V Naveen Project

A STUDY ON
CAPITAL STRUCTURE ANALYSIS

AT
NCL INDUSTRIES LTD
HYDERABAD
A dissertation submitted
in partial fulfillment of the requirements
for the award of the degree of
MASTER
OF
BUSINESS ADMINISTRATION
SUBMITTED BY
VADDAM NAVEEN
HT No:228213672229
[MBA FINANCE/2013 -2015]
Under the guidance of

Mr. T.RAVI KUMAR
Department of Business Management

KOMMURI PRATAP INSTITUTE OF MANGEMENT
(Affiliated to OSMANIA UNIVERSITY)
GHANPUR, GHATKESAR ,R.R (dist)
DECLARATION
This project work entitled A STUDY ON CAPITAL STRUCTURE ANALYSIS

AT NCL INDUSTRIES LIMITED, HYDERABAD was prepared and submitted
by me to the department of MBA KOMMURI PRATAP INSTITUTE OF
MANAGEMENT, GHANPUR, R.R.DIST, in partial fulfillment of requirement for
the award of the degree of Master of Business Administration. I hereby declare that
is the original work done by me and the findings are collected through a survey during
my study period 45 days and not submitted anywhere before.
Place: Hyderabad
(VADDAM NAVEEN)
HT No: 228213672229
ACKNOWLEDGEMENT
It gives me pleasure to express my deep sense of gratitude to my guide Mr. A. Ramesh

Manager (Finance), NCL, Hyderabad for his guidance, support, cooperation and
constant encouragement at every stage of this project work.
I would like to express my heartful thanks to Mr. T.RAVI KUMAR, Dept of MBA, St.
Francis Institute of Management for her timely directions, Valuable guidelines and
encouragement to carry out my project successfully.
Finally, I would like to thank my family, friends, who directly or indirectly extended
their encouragement and assistance throughout this Endeavour.
I thank the management of NCL, Hyderabad for giving me an opportunity to work in
their company.
(VADDAM NAVEEN)
HT No: 228213672229
CONTENTS
CHAPTER
CHAPTER I
CHAPTER II
CHAPTER III
CHAPTER IV
CHAPTER V
CHAPTER VI
CHAPTER VII
TITLE
INTRODUCTION
PAGE NO
OBJECTIVES OF THE STUDY
NEED FOR THE STUDY
SCOPE OF THE STUDY
RESEARCH METHODOLOGY
PERIOD OF THE STUDY
LIMITATIONS OF THE STUDY

COMPANY PROFILE
INDUSTRY PROFILE
REVIEW OF LITERATURE
DATA ANALYSIS AND INTERPRETATION
FINDINGS AND SUGGESTIONS
CONCLUSIONS
BIBLIOGRAPHY
CHAPTER I
INTRODUCTION
INTRODUCTION
The assets of a company can be financed either by increasing the owners claim or the
creditors claim. The owners claims increase when the form raises funds by issuing
ordinary shares or by retaining the earnings, the creditors claims increase by
borrowing .The various means of financing represents the financial structure of an
enterprise .The financial structure of an enterprise is shown by the left hand side
(liabilities plus equity) of the balance sheet. Traditionally, short-term borrowings are
excluded from the list of methods of financing the firms capital expenditure, and
therefore, the long term claims are said to form the capital structure of the
enterprise .The capital structure is used to represent the proportionate relationship
between debt and equity .Equity includes paid-up share capital, share premium and
reserves and surplus.
The financing or capital structure decision is a significant managerial decision .It
influences the shareholders returns and risk consequently; the market value of share
may be affected by the capital structure decision. The company will have to plan its
capital structure initially at the time of its promotion.
NEED AND IMPORTANCE OF CAPITAL STRUCTURE
The value of the firm depends upon its expected earnings stream and the rate used to
discount this stream. The rate used to discount earnings stream its the firms required
rate of return or the cost of capital. Thus, the capital structure decision can affect the
value of the firm either by changing the expected earnings of the firm, but it can affect
the reside earnings of the shareholders. The effect of leverage on the cost of capital is
not very clear. Conflicting opinions have been expressed on this issue. In fact, this
issue is one of the most continuous areas in the theory of finance, and perhaps more
theoretical and empirical work has been done on this subject than any other.
If leverage affects the cost of capital and the value of the firm, an optimum capital
structure would be obtained at that combination of debt and equity that maximizes the
total value of the firm or minimizes the weighted average cost of capital. The question
of the existence of optimum use of leverage has been put very succinctly by Ezra
Solomon in the following words.
Given that a firm has certain structure of assets, which offers net operating earnings of
given size and quality, and given a certain structure of rates in the capital markets, is
there some specific degree of financial leverage at which the market value of the
firms securities will be higher than at other degrees of leverage?
The existence of an optimum capital structure is not accepted by all. There exist two
extreme views and middle position. David Durand identified the two extreme views
the net income and net operating approaches.
OBJECTIVES OF THE STUDY

The project is an attempt to seek an insight into the aspects that are involved in the
capital structuring and financial decisions of the company. This project endeavors to
achieve the following objectives.
To Study the capital structure of NCL through EBIT-EPS analysis
Study effectiveness of financing decision on EPS and EBIT of the firm.
Examining leverage analysis of NCL Ind. LTD.
Examining the financing trends in the NCL Industries LTD. for the period of
2005-10.
Study debt/equity ratio of NCL Ind. Ltd for 2005-10.
NEED OF THE STUDY

Capital structuring decisions are of paramount importance in financial decisionmaking. Special care should therefore be taken in making these decisions on account
of following reasons.
Heavy investments.
Long term commitment on funds
Irreversible decisions
Long term impact of profitability
Most difficult to make.
Wealth maximization of shareholders.
Cash forecast.
SCOPE OF THE STUDY

A study of the capital structure involves an examination of long term as well as short
term sources that a company taps in order to meet its requirements of finance. The
scope of the study is confined to the sources that NCL (IND) LTD tapped over the
years under study i.e. 2005-10.
METHODOLOGY OF THE STUDY

Research design or research methodology is the procedure of collecting, analyzing
and interpreting the data to diagnose the problem and react to the opportunity in such
a way where the costs can be minimized and the desired level of accuracy can be
achieved to arrive at a particular conclusion.
Data relating to NCL Ind. Ltd. has been collected through:
SECONDARY SOURCES:
The secondary data is collected from various financial books, magazines and from
stock lists of various newspapers and published annual reports of the company for the
year 2005-10.
PRIMARY SOURCES:
The primary data information is gathered by having discussions with the Finance
manager and other members of the Finance department.
DATA ANALYSIS:
The collected data has been processed using the tools of:
Ratio analysis
Graphical analysis
Year-year analysis
These tools access in the interpretation and understanding of the Existing scenario of
the Capital Structure.
PERIOD OF THE STUDY
The present study is made during the II semester of the MBA course i.e. from 11th
May 2010 to 25th June 2010.
LIMITATIONS OF THE STUDY

The limitations of this study are
The time period of study has been limited to less than two months, this period
is small to study the practical of investment decisions of a company like NCL.
It dose not consider all of the new unapproved schemes.
As it is considering only a part of the estimated budget which is a great

limitation to give suggestion under the heading of capital structuring.
CHAPTER II
COMPANY PROFILE
COMPANY PROFILE
NCL Industries Ltd is a company established in 1981 and today it is marked among
the top ten Cement Production companies of India, growing at over 25% as of 2009.
NCL Industries Ltd has a countrywide office, network with fully computerized
operations and a professional team & worker. The company has an installed capacity
of 297000 tones of Cement & 3000 tones of Cement Boards. The company is
expanding after Economic reforms have set in NCL Industries has spread its wings
over several high production based mechanism as will.
The companies sister concerns include Altek Coating Products Ltd. NCL energy ltd,
NCL homes ltd, Kakatiya Chemical Ltd. the members of the Board comprised of
eminent personalities from the field of Banking, Taxation, Corporate loss and
Industry. Jaya Bharath Reddy is the Chairman and Ravi (Managing Director)
industrialist having through knowledge and experience in cement business and allied
fields, with a new appointed M.D Sri. K.Ravi. The broad based clientele group
reflects the high respect and with NCL Industries Ltd, in production circles. The client
includes repeated business houses like NCL homes Ltd, and confident financial
institutions such as OBC (Oriental Bank of Commerce), Vijaya Bank and Canara
Bank.
The Plant is located in Nalgonda District of A.P where abundant raw materials such as
Lime Stone, Fire Wood etc., are available, apart from the main resources River
Krishna flowing adjacent to the plant.
ICRA has assigned a LBBB- (pronounced as L Triple B minus) rating indicating
moderate-creditqualityto the Rs 462.5 million term loans and Rs. 380 million fundbased bank limits of NCL IndustriesLimited (NCL); the instrument rated within the
category carries higher than average credit risk. ICRAhas also assigned an A3
(pronounced A three) rating to Rs 10.0 million short-term bank limits (nonfundbased)
indicating moderate credit quality in the short term.
NCL has a mini-cement plant with installed capacity of 6.27 lakh tonnes per annum
(TPA) in Nalgondadistrict of AP, close to limestone mines nearby and fly ash from
nearby thermal power plants. As partof diversification the company also entered into
cement bonded particle wood manufacture and prefabricated
10
structures. During the last couple of years NCLs profitability has improved in line
with thefavourable price trends in the cement industry. The financial profile of the
company has howeverremained under strain due to large capital expenditure incurred
in doubling its capacity in cement andcement boards over the last couple of years. The
merger of NCL Energy during 2007-08 also impacted
the financial profile of NCL. The rating factors in NCLs regional concentration, the
likely unfavourablechange in cement supply dynamics over the medium term and the
companys aggressive debt fundedcapex plan, which is likely to result in significant
deterioration in its financial profile.
NCL Industries (formerly known as Nagarjuna Cement Limited) operates in four
business segmentscement,cement bonded particle boards, prefab structures and hydel
power generation. Thepromoters, Mr. K Ravi, Mr. K Madhu, Mr. GDLSN Raju and
Mr. V.V.Goradia together, hold 39% stakein the company. The company is listed at
BSE. The cement produced by the company is marketed
under Nagarjuna brand. During 1993, NCL diversified into cement bonded wood
particle board intechnical collaboration with Bison Werke of Germany. Further the
company also entered into prefabricatedstructures. During 2007-08, NCL merged its
group company NCL Energy, with two hydelpower plants (8.25 MW and 7.5 MW
respectively), to benefit from accumulated losses.During 2009-10, the company has
expanded its cement capacity to 6.27 lakh TPA and is in the
process of adding another 13.2 lakh TPA in the current financial year.
For further details please contact:
Mr. Subrata Ray, (Tel. No. +91 22 30470027)
Sector: Cement
BSE:502168
NSE:NCLIND
Market Lot: 1 Face Value: 10
Bloomberg:NCLI@IN
Reuters:NCLI.BO
ISIN Demat: INE732C01016
Related Companies
Decan Cement
Sri Digv Cem
LTP(Last
Traded Price)
121.10
5.93
11
Change
% Change
-1.00
-0.05
-0.82
-0.84
Saura Cemen
Kakatiya Cem
Barak Vall
Shri Keshav Cem
Hindustan Bio
16.00
51.00
13.25
9.50
1.44
0.00
0.00
-0.54
0.00
-0.06
0.00
0.00
-3.92
0.00
-4.00
Key Market Stats

