Particulars Dividend Per Share Net Proceeds Mar'12 48.5 1000 Mar'11 48.5 1000 Mar'10 48.5 1000 Mar'09 42.5 1000 Mar'10 33 1000 Mar'12 Mar'11 Mar'10 Mar'09 Mar'10 4.85 4.85 4.85 4.25 3.3

COST OF CAPITAL Particulars Value Of The Firm Overall Cost Of Capital Mar'12 198.26 7.9 Mar'11 168.8 7.59 Mar'10 135.05 7.72 Mar'09 125.67 6.92 Mar'10 125.4 5.63