Mkt. Cap. (Rs. mn.)
25%
657.10
Tiny
P/E
2.06
BSE
NSE
P/BV
1.27
Book
Closure Book
Closure
Div (%)
25.00
Period
Period
Div Type
Final
Purpose :
Purpose :
Del Vol/Total Vol (%) 65.49
Corporate Action
Dividend (exdate: )
Bonus
OTHER INDICATORS
5 DMA
Price
21.16
Volume (in '000) 26
1W
Price rel to Sensex
-4.66
(%)
Price Appreciation
-8.92
(%)
22 DMA
22.30
24
1 MO
50 DMA
22.62
22
3 MO
200 DMA
31.59
35
1 Year
-3.00
1.85
-22.98
-11.16
-7.01
-60.28
RecentDevelopments
02-APR-14
The company received orders aggregating to Rs 502.5 million from Andhra Pradesh
Health & Medical Housing & Infrastructure Development Corporation for
construction of prefab structures. These structures will house the campuses of the
12
APIIT (Andhra Pradesh Indian Institute of Information Technology) at three locations

in the state of Andhra Pradesh and will cover an area aggregating to over 600,000 sq.
ft. The above order constitutes the largest order from a single source bagged by the
company in its history and exceeds the annual turnover achieved by the prefab
division
during
any
of
the
past
years.
17-MAR-10
On Mar.17, 2010, the authorized sub-committee of the board allotted 3,333,400
warrants on a preferential basis to the promoters/promoter group pursuant to the
special
resolution
passed
by
the
shareholders.
FuturePlans
The company is embarking on a project to establish a project for manufacture of
clinker at a capacity of 3,000 TPD and enhance the grinding capacity by 4,000 TPD
by way of establishment of two grinding units of 2000 TPD each at Mattapally and
Kondapalli.
The
expansion projects are expected to be completed as per schedule by December

2010. The trial runs are planned to be performed in January 2011.
13
CHAPTER III
INDUSTRY PROFILE
CEMENT INDUSTRY
INTRODUCTION
Cement is a key infrastructure industry. It has been decontrolled from price and
distribution on 1st March 1989 and re-licensed on 25th July 1991. However, the
performance of the industry and prices of cement are monitored regularly. The
constraints faced by the industry are reviewed in the Infrastructure coordination
14
committee meetings held in the cabinet secretariat under the chairmanship of

secretary (coordination).
Its performance is also reviewed by the cabinet
committee n infrastructure.
CAPACITY AND PRODUCTION
India is the second largest producer of cement in the world after china. The
cement Industry comprises of 128 large cement plants with an installed capacity
of 148.28 million tones and more than 300 mini cement plant with an estimated
capacity of 11.10 million tones per annum. The cement corporation of India,
which is central public sector undertaking, has 10 units. There are 10 large
cement plants owned by various state Governments. The total installed capacity
in the country as a whole is 159.38 million tones. Actual cement production in
2005-06 was 116.35 million tones as against a production of 106.90 million tones
in 2004-05, registering a growth rate of 8.84%.
Keeping in view the trend of growth of the industry in previous years, a
production Target of 126 million tones has fixed for the year 2006_07
During
the period April-June 2006, a production (provisional) was 31.30 million tones.
The industry has achieved a growth rate of 4.86 per cent during this period.
EXPORTS
Apart from meeting the entire domestic demand, the industry is also exporting
cement and clinker. The export of cement during 2012-13 and 2013-14 was 5.14
million tones and 6.92 million tones respectively. Export during April-May, 2013
was 1.35 million tones. Major exporters were Gujarat Ambuja Cements Ltd, and
ULTRATECH Ltd.
15
RECOMMENDATIONS ON CEMENT INDUSTRY

For the development of the cement industry Working Group on cement Industry
was constituted by the planning commission for the formulation of X Five Year
Plan. The working Group has projected a growth rate of 10% for the cement
industry during the plan period and has projected creation of additional capacity
of 40-62 million tones mainly through expansion of existing plants. The working
Group has identified following thrust areas for improving demand for cement;
Further push to housing development programmes;
Promotion of concrete Highways and roads; and
Use of ready-mix concrete in large infrastructure project.
Further, in order to improve global competitiveness of the Indian Cement

Industry, the Department of Industrial policy & promotion commissioned a study
on the global competitiveness of the Indian industry through an organization of
international repute, viz. KPMG Consultancy Pvt. Ltd. The report submitted by
the organization has made several recommendations for
making the Indian
Cement Industry more competitive in the international market. The

recommendations are under consideration.
TECHNOLOICAL CHANGE
Cement industry has made tremendous strides in technological up gradation and
assimilation of latest technology. At present ninety three per cent of the total
capacity in the industry is based on modern and environment-friendly dry process
technology and only seven per cent of the capacity is based on old wet and semidry process technology. There is tremendous scope for waste heat recovery in
cement plants and thereby reduction in emission level. One project for cogeneration of power utilizing waste heat in an Indian cement plant is being
implemented with Japanese assistance under Green Aid Plan. The induction of
advanced technology has helped the industry immensely to conserve energy and
fuel and to save materials substantially. Indian is also producing different
16
varieties of cement like Ordinary Portland Cement (OPC), Portland Pozzolana

Cement (PPC), Portland Blast Furnace Slag Cement (PBFS), Oil Well Cement,
Rapid Hardening Portland Cement, Sulphate Resisting Portland Cement, White
Cement etc. Production of these varieties of cement conform to the BIS
Specifications. It is worth mentioning that some cement plants have set up
dedicated jetties for promoting bulk transportation and export.
17
CHAPTER IV
REVIEW OF LITERATURE
CAPITAL STRUCTURE DEFINED

The assets of a company can be financed either by increasing the owners claim or the
creditors claim. The owners claims increase when the form raises funds by issuing
ordinary shares or by retaining the earnings, the creditors claims increase by
borrowing .The various means of financing represents the financial structure of an
enterprise .The financial structure of an enterprise is shown by the left hand side
18
(liabilities plus equity) of the balance sheet. Traditionally, short-term borrowings are
excluded from the list of methods of financing the firms capital expenditure, and
therefore, the long term claims are said to form the capital structure of the
enterprise .The capital structure is used to represent the proportionate relationship
between debt and equity .Equity includes paid-up share capital, share premium and
reserves and surplus.
The financing or capital structure decision is a significant managerial decision .It
influences the shareholders returns and risk consequently; the market value of share
may be affected by the capital structure decision. The company will have to plan its
capital structure initially at the time of its promotion.
FACTORS AFFECTING THE CAPITAL STRUCTURE

LEVERAGE:
The use of fixed charges of funds such as preference shares,
debentures and term-loans along with equity capital structure is described as financial
leverage or trading on. Equity. The term trading on equity is used because for raising
debt.
DEBT /EQUITY RATIO: Financial institutions while sanctioning long-term loans
insists that companies should generally have a debt equity ratio of 2:1 for medium
and large scale industries and 3:1 indicates that for every unit of equity the company
has, it can raise 2 units of debt. The debt-equity ratio indicates the relative proportions
of capital contribution by creditors and shareholders.
EBIT-EPS ANALYSIS: In our research for an appropriate capital structure we need
to understand how sensitive is EPS (earnings per share) to change in EBIT (earnings
before interest and taxes) under different financing alternatives.
The other factors that should be considered whenever a capital structure decision is
taken are
Cost of capital
Cash flow projections of the company
19
Size of the company
Dilution of control
Floatation costs
FEATURES OF AN OPTIMAL CAPITAL STRUCTURE

An optimal capital structure should have the following features,
PROFITABILITY: The Company should make maximum use of leverages at a

minimum cost.
FLEXIBILITY: The capital structure should be flexible to be able to meet the

changing conditions .The company should be able to raise funds whenever the
need arises and costly to continue with particular sources.
CONTROL: The capital structure should involve minimum dilution of control of

the company.
SOLVENCY: The use of excessive debt threatens the solvency of the company.
In a high interest rate environment, Indian companies are beginning to realize the
advantage of low debt.
CAPITAL STRUCTURE AND FIRM VALUE

Since the objective of financial management is to maximize shareholders wealth, the
key issue is: what is the relationship between capital structure and firm value?
Alternatively, what is the relationship between capital structure and cost of capital?
Remember that valuation and cost of capital are inversely related. Given a certain
level of earnings, the value of the firm is maximized when the cost of capital is
minimized and vice versa.
20
There are different views on how capital structure influences value. Some argue that
there is no relationship what so ever between capital structure and firm value; other
believe that financial leverage (i.e., the use of debt capital) has a positive effect on
firm value up to a point and negative effect thereafter; still others contend that, other
things being equal, greater the leverage, greater the value of the firm.
THE CAPITAL STRUCTURE DECISION PROCESS
21
CAPITAL STRUCTURE AND PLANNING

Capital structure refers to the mix of long-term sources of funds. Such as debentures,
long-term debt, preference share capital including reserves and surplus (i.e., retained
earnings) The board of directors or the chief financial officer (CEO) of a company
should develop an appropriate capital structure, which are most factors to the
22
company. This can be done only when all those factors which are relevant to the
companys capital structure decision are properly analysed and balanced. The capital
structure should be planned generally keeping in view the interests of the equity
shareholders, being the owners of the company and the providers of risk capital
(equity) would be concerned about the ways of financing a companys operations.
However, the interests of other groups, such as employees, customers, creditors,
society and government, should also be given reasonable consideration. When the
company lays down its objective in terms of the shareholders wealth maximization
(SWM), it is generally compatible with the interests of other groups. Thus while
developing an appropriate capital structure for its company, the financial manager
should inter alia aim at maximizing the long-term market price per share.
Theoretically, there may be a precise point or range within an industry there may be a
range of an appropriate capital structure with in which there would not be great
differences in the market value per share. One way to get an idea of this range is to
observe the capital structure patterns of companies vis--vis their market prices of
shares. It may be found empirically that there are not significant differences in the
share values within a given range. The management of a company may fix its capital
structure near the top of this range in order to make maximum use of favorable
leverage, subject to other requirements such as flexibility, solvency, control and norms
set by the financial institutions, the security exchange Board of India (SEBI) and
Stock exchanges.
23
FEATURES OF AN APPROPRIATE CAPITAL STRUCTURE

The board of Director or the chief financial officer (CEO) of a company should develop
an appropriate capital structure, which is most advantageous to the company. This can be
done only when all those factors, which are relevant to the companys capital structure
decision, are properly analyzed and balanced. The capital structure should be planned
generally keeping in view the interest of the equity shareholders and financial
requirements of the company. The equity shareholders being the shareholders of the
company and the providers of the risk capital (equity) would be concerned about the
ways of financing a companys operation. However, the interests of the other groups,
such as employees, customer, creditors, and government, should also be given reasonable
consideration. When the company lay down its objectives in terms of the shareholders
wealth maximizing (SWM), it is generally compatible with the interest of the other
groups. Thus, while developing an appropriate capital structure for it company, the
financial manager should inter-alia aim at maximizing the long-term market price per
share. Theoretically there may be a precise point of range with in which the market value
per share is maximum. In practice for most companies with in an industry there may be a
range of appropriate capital structure with in which there would not be great differences
in the market value per share. One way to get an idea of this range is to observe the
capital structure patterns of companies Vis-a Vis their market prices of shares. It may be
found empirically that there is no significance in the differences in the share value with in
a given range. The management of the company may fit its capital structure near the top
of its range in order to make of maximum use of favorable leverage, subject to other
requirement (SEBI) and stock exchanges.
A SOUND OR APPROPRIATE CAPITAL STRUCTURE SHOULD

HAVE THE FOLLOWING FEATURES
RETURN: the capital structure of the company should be most advantageous, subject
to the other considerations; it should generate maximum returns to the shareholders
without adding additional cost to them.
RISK: the use of excessive debt threatens the solvency of the company. To the point
debt does not add significant risk it should be used other wise it uses should be
avoided.
FLEXIBILITY: the capital structure should be flexibility. It should be possible to

the company adopt its capital structure and cost and delay, if warranted by a changed
situation. It should also be possible for a company to provide funds whenever needed
to finance its profitable activities.
CAPACITY: The capital structure should be determined within the debt capacity of
the company and this capacity should not be exceeded. The debt capacity of the
company depends on its ability to generate future cash flows. It should have enough
cash flows to pay creditors, fixed charges and principal sum.
CONTROL: The capital structure should involve minimum risk of loss of control of
the company. The owner of the closely held companys of particularly concerned
about dilution of the control.
APPROACHES TO ESTABLISH APPROPRIATE CAPITAL

STRUCTURE
The capital structure will be planned initially when a company is incorporated .The initial
capital structure should be designed very carefully. The management of the company
should set a target capital structure and the subsequent financing decision should be made
with the a view to achieve the target capital structure .The financial manager has also to
deal with an existing capital structure .The company needs funds to finance its activities
continuously. Every time when fund shave to be procured, the financial manager weighs
the pros and cons of various sources of finance and selects the most advantageous sources
keeping in the view the target capital structure. Thus, the capital structure decision is a
continuous one and has to be taken whenever a firm needs additional Finances.
The following are the three most important approaches to decide about a firms capital
structure.
EBIT-EPS approach for analyzing the impact of debt on EPS.
Valuation approach for determining the impact of debt on the shareholders value.
Cash flow approached for analyzing the firms ability to service debt.
In addition to these approaches governing the capital structure decisions, many other
factors such as control, flexibility, or marketability are also considered in practice.
EBIT-EPS APPROACH
We shall emphasize some of the main conclusions here .The use of fixed cost sources of
finance, such as debt and preference share capital to finance the assets of the company, is
know as financial leverage or trading on equity. If the assets financed with the use of debt
yield a return greater than the cost of debt, the earnings per share also increases without an
increase in the owners investment. The earnings per share also increase when the
preference share capital is used to acquire the assets. But the leverage impact is more
pronounced in case of debt because
The cost of debt is usually lower than the cost of performance share capital and
The interest paired on debt is tax deductible.
Because of its effect on the earnings per share, financial leverage is an important
consideration in planning the capital structure of a company. The companies with high level
of the earnings before interest and taxes (EBIT) can make profitable use of the high degree
of leverage to increase return on the shareholders equity. One common method of
examining the impact of leverage is to analyze the relation ship between EPS and various
possible levels of EBIT under alternative methods of financing.
The EBIT-EPS analysis is an important tool in the hands of financial manager to get an
insight into the firms capital structure management .He can considered the possible
fluctuations in EBIT and examine their impact on EPS under different financial plans of the
probability of earning a rate of return on the firms assets less than the cost of debt is
insignificant, a large amount of debt can be used by the firm to increase the earning for
share. This may have a favorable effect on the market value per share. On the other hand, if
the probability of earning a rate of return on the firms assets less than the cost of debt is
very high, the firm should refrain from employing debt capital .it may, thus, be concluded
that the greater the level of EBIT and lower the probability of down word fluctuation, the
more beneficial it is to employ debt in the capital structure However, it should be realized
that the EBIT EPS is a first step in deciding about a firms capital structure .It suffers from
certain limitations and doesnt provide unambiguous guide in determining the capital
structure of a firm in practice.
FINANCIAL LEVERAGE
INTRODUCTION
Leverage, a very general concept, represents influence or power. In financial analysis
leverage represents the influence of a financial variable over same other related financial
variable.
Financial leverage is related to the financing activities of a firm. The sources from which
funds can be raised by a firm, from the viewpoint of the cost can be categorized into:
Those, which carry a fixed finance charge.
Those, which do not carry a fixed charge.
The sources of funds in the first category consists of various types of long term debt
including loans, bonds, debentures, preference share etc., these long-term debts carry a
fixed rate of interest which is a contractual obligation for the company except in the case
of preference shares. The equity holders are entitled to the remainder of operating profits
if any.
Financial leverage results from presence of fixed financial charges in eh firms income
stream. These fixed charges dont vary with EBIT or operating profits. They have to be
paid regardless of EBIT availability. Past payment balances belong to equity holders.
Financial leverage is concerned with the effect of changes I the EBIT on the earnings
available to shareholders.
DEFINITION
Financial leverage is the ability of the firm to use fixed financial charges to magnify the
effects of changes in EBIT on EPS i.e., financial leverage involves the use of funds
obtained at fixed cost in the hope of increasing the return to shareholder.
The favorable leverage occurs when the Firm earns more on the assets purchase with the
funds than the fixed costs of their use. The adverse business conditions, this fixed charge
could be a burden and pulled down the companies wealth
MEANING OF FINANCIAL LEVERAGE

As stated earlier a company can finance its investments by debt/equity. The company
may also use preference capital. The rate of interest on debt is fixed, irrespective of the
companys rate of return on assets. The company has a legal banding to pay interest on
debt .The rate of preference dividend is also fixed, but preference dividend are paid when
company earns profits. The ordinary shareholders are entitled to the residual income.
That is, earnings after interest and taxes belong to them. The rate of equity dividend is not
fixed and depends on the dividend policy of a company.
The use of the fixed charges, sources of funds such as debt and preference capital along
with owners equity in the capital structure, is described as financial leverages or
gearing or trading or equity. The use of a term trading on equity is derived from
the fact that it is the owners equity that is used as a basis to raise debt, that is, the equity
that is traded upon the supplier of the debt has limited participation in the companies
profit and therefore, he will insists on protection in earnings and protection in values
represented by owners equitys
FINANCIAL LEVERAGE AND THE SHAREHOLDERS RISK

Financial leverage magnifies the shareholders earnings we also find that the variability of
EBIT causes EPS to fluctuate within wider ranges with debt in the capital structure that is
with more debt EPS raises and falls faster than the rise and fall in EBIT. Thus financial
leverage not only magnifies EPS but also increases its variability.
The variability of EBIT and EPs distinguish between two types of risk- operating risk and
financial risk. The distinction between operating and financial risk was long ago
recognized by Marshall in the following words.
OPERATING RISK
Operating risk can be defined as the variability of EBIT (or return on total assets). The
environment internal and external in which a firm operates determines the variability of
EBIT. So long as the environment is given to the firm, operating risk is an unavoidable
risk. A firm is better placed to face such risk if it can predict it with a fair degree of
accuracy.
THE VARIABILITY OF EBIT HAS TWO COMPONENTS
Variability of sales
Variability of expenses
1. VARIABILITY OF SALES:
The variability of sales revenue is in fact a major determinant of operating risk. Sales of a
company may fluctuate because of three reasons. First the changes in general economic
conditions may affect the level of business activity. Business cycle is an economic
phenomenon, which affects sales of all companies. Second certain events affect sales of
company belongings to a particular industry for example the general economic condition
may be good but a particular industry may be hit by recession, other factors may include
the availability of raw materials, technological changes, action of competitors, industrial
relations, shifts in consumer preferences and so on. Third sales may also be affected by
the factors, which are internal to the company. The change in management the product
market decision of the company and its investment policy or strike in the company has a
great influence on the companys sales.
2. VARIABILITY OF EXPENSES:
Given the variability of sales the variability of EBIT is further affected by the
composition of fixed and variable expenses. Higher the proportion of fixed expenses
relative to variable expenses, higher the degree of operating leverage. The operating
leverage affects EBIT. High operating leverage leads to faster increase in EBIT when
sales are rising. In bad times when sales are falling high operating leverage becomes a
nuisance; EBIT declines at a greater rate than fall in sales. Operating leverage causes
wide fluctuations in EBIT with varying sales. Operating expenses may also vary on
account of changes in input prices and may also contribute to the variability of EBIT.
FINANCIAL RISK
For a given degree of variability of EBIT the variability of EPS and ROE increases with
more financial leverage. The variability of EPS caused by the use of financial leverage is
called financial risk. Firms exposed to same degree of operating risk can differ with
respect to financial risk when they finance their assets differently. A totally equity
financed firm will have no financial risk. But when debt is used the firm adds financial
risk. Financial risk is this avoidable risk if the firm decides not to use any debt in its
capital structure.
MEASURES OF FINANCIAL LEVERAGE

The most commonly used measured of financial leverage are:
Debt ratio: the ratio of debt to total capital, i.e.
Where, D is value of debt, S is value of equity and V is value of total

capital D and S may be measured in terms of book value or market value. The book value
of equity is called not worth.
Debt-equity ratio: The ratio of debt to equity, i.e.,
Interest coverage: the ration of net operating income (or EBIT) to interest charges, i.e.
The first two measures of financial leverage can be expressed in terms of book or market
values. The market value to financial leverage is the erotically more appropriate because
market values reflect the current altitude of investors. But, it is difficult to get reliable
information on market values in practice. The market values of securities fluctuate quite
frequently.
There is no difference between the first two measures of financial leverage in operational
terms. They are related to each other in the following manner.
These relationships indicate that both these measures of financial leverage will rank
companies in the same order. However, the first measure (i.e., D/V) is more specific as its
value ranges between zeros to one. The value of the second measure (i.e., D/S) may vary
from zero to any large number. The debt-equity ratio, as a measure of financial leverage,
is more popular in practice. There is usually an accepted industry standard to which the
companys debt-equity ratio is compared. The company will be considered risky if its
debt-equity ratio exceeds the industry-standard. Financial institutions and banks in India
also focus on debt-equity ratio in their lending decisions.
The first two measures of financial leverage are also measures of capital gearing. They
are static in nature as they show the borrowing position of the company at a point of time.
These measures thus fail to reflect the level of financial risk, which inherent in the
possible failure of the company to pay interest repay debt.
The third measure of financial leverage, commonly known as coverage ratio, indicates
the capacity of the company to meet fixed financial charges. The reciprocal of interest
coverage that is interest divided by EBIT is a measure of the firms incoming gearing.
Again by comparing the companys coverage ratio with an accepted industry standard,
the investors, can get an idea of financial risk .how ever, this measure suffers from certain
limitations. First, to determine the companys ability to meet fixed financial obligations,
it is the cash flow information, which is relevant, not the reported earnings. During
recessional economic conditions, there can be wide disparity between the earnings and
the net cash flows generated from operations. Second, this ratio, when calculated on past
earnings, does not provide any guide regarding the future risky ness of the company.
Third, it is only a measure of short-term liquidity than of leverage.
FINANCIAL LEVERAGE AND THE SHARE HOLDERS RETURN

The primary motive of a company in using financial leverage is to magnify the
shareholders return under favorable economic conditions. The role of financial leverage
in magnifying the return of the shareholders is based under assumption that the fixed
charges funds (such as the loan from financial institutions and other sources or
debentures) can be obtained at a cost lower than the firms rate of return on net assets.
When the difference between the earnings generalized by assets financed by the fixed
charges funds and cost of these funds are distributed to the shareholders, the earnings per
share (EPS) or return on equity increases. However, EPS or ROE will fall if the company
obtains the fixed charges funds at a cost higher than the rate of return on the firms assets.
It should, there fore, be clear that EPS, ROE and ROI are the important figures for
analyzing the impact of financial leverage.
COMBINED EFFECT OF OPERATING AND FINANCIAL

LEVERAGES
Operating and financial leverages together cause wide fluctuations in EPS for a given
change in sales. If a company employs a high level of operating and financial leverage,
even a small change in the level of sales will have dramatic effect on EPS. A company
with cyclical sales will have a fluctuating EPS; but the swings in EPS will be more
pronounced if the company also uses a high amount of operating and financial leverage.
The degree of operating and financial leverage can be combined to see the effect of total
leverage on EPS associated with a given change in sales. The degree of combined
leverage (DCL) is given by the following equation:
Yet another way of expressing the degree of combined leverage is as follows:
Since Q (S-V) is contribution and Q (S-V)-F-INT is the profit after interest but before
taxes, Equation 2 can also be written as follows:
THE CAPITAL STRUCTURE CONTROVERSY

The value of the firm depends upon its expected earnings stream and the rate used to
discount this stream. The rate used to discount earnings stream its the firms required rate
of return or the cost of capital. Thus, the capital structure decision can affect the value of
the firm either by changing the expected earnings of the firm, but it can affect the reside
earnings of the shareholders. The effect of leverage on the cost of capital is not very clear.
Conflicting opinions have been expressed on this issue. In fact, this issue is one of the
most continuous areas in the theory of finance, and perhaps more theoretical and
empirical work has been done on this subject than any other.
If leverage affects the cost of capital and the value of the firm, an optimum capital
structure would be obtained at that combination of debt and equity that maximizes the
total value of the firm or minimizes the weighted average cost of capital. The question of
the existence of optimum use of leverage has been put very succinctly by Ezra Solomon
in the following words.
Given that a firm has certain structure of assets, which offers net operating earnings of
given size and quality, and given a certain structure of rates in the capital markets, is there
some specific degree of financial leverage at which the market value of the firms
securities will be higher than at other degrees of leverage?
The existence of an optimum capital structure is not accepted by all. There exist two
extreme views and middle position. David Durand identified the two extreme views the
net income and net operating approaches.
1. NET INCOME APPROACH:
Under the net income approach (NI), the cost of debt and cost of equity are assumed to be
independent to the capital structure. The weighted average cost of capital declines and the
total value of the firm rise with increased use of leverage.
2. NET OPERATING INCOME APPROACH:
Under the net operating income (NOI) approach, the cost of equity is assumed to increase
linearly with average. As a result, the weighted average cost of capital remains constant
and the total value of the firm also remains constant as leverage is changed.
3. TRADITIONAL APPROACH:
According to this approach, the cost of capital declines and the value of the firm increases
with leverage up to a prudent debt level and after reaching the optimum point, coverage
cause the cost of capital to increase and the value of the firm to decline.
Thus, if NI approach is valid, leverage is significant variable and financing decisions
have an important effect on the value of the firm. On the other hand, if the NOI approach
is correct then the financing decisions should not be a great concern to the financing
manager, as it does not matter in the valuation of the firm.
Modigliani and Miller (MM) support the NOI approach by providing logically consistent
behavioral justifications in its favor. They deny the existence of an optimum capital
structure between the two extreme views; we have the middle position or intermediate
version advocated by the traditional writers. Thus these exists an optimum capital
structure at which the cost of capital is minimum. The logic of this view is not very
sound. The MM position changes when corporate taxes are assumed. The interest tax
shield resulting from the use of debt adds to the value of the firm. This advantage reduces
the when personal income taxes are considered.
CAPITAL
STRUCTURE
MATTERS:
THE
NET
INCOME
APPROACH
The essence of the net income (NI) approach is that the firm can increase its value or
lower the overall cost of capital by increasing the proportion of debt in the capital
structure. The crucial assumptions of this approach are:
The use of debt does not change the risk perception of investors; as a result, the
equity capitalization rate, kc and the debt capitalization rate, kd, remain constant
with changes in leverage.
The debt capitalization rate is less than the equity capitalization rate (i.e. kd<ke)
The corporate income taxes do not exist.
The first assumption implies that, if ke and kd are constant increased use by debt by
magnifying the shareholders earnings will result in higher value of the firm via higher
value of equity consequently the overall or the weighted average cost of capital k o, will
decrease. The overall cost of capital is measured by equation: (1)
It is obvious from equation 1 that, with constant annual net operating income (NOI), the
overall cost of capital would decrease as the value of the firm v increases. The overall
cost of capital ko can also be measured by
KO = Ke - (Ke - Kd) D/V
As per the assumptions of the NI approach K e and Kd are constant and Kd is less than Ke.
Therefore, Ko will decrease as D/V increases. Equation 2 also implies that the overall cost
of capital Ko will be equal to Ke if the form does not employ any debt (i.e. D/V =0), and
that Ko will approach Kd as D/V approaches one.
NET OPERATING INCOME APPROACH

According to the met operating income approach the overall capitalization rate and the
cost of debt remain constant for all degree of leverage.
rA and rD are constant for all degree of leverage. Given this, the cost of equity can be
expressed as.
The critical premise of this approach is that the market capitalizes the firm as a whole at
discount rate, which is independent of the firms debt-equity ratio. As a consequence, the
decision between debt and equity is irrelevant. An increase in the use of debt funds which
are apparently cheaper or offset by an increase in the equity capitalization rate. This
happens because equity investors seek higher compensation as they are exposed to
greater risk arising from increase in the degree of leverages. They raise the capitalization
rate rE (lower the price earnings ratio, as the degree of leverage increases.
The net operating income position has been \advocated eloquently by David Durand. He
argued that the market value of a firm depends on its net operating income and business
risk. The change in the financial leverage employed by a firm cannot change these
underlying factors. It merely changes the distribution of income and risk between debt
and equity, without affecting the total income and risk which influence the market value
(or equivalently the average cost of capital) of the firm. Arguing in a similar vein,
Modigliani and Miller, in a seminal contribution made in 1958, forcefully advanced the
proposition that the cost of capital of a firm is independent of its capital structure.
COST OF CAPITAL AND VALUATION APPROACH

The cost of a source of finance is the minimum return expected by its suppliers. The
expected return depends on the degree of risk assumed by investors. A high degree of risk
is assumed by shareholders than debt-holders. In the case of debt-holders, the rate of
interest is fixed and the company is legally bound to pay dividends even if the profits are
made by the company. The loan of debt-holders is returned within a prescribed period,
while shareholders will have to share the residue only when the company is wound up.
This leads one to conclude that debt is cheaper source of funds than equity. This is
generally the case even when taxes are not considered. The tax deductibility of interest
charges further reduces the cost of debt. The preference share capital is also cheaper than
equity capital, but not as cheap as debt. Thus, using the component, or specific, cost of
capital as criterion for financing decisions and ignoring risk, a firm would always like to
employ debt since it is the cheapest source of funds.
CASH FLOW APPROACH

One of the features of a sound capital structure is conservatism does not mean employing
no debt or small amount of debt. Conservatism is related to the fixed charges created by
the use of debt or preference capital in the capital structure and the firms ability to
generate cash to meet these fixed charges. In practice, the question of the optimum
(appropriate) debt equity mix boils down to the firs ability to service debt without any
threat of insolvency and operating inflexibility. A firm is considered prudently financed if

it is able to service its fixed charges under any reasonably predictable adverse conditions.
The fixed charges of a company include payment of interest, preference dividend and
principal, and they depend on both the amount of loan securities and the terms of
payment. The amount of fixed charges will be high if the company employs a large
amount of debt or preference capital with short-term maturity. Whenever a company
thinks of raising additional debt, it should analyze its expected future cash flows to meet
the fixed charges. It is mandatory to pay interest and return the principal amount of debt
of a company not able to generate enough cash to meet its fixed obligation; it may have
to face financial insolvency. The companies expecting larger and stable cash inflows in to
employ fixed charge sources of finance by those companies whose cash inflows are
unstable and unpredictable. It is possible for high growth, profitable company to suffer
from cash shortage if the liquidity (working capital) management is poor. We have
examples of companies like BHEL, NTPC, etc., whose debtors are very sticky and they
continuously face liquidity problem in spite of being profitability servicing debt is very
burdensome for them.
One important ratio which should be examined at the time of planning the capital
structure is the ration of net cash inflows to fixed changes (debt saving ratio). It indicates
the number of times the fixed financial obligation are covered by the net cash inflows
generated by the company.
LIMITATION OF EPS AS A FINANCING-DECISION CRITERION

EPS is one of the mostly widely used measures of the companys performance in
practice. As a result of this, in choosing between debt and equity in practice, sometimes
too much attention is paid on EPS, which however, has serious limitations as a financingdecision criterion.
The major short coming of the EPS as a financing-decision criterion is that it does not
consider risk; it ignores variability about the expected value of EPS. The belief that
investors would be just concerned with the expected EPS is not well founded. Investors
in valuing the shares of the company consider both expected value and variability.
EPS VARIABILITY AND FINANCIAL RISK

The EPS variability resulting form the use of leverage is called financial risk. Financial
risk is added with the use of debt because of
The increased variability in the shareholders earnings and
The threat of insolvency.
A firm can avid financial risk altogether if it does not employ any debt in its capital
structure. But then the shareholders will be deprived of the benefit of the financial risk
perceived by the shareholders, which does not exceed the benefit of increase EPS. As we
have seen, if a company increase its debt beyond a point the expected EPS will continue
to increase but the value of the company increases its debt beyond a point, the expected
EPS will continue to increase, but the value of the company will fall because of the
greater exposure of shareholders to financial risk in the form of financial distress. The
EPS criterion does not consider the long-term perspectives of financing decisions. It fails
to deal with the risk return trade-off. A long term view of the effects of the financing
decisions, will lead one to a criterion of the wealth maximization rather that EPS
maximization. The EPS criterion is an important performance measure but not a decision
criterion.
Given limitations, should the EPS criterion be ignored in making financing decision?
Remember that it is an important index of the firms performance and that investors rely
heavily on it for their investment decisions. Investors do not have information in the
projected earnings and cash flows and base their evaluation and historical data. In
choosing between alternative financial plans, management should start with the
evaluation of the impact of each alternative on near-term EPS. But managements
ultimate decision making should be guided by the best interests of shareholders.

Therefore, a long-term view of the effect of the alternative financial plans on the value of
the shares should be taken, o management opts for a financial plan which will maximize
value in the long run but has an adverse impact in near-term EPS, and the reasons must
be communicated to investors. A careful communication to market will be helpful in
reducing the misunderstanding between management and Investors.
COMPOSITION AND OBSERVATION

The sources tapped by NCL Industries Ltd. Can be classified into:
Shareholders funds resources
Loan fund resources
SHAREHOLDER FUND RESOURCES

Shareholders fund consists of equity capital and retained earnings.
EQUITY CAPITAL BUILD-UP
From 1996, the Authorised capital is Rs.450 lacs of equity shares at Rs.10 each.
The issued equity capital is RS.1622.93 lacs at Rs.10 each for the period 20052009 and subscribed and paid-up capital is Rs. 1622.93 lacs at Rs.10 each for the
period of 2006-2009.
In 2005-2014 the calls in arrears added to equity is Rs.0.55 lacs and in 2004 there
are no calls in arrears.
There is an increase of 1.38% in the equity from 2005-2014.
RETAINED EARNINGS COMPOSITION

This includes
Capital Reserve
Share Premium Account
General Reserve
Contingency Reserve
Debentures Redemption Reserve
Investment Allowance Reserve
Profit & Loss Account
The profit levels, company dividend policy and growth plans determined. The amounts
transferred from P&L A/c to General Reserve. Contingency Reserve and Investment
Allowance Reserve.
The Investment Allowance Reserve is created for replacement of long term leased assets and
this reserve was removed from books because assets pertaining to such reserves ceased to
exist. The account was transferred to investment allowance utilized.
CHAPTER V
DATA ANALYSIS
AND
INTERPRETATION
RATIO ANALYSIS
The primary user of financial statements are evaluating part performance and predicting
future performance and both of these are facilitated by comparison. Therefore the focus
of financial analysis is always on the crucial information contained in the financial
statements. This depends on the objectives and purpose of such analysis. The purpose of
evaluating such financial statement is different form person to person depending on its
relationship. In other words even though the business unit itself and shareholders,
debenture holders, investors etc. all under take the financial analysis differs. For example,
trade creditors may be interested primarily in the liquidity of a firm because the ability of
the business unit to play their claims is best judged by means of a through analysis of its
l9iquidity. The shareholders and the potential investors may be interested in the present
and the future earnings per share, the stability of such earnings and comparison of these
earnings with other units in thee industry. Similarly the debenture holders and financial
institutions lending long-term loans maybe concerned with the cash flow ability of the
business unit to pay back the debts in the long run. The management of business unit, it
contrast, looks to the financial statements from various angles. These statements are
required not only for the managements own evaluation and decision making but also for
internal control and overall performance of the firm. Thus the scope extent and means of
any financial analysis vary as per the specific needs of the analyst. Financial statement
analysis is a part of the larger information processing system, which forms the very basis
of any decision making process.
The financial analyst always needs certain yardsticks to evaluate the efficiency and
performance of business unit. The one of the most frequently used yardsticks is ratio
analysis. Ratio analysis involves the use of various methods for calculating and
interpreting financial ratios to assess the performance and status of the business unit. It is
a tool of financial analysis, which studies the numerical or quantitative relationship
between with other variable and such ratio value is compared with standard or norms in
order to highlight the deviations made from those standards/norms. In other words, ratios
are relative figures reflecting the relationship between variables and enable the analysts to
draw conclusions regarding the financial operations.
However, it must be noted that ratio analysis merely highlights the potential areas of
concern or areas needing immediate attention but it does not come out with the
conclusion as regards causes of such deviations from the norms. For instance, ABC Ltd.
Introduced the concept of ratio analysis by calculating the variety of ratios and comparing
the same with norms based on industry averages. While comparing the inventory ratio
was 22.6 as compared to industry average turnover ratio of 11.2. However on closer sell
tiny due to large variation from the norms, it was found that the business units inventory
level during the year was kept at extremely low level. This resulted in numerous
production held sales and lower profits. In other words, what was initially looking like an
extremely efficient inventory management, turned out to be a problem area with the help
of ratio analysis? As a matter of caution, it must however be added that a single ration or
two cannot generally provide that necessary details so as to analyze the overall
performance of the business unit.
In order to arrive at the reasonable conclusion regarding overall performance of the
business unit, an analysis of the entire group of ratio is required. However, ration analysis
should not be considered as ultimate objective test but it may be carried further based on
the out come and revelations about the causes of variations. Some times large variations
are due to unreliability of financial data or inaccuracies contained there in therefore
before taking any decision the basis of ration analysis, their reliability must be ensured.
Similarly, while doing the inter-firm comparison, the variations may be due to different
technologies or degree of risk in those units or items to be examined are in fact the
comparable only. It must be mentioned here that if ratios are used to evaluate operating
performance, these should exclude extra ordinary items because there are regarded as
non-recurring items that do not reflect normal performance.
Ratio analysis is the systematic process of determining and interpreting the numerical
relationship various pairs of items derived form the financial statements of a business.
Absolute figures do not convey much tangible meaning and is not meaningful while
comparing the performance of one business with the other.
It is very important that the base (or denominator) selected for each ratio is relevant with
the numerator. The two must be such that one is closely connected and is influenced by
the other
CAPITAL STRUCTURE RATIOS

Capital structure or leverage ratios are used to analyse the long-term solvency or stability
of a particular business unit. The short-term creditors are interested in current financial
position and use liquidity ratios. The long-term creditors world judge the soundness of a
business on the basis of the long-term financial strength measured in terms of its ability
to pay the interest regularly as well as repay the installment on due dates. This long-term
solvency can be judged by using leverage or structural ratios.
There are two aspects of the long-term solvency of a firm:
Ability to repay the principal when due, and
Regular payment of interest, there are thus two different but mutually dependent and
interrelated types of leverage ratio such as: Ratios based on the relationship between
borrowed funds and owners capital, computed form balance sheet e.g. debt-equity
ratio, dividend coverage ratio, debt service coverage ratio etc.,
RETURN ON ASSETS
In this case profits are related to assets as follows
Return on assets =
Net profit after tax

Total assets
Particulars
2009
2010
2011
2012
2013
2014
128.5
ROA =
PAT
TOTAL ASSETS
290.77
9044.4
274.5
8916.5
104.12
8632.1
7
8985.
252.19
9283.8
340.78
1017.3
1
3.21
1
3.08
1
1.21
5
1.43
6
2.72
2
3.34
RETURN ON CAPITAL EMPLOYED

Here return is compared to the total capital employed. A comparison of this ratio with that
of other units in the industry will indicate how efficiently the funds of the business have
been employed. The higher the ratio the more efficient is the use of capital employed.
Return on capital employed
Net profit after taxes & Interest

Total capital employed
(Total capital employed = Fixed assets + Current assetsCurrent liabilities)
Particulars
2009
2010
2011
2012
2013
2014
ROSE=PAT
290.77
Total capital 7111.40
274.5
104.12
128.57
252.19
340.78
7112.91
6827.97
6993.93
7079.20
9994.02
3.85
1.52
1.83
3.56
3.40
emp
4.08
YEAR 2008-2009
PERFORMANCE OF COMPANY (AMOUNT IN RS.000S)
Gross Revenue
Profit (Loss) before tax
Earnings per share Rs.
773919
30577
1.79
Total Expenditure
Profit after tax
Dividend ratio
743342
29077
10%
YEAR 2009-2010
Gross Revenue
742200
30279
1.69
Total Expenditure
Profit after tax
Dividend ratio
711921
27450
10%
YEAR 2010-2011
Gross Revenue
726774
11218
0.64
Total Expenditure
Profit after tax
Dividend ratio
715556
10412
5%
YEAR 2011-2012
Gross Revenue
726774
11218
0.64
Total Expenditure
Profit after tax
Dividend ratio
715556
10412
5%
YEAR 2012-2013
Gross Revenue
924313
51802
1.55
Total Expenditure
Profit after tax
Dividend ratio
872511
25219
10%
YEAR 2013-2014
Gross Revenue
1275243
71313
2.10
Total Expenditure
Profit after tax
Dividend ratio
1203680
34078
15%
PERFORMANCE ANALYSIS OF 2008-2009

There has been an increase of over 25% sales, where compared to previous year there by
contributing to increase in Gross Profit which increases over 45% because of increase in
sales and decrease in cost of sales which in due to reduction in royalty for mining and
other overheads reduction. In this year the companys operating profit is around 165 lacs
as compared to a heavy loss of over 365 lacs in previous year cost reduction also
contributed to the alone. A dividend of Rs.178 lacs was declared for the year including
Tax.

There has been an increase of over 20% sales when compared to cost year, which
resulted in Gross Profit of Rs.1375 lacs as against around 1300 lacs in last year. Because
of decrease in Non-Operating expenses to the time of 130 lacs the Net profit has
increased. It stood at 293 lacs in current year against 165 lacs in previous year because of
redemption of debenture and cost reduction. A dividend of Rs.162 lacs was declared
during the year at 10% on equity.
The production and Sales has increased by 23%
Cement turn over has increased by 6% as against fall in Sales realization by 15% last
year.
Cement Boards Division has contributed 18% more than the previous year to the
PBDIT.
Perform Division realization has increased by 4% even the Turn over have came
down to 845 lacs from 1189lacs in last year.
The profit After Tax has came down from 302 lacs to 112lacs in Current year because
of slope in Cement Industry.
The Interest cost has come down by 24% due to reduction in Interest rates by
Commercial Banks & Public Deposits.

The Cement Industry has a successful year because of Govt. policies such as
infrastructure Development a Rural housing. There has been a small reduction in Gross
Sales and with the performance of prefab Division the Gross Profit gap has narrowed and
contributing to the EBIT. The Gross Profit has increased considerably from 1014 lacs in
Last year to 1259 lacs in Current year. The interest payment has increased by 14 lacs in
the Current year and the Profit before Tax at 331 lacs when compared to 112 lacs in Last
year. The Net profit also increased from 104 lacs in Last year to 128.57 lacs in Current
year. The Director has recommended a 7.5% Dividend and in Last year it was at 5%.
In 2004-05 the company has performed well in all decisions because of high demand and
realizations. The Gross Profit Increased considerably and the interest payments have
decreased at about 140 lacs because of loans taken from the bank at a lesser rate of
interest and payment of loan funds for which the company is paying higher rate of
interest. In the previous year, the cash credit granted by UCO bank to the tune of Rs.594
lacs and losing of loan funds borrowed from Vijaya Bank and Canara Bank factors, which
can tribute to increase in the Profit before Tax to the tune of Rs.190 lacs the company
declared a dividend of 10% on its equity to its shareholders when compared to 7.5% in
the previous year. The EPS of the company also increased considerably which investors
in coming period. The company has taken up a plant expansion program during the year
to increase the production activity and to meet the increase in the demand
Company is operating in 3 segments, out of which cement contributes about 55%

of turnover while the Boards and prefab segments contribute about 45%. Huge
investment in the industrial sector over the next 3 years is expected to lead to higher
cement off take on the back of strong GDP growth across the country. It is expected that
the domestic cement consumption would grow at a CAGR of 8% for the next 5 ears. By
FY 2001 the domestic consumption is expected to grow to 199 million Tons from 136
million Tons consumption FY2006. During the year 2005-06 your companys Gross sales
increased by about 38% to Rs.12708 Lacks from Rs.9224 Lacks in FY
2004-05. Net
sales increased by about 39% to Rs.10337 Lacks from Rs.7448 Lacks in FY 2004-05.
Improved sales from all the tree divisions particularly from prefab division contributed
for increased turnover.
EBIT LEVELS
Particulars
2009
2010
2011
2012
2013
2014
1096.15
969.61
618.76
803
861.16
1235.69
126.54
477.39
294.2
234.99
374.53
Earnings Before
Interest & Tax
Change
43.55
% Change
11.50%
26.83%
21.44
%
30.30%
DEGREE OF FINANCIAL LEVERAGE:
The higher the quotient of DEL, the greater the leverage is. In NCL Industries case it is
increasing because of decrease in EBIT levels from 2003-2004, to 2008-2009.
The EBIT level is in a decreasing trend because of drastic decline in prices in Cement
Industry during above period.
In the year 2008 and 2009 the EBIT level has increased substantially because of Raise inn
Cement prices because of demand and the policies of Govt. such as rural housing and
irrigation project taken up.
2500
2000
1500
1000
500
0
1
INTERPRETATION
The EBIT level in 2005 is at 1096.15 lacs and is decreasing every year till 2006. Because
of slump in the Cement Industry less realisation. The EBIT levels in 2007 again started
growing and reached to 802.46 lacs and in 2006 were at 861.16 lakhs and in 2009 were at
861.16, because of the sale price increase per bag and increase in demand. The
infrastructure program taken up by the A.P. Govt. in the field s of rural housing irrigation
projects created demand and whole Cement Industries are making profits.
PERFORMANCE
EPS ANALYSIS
Particulars
2009
2907700
2010
2011
2012
3056900
2013
3280600
2014
2745000
10412000
34078000
2907700
1285700
2521900
share holder
No. OF equity
27450000
10412000
34093133
share of Rs.10/-
1623482
1623482
1623482
5
0.79
5
1.55
Profit After Tax

Less: Preference
Dividend
Amount of Equity
each
EPS
5
1.79
16234825
1.69
16234825
0.64
16234825
2.1
EPS LEVELS
2.5
EPS
2
1.5
1
0.5
0
2005
2006
2007
2008
YEARS
2009
2010
INTERPRETATION
The PAT is in an increasing trend from 2005-2006 because of increase in sale prices and
also decreases in the cost of manufacturing. In 2007 and 2008 even the cost of
manufacturing has increased by 5% because of higher sales volume PAT has increased
considerably, which leads to higher EPS, which is at 9.36 in 2008
EBIT EPS CHART
One convenient and useful way showing the relationship between EBIT and EPS for the
alternative financial plans is to prepare the EBIT-EPS chart. The chart is easy to prepare
since for any given level of financial leverage, EPS is linearly related to EBIT. As noted
earlier, the formula for calculating EPS is
EPS = (EBIT - INT) (1 T)
(EBIT - INT) (1 T)
We assume that the level of debt, the cost of debt and the tax rate are constant. Therefore
in equation, the terms (1-T)/N and INT (=iD) are constant: EPS will increase if EBIT
increases and fall if EBIT declines. Can also be written as follows
Under the assumption made, the first part of is a constant and can be represented by an
EBIT is a random variable since it can assume a value more or less than expected. The
term (1 T)/N are also a constant and can be shown as b. Thus, the EPS, formula can be
written as:
EPS = a + bEBIT
Clearly indicates that EPS is a linear function of EBIT.
FINANCING DECISION
Financing strategy forms a key element for the smooth running of any organization where
flow, as a rare commodity, has to be obtained at the optimum cost and put into the wheels
of business at the right time and if not, it would lead intensely to the shut down of the
business.
Financing strategies basically consists of the following components:
Mobilization
Costing
Timing/Availability
Business interests
Therefore, the strategy is to always keep sufficient availability of finance at the optimum
cost at the right time to protect the business interest of the company.
STRATEGIES IN FINANCE MOBILIZATION
There are many options for the fund raising program of any company and it is quite
pertinent to note that these options will have to be evaluated by the finance manager
mainly in terms of:
Cost of funds
Mode of repayment
Timing and time lag involved in mobilization
Assets security
Stock options
Cournands in terms of participative management and
Other terms and conditions.
Strategies of finance mobilization can be through two sectors, that is, owners resources
and the debt resources. Each of the above category can also be split into: Securitized
resources; and non-securities resources. Securitized resources are those who instrument
of title can be traded in the money market and non-securities resources and those, which
cannot be traded in the market.
THE FORMS OF FUNDS MOBILIZATION IS ILLUSTRATED BY A CHART:

FUNDING MIX - SOURCES
OWNERS FUND
EQUITY
CAPITAL
RETAINED
EARNINGS
BORROWED FUND
PREFERENCE
CAPITAL
CONVENTIONAL
SOURCES
NON- CONVENTIONAL
SOURCES
FINANCIAL
SUPPLIERS CREDIT
INSTITUTION
SHORT TERM
BANK
BANK BORROWING
CASH CREDIT
DEBENTURES
FIXED DEPOSITS
ICD
HIRE PURCHASE
NCL INDUSTRIES LTD. THE FUNDING MIX
Particulars
2009
2010
2011
2012
2013
2014
a) Share capital
b) Reserves and
1622.93
1622.93
1622.93
1622.93
1622.93
2179.97
surplus
1502.87
796.48
890.21
881.46
948.59
937.65
c)Deferred tax
TOTAL (A)
Loan Funds
3125.8
778.62
3198.03
787.99
3301.13
2504.39
2571.52
3117.62
a) Secured Loans
1724.9
1372.53
1413.17
1167.82
1783.66
4015.28
b) Unsecured Loans
2299.16
2588.22
2161.95
2404.33
1711.95
1954.07
TOTAL (B)
TOTAL (A+B)
% of S H in total C.E
% of Loan Fund in
4024.06
7154.86
43.72
3960.75
7158.78
44.67
3575.12
6876.24
48
3572.15
6075.92
41.22
3495.61
6067.13
42.38
5969.35
9086.97
34.3
56.28
55.33
52
58.78
57.62
65.69
Source of funds
Share holders funds
total C.E
INTERPRETATION
The shareholder fund is at 3125.8 constitutes 43.72% in total C.E and loan funds
constitute 56.28% in 2004-05. The Funding Mix on an average for 6 years will be 45% of
shareholders Fund and 55% of Loan Funds there by the company is trying to maintain a
good Funding Mix. The leverage or trading on equity is also good because the company
affectively utilizing the Loan Funds in the Capital Structure. So that it leads to higher
profit increase of EPS in 2005 at 0.79 to 2006 1.55
TERM LOANS
2008-2009
Particulars
Rs. (in Lakhs)
TERM LOANS
IDBI
0.00
IFCI
0.00
0.00
HIRE PURCHASE LOANS

TVS Lakshmi Credit Ltd
0.00
0.00
Haritha Finance Ltd
0.00
0.00
Funded interest
0.00
0.00
Non Convertible Debentures
1027.98
CASH CREDIT
Global Trust Bank
641.33
Vijaya Bank
55.59
696.92
1,724.90
UNSECURED LOANS
Deposits from public
727.76
Lease /Hire purchases
0.34
IFST Loan from Govt. of AP
0.00
Deferred sales tax loan
1.60
Deposits from stockiest & others

Inter corporate deposits
1,566.21
3.25
TOTAL
2,299.16
TERM LOANS
2009-2010
Particulars
Rs. (in Lakhs)
TERM LOANS
IDBI
0.00
IFCI
0.00
0.00
HIRE PURCHASE LOANS

0.00
0.00
Haritha Finance Ltd
0.00
0.00
Funded interest
0.00
0.00
Non Convertible Debentures
677.75
CASH CREDIT
Global Trust Bank
638.21
Vijaya Bank
56.57
694.78
1,372.53
UNSECURED LOANS
602.15
4.64
IFST Loan from Govt. of AP
0.00
0.00
1730.39
50.00
Others
201.04
TOTAL
2588.22
TERM LOANS
2010-2011
Particulars
Rs. (in Lakhs)
TERM LOANS
Indian Renewable Energy
255.00
development agency ltd.

Non convertible debentures
509.61
HIRE PURCHASE LOANS

0.00
0.00
Haritha Finance Ltd
0.00
0.00
Funded interest
0.00
0.00
CASH CREDIT
Global Trust Bank
583.41
Vijaya Bank
65.15
648.56
1,413.17
UNSECURED LOANS
600.54
21.25
Canara Bank factors ltd.
100.09
0.00

1,239.02
0.00
Others
201.04
TOTAL
2161.94
TERM LOANS
2011-2012
Particulars
Rs. (in Lakhs)
TERM LOANS
207.00

0.00
HIRE PURCHASE LOANS

0.00
0.00
Haritha Finance Ltd
0.00
0.00
Funded interest
0.00
0.00
CASH CREDIT
Global Trust Bank
627.10
Vijaya Bank
174.12
Canara Bank Factors
158.98
960.20
1167.20
UNSECURED LOANS
592.31
1600.68
Lease/Hire purchase
10.30
Others
201.04
TOTAL
3571.53
TERM LOANS
2012-2013
Particulars
Rs. (in Lakhs)
TERM LOANS
779.17

0.00
HIRE PURCHASE LOANS

0.00
0.00
Haritha Finance Ltd
0.00
0.00
Funded interest
0.00
0.00
CASH CREDIT
Oriental Bank of Commerce
410.15
UCO Bank
594.34
Canara Bank Factors
0.00
1004.49
1167.20
UNSECURED LOANS
399.69
1053.83
Lease/Hire purchase
57.39
Others
201.04
TOTAL
3495.64
TERM LOANS
2013-2014
Particulars
Rs. (in Lakhs)
TERM LOANS
2532.14

0.00
HIRE PURCHASE LOANS

0.00
0.00
Haritha Finance Ltd
0.00
0.00
Funded interest
0.00
0.00
CASH CREDIT
Oriental Bank of Commerce
561.32
UCO Bank
Canara Bank Factors
UTI Bank Ltd
306.54
403.46
211.82
UNSECURED LOANS
Interest free from sales tax
deferment loan
1483.14
4015.28
162.40
616.87
919.26
Lease/Hire purchase
54.25
Others
201.29
TOTAL
5969.35
TERMS LOANS
Rs. IN LAKHS
7,000.00
6,000.00
5,000.00
4,000.00
3,000.00
2,000.00
1,000.00
0.00
200809
200910
201011
201112
YEARS
201213
201314
INTERPRETATION
The Non-convertible debentures are being redeemed from 2008 and 2009 financial year
onwards and were completely repaid by 2013-2014. The cash credit assistance was
provided by Global Trust Bank and Vijaya Bank to the tune of Rs.696 lacs and Canara
bank factors to the tune Rs.158 lacs was completely repaid by taking cash credit facility
from Oriental Bank of Commerce and UCO Bank to the tune of Rs.1000 lacs. The
company is paying of deposits from public every year.
Deposits from public were stood at 727.76 lacs in 2008-2009 and in 2013-2014 it came
down to 399.69 lacs. The IRIDA has granted Rs.255 lacs term loan for installation of
energy saving equipment and the loan was again increased to 779.17 lacs in 2013-2014.
YEAR 2008- 2009

POSITION OF MOBILIZATION AND DEVELOPMENT OF FUNDS
(AMOUNT IN RS.000S)
Total liabilities
Sources of funds
Paid u capital
Secured Loans
Application of funds
Net fixed assets
Net current assets
Accumulated losses
714986
Total assets
714986
162293
172496
Reserves & surplus

Unsecured loans
150287
229916
522854
182008
Investments
Misc. Expenditure
6278
3846
YEAR 2009 - 2010

(AMOUNT IN RS. 000S)
Total liabilities
Sources of funds
Paid u capital
Secured Loans
Net fixed assets
Net current assets
Accumulated losses
715878
Total assets
715878
162293
137253
Reserves & surplus

Unsecured loans
79648
258822
554677
150891
Investments
Misc. Expenditure
5723
4587
YEAR 2010 2011

Total liabilities
Sources of funds
Paid u capital
687624
Total assets
687624
162293
Secured Loans
Net fixed assets
Net current assets
Accumulated losses
141317
Reserves & surplus

Deferred tax
Unsecured loans
89021
78799
216194
Investments
Misc. Expenditure
5019
4827
517233
160545
Nil
Financial leverage results from the presence of fixed financial charges in the firm income
stream. These fixed charges dont vary with EBIT availability post payment balances
belong to equity holders.
Financial leverage is concerned with the effect of charges in the EBIT on the earnings
available to shareholders.
YEAR 2011-2012
Total liabilities
Sources of funds
Paid u capital
703225
Total assets
703225
162293
Secured Loans
116720
Reserves & surplus

Deferred tax
Unsecured loans
88146
78799
240433
Net fixed assets

Net current assets
Accumulated losses
477931
211462
Nil
Investments
Misc. Expenditure
10000
4827
YEAR 2012- 2013

POSITION OF MOBILIZATION AND DEVELOPMENT OF FUNDS (AMOUNT
IN RS. 000S)
Total liabilities
Sources of funds
Paid u capital
Secured Loans
Net fixed assets
Net current assets
Accumulated losses
928386 Total assets
928386
1622.93 Reserves & surplus

Deferred tax
178366 Unsecured loans
94859
1041.93
171195
481100 Investments
213820 Misc. Expenditure
Nil
13000
2986
YEAR 2013 2014

Total liabilities
Sources of funds
Paid u capital
1017320
Total assets
1017320
1623.48
Secured Loans
Net fixed assets
Net current assets
Accumulated losses
4015.28
Reserves & surplus

Deferred tax
Unsecured loans
93765
1086.23
195407
Investments
Misc. Expenditure
13000
4910
7055.88
2938.22
Nil
CHAPTER VI
FINDINGS
AND
SUGGESTIONS
FINDINGS
Sales in 2012-2013 are 7267.74 and in 2013-2014 12752.43 lakhs those in a

decreasing trend to the extent of 20% every year. On the other hand
manufacturing expenses are at 8725.11 lakhs from 2012-2013. There has been
significant increase in cost of production during 2012-2013 because of increase in
Royasslty.
The interest charges were 492.21 in 2012 and 357.07in 2013 and 522.56
respectively shows that the company redeemed fixed interest bearing funds from
time to time out of profit from 2007-2008.Debantures were partly redeemed with
the help of debenture redemption reserve and other references.
The PAT (Profit after Tax) in 2013-2014 is at 340.78 lakhs. The PAT has increased
in prices in whole Cement industry during the
above period. The profit has
increased almost 15% during the period 2011-2014.
Debentures were redeemed by transfers to D.R.R. in 2012-2014.
A steady transfer for dividend during 2010-2014 from P&L appropriation but in
2007 there is no adequate dividend equity Shareholders.
The share capital of the company remained in charge during the three-year period
because of no public issues made by the company.
The secured loans have decreased consistently from 2012 - 2014 and slight
increase in 2010.
The unsecured loans have increased from 2011-2014. All the secured and an
insecure loan obtained by the company to optimize the leverage financially has
some set books. Because of non-payment of dividends to share holders. Because
of less profit made during the period.
The reserves of the company steadily increase from 2011 to 2014. Because of less
transfer in P&L appropriation A/C and transfer to differed Tax. Thus
marginalizing the equity interest net worth of the company.
The current ratio of the company in 2011-12 is at 2.08 and in 2012-13 at 1.98 and in
2013-14 at 1.95, which is as per the norms of the manufacturing Industry. The
current Ratio shows that the companys liquidity or short-term solvency is in a
better position to pay off the current liabilities as and when payable.
The quick ratio is also increased considerably during the period.
SUGGESTIONS
The company has to maintain the optimal capital structure and leverage so that in
coming years it can contribute to the wealth of the shareholders.
The mining loyalty contracts should be revised so that it will decrease the direct in
the production.
The company has to exercise control over its out side purchases and overheads
which have effect on the profitability of the company.
As the interest rates in pubic Financial institutions are in a decreasing trend after
globalization the company going on searching for loan funds at a less rate of
interest as in the case of UCO Bank.
Efficiency and competency in managing the affairs of the company should be

maintained.
CHAPTER VII
CONCLUSION
Since, all the production units in NCL INDESTRIES LIMITED COMPANY Will
run perpetually through out the year, there will be minimum variations in the revenue
expenditure budget estimates and actuals. As the expenditure will be incurred more or
less to the estimations made by the organization.
In concern with overhead expenses, it will also be with minimum variations between
budget estimates and actuals. Since the production process will be consistent. Any change
in the items of expenditure, will lead to the review in the budget estimates by the
accounts and finance department. It is also suggested to the company that budget
techniques will be very useful to control and manage cost effectively.
BIBLOGRAPHY
Financial Management
Khan & Jain
I.M. Pandey
R.P. Rastogi
Strategic Management
John .A. Pierce
nclindustries.com
World Wide Web
News Papers
Financial Express
Economic Times
Websites
www.nclind.com
www.google.com

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A STUDY ON

CAPITAL STRUCTURE ANALYSIS

Under the guidance of

Department of Business Management

This project work entitled A STUDY ON CAPITAL STRUCTURE ANALYSIS

It gives me pleasure to express my deep sense of gratitude to my guide Mr. A. Ramesh

OBJECTIVES OF THE STUDY

NEED FOR THE STUDY

SCOPE OF THE STUDY

PERIOD OF THE STUDY

LIMITATIONS OF THE STUDY

NEED AND IMPORTANCE OF CAPITAL STRUCTURE

OBJECTIVES OF THE STUDY

To Study the capital structure of NCL through EBIT-EPS analysis

Study effectiveness of financing decision on EPS and EBIT of the firm.

Examining leverage analysis of NCL Ind. LTD.

Study debt/equity ratio of NCL Ind. Ltd for 2005-10.

NEED OF THE STUDY

Long term commitment on funds

Long term impact of profitability

Most difficult to make.

Wealth maximization of shareholders.

SCOPE OF THE STUDY

METHODOLOGY OF THE STUDY

PERIOD OF THE STUDY

LIMITATIONS OF THE STUDY

It dose not consider all of the new unapproved schemes.

As it is considering only a part of the estimated budget which is a great

Key Market Stats

APIIT (Andhra Pradesh Indian Institute of Information Technology) at three locations

expansion projects are expected to be completed as per schedule by December

committee meetings held in the cabinet secretariat under the chairmanship of

Its performance is also reviewed by the cabinet

RECOMMENDATIONS ON CEMENT INDUSTRY

Further push to housing development programmes;

Promotion of concrete Highways and roads; and

Use of ready-mix concrete in large infrastructure project.

Further, in order to improve global competitiveness of the Indian Cement

making the Indian

Cement Industry more competitive in the international market. The

varieties of cement like Ordinary Portland Cement (OPC), Portland Pozzolana

CAPITAL STRUCTURE DEFINED

FACTORS AFFECTING THE CAPITAL STRUCTURE

The use of fixed charges of funds such as preference shares,

Cash flow projections of the company

Size of the company

FEATURES OF AN OPTIMAL CAPITAL STRUCTURE

PROFITABILITY: The Company should make maximum use of leverages at a

FLEXIBILITY: The capital structure should be flexible to be able to meet the

CONTROL: The capital structure should involve minimum dilution of control of

CAPITAL STRUCTURE AND FIRM VALUE

THE CAPITAL STRUCTURE DECISION PROCESS

CAPITAL STRUCTURE AND PLANNING

FEATURES OF AN APPROPRIATE CAPITAL STRUCTURE

A SOUND OR APPROPRIATE CAPITAL STRUCTURE SHOULD

FLEXIBILITY: the capital structure should be flexibility. It should be possible to

APPROACHES TO ESTABLISH APPROPRIATE CAPITAL

EBIT-EPS approach for analyzing the impact of debt on EPS.

The interest paired on debt is tax deductible.

Those, which carry a fixed finance charge.

Those, which do not carry a fixed charge.

MEANING OF FINANCIAL LEVERAGE

FINANCIAL LEVERAGE AND THE SHAREHOLDERS RISK