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PROJECT REPORT
ON

CAPITAL STRUCTURE
ANALYSIS
OF

RELIANCE INDUSTRIES
PROJECT GUIDE:TEJAS PAREKH (MBAGJ0042)
PAREPARED BY: AJAB TAHERALI JABUWALA

MBA 4TH SEM FINANCE

ROLL NO.
SIKKIM MANIPAL UNIVERSITY
2014-2015

CERTIFICATE OF THE COMPANY

DECLARATION
I hereby declare that the project entitle A STUDY ON CAPITAL
STRUCTURE Submitted in partial fulfillment of the requirements for
award of the degree of MBA at BARODA Institute of Technology, affiliated
to Sikkim Manupal University, Sikkim, is an authentic work and has not
been submitted to any other University/Institute for award of any
degree/diploma.
AJAB TAHER JABUWALA
(10241E0039)
MBA, BIT
VADODARA, GUJARAT

ACKNOWLEDGEMENT

Firstly I would like to express our immense gratitude towards our

institution BARODA Institute of Technology, which created a great platform to
attain profound technical and management skills in the field of MBA, thereby
fulfilling our most cherished goal.
I would thank all the finance department of RELIENCE INDUSTIES LTD,
specially Mr.

(Asst Manager Finance), and the employees in the finance

department for guiding me and helping me in successful completion of the

project.
I am very much thankful to our professor Mr. Tejas Parekh (Internal Guide)
madam for extending his cooperation in doing this project.
I am also thankful to our project coordinator Mr. Vaibhav pradhan and Mrs.
Kirti Pradhan for extending his cooperation in completion of Project.
I convey my thanks to my beloved family and my faculty who helped me
directly or indirectly in bringing this project successfully.
Ajab Taherali Jabuwala
(1305002062)

INDEX

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. (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.

These exist two extreme views and middle position. David Durand identified the
two extreme views the net income and net operating approaches.

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 RELIEANCE
INDUSTRIES tapped over the years under study i.e. 2013-2014.

PROBLEM STATEMENT:

Capital structure is the mixture of the debt and equity capital maintained and
used by a firm to finance itself. There is no common ground among the
researcher on this subject. This seeming common ground on the topic is fact
that no single theory of capital structure is able to explain the observed capital

structure decision and performance of the firms. The problem is how we can
better utilize the capital structure of the company

OBJECTIVES OF THE STUDY:

1. To study of solvency of the company from the point of view long term,
medium term, and short

term and immediate prospect.

2. To Study the capital structure of RELIENACE INDUSTRIES Ltd through EBIT-EPS

analysis
3. Study effectiveness of financing decision on EPS and EBIT of the firm.
4. Examining the financing trends in the RELIENACE INDUSTRIES Ltd for the
period of 2013- 14.
5. Study debt/equity ratio of RELIENACE INDUSTRIES Ltd for 2013-14.
6. To measure Profitability of the RELIENACE INDUSTRIES Ltd.
7. To ascertain credit standing of the RELIENACE INDUSTRIES Ltd.
8. To measure operational efficiency of the RELIENACE INDUSTRIES Ltd.
9. To check effective utilization of the RELIENACE INDUSTRIES Ltd.
10. Effective investment analysis of the RELIENACE INDUSTRIES Lt

RESEARCH METHODOLOGY AND DATA ANALYSIS

Data relating to Ultra tech cements. Has been collected through
SECONDARY SOURCES:
Published annual reports of the company for the year 2013-14.
Literature review of the companys documentary.

PRIMARY SOURCES:

 Detailed discussions with Vice-President.

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.

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 financing-decision 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.

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 (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 debtequity 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
Size of the company
Dilution of control
Floatation costs

FEATURES OF AN OPTIMAL CAPITAL STRUCTURE:

An optimal capital structure should have the following features,
1. PROFITABILITY: - The Company should make maximum use of leverages at a
minimum cost.
2. 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.
3. CONTROL: - The capital structure should involve minimum dilution of control
of the company.
4. 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.
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.

CAPITAL STRUCTURE AND PLANNING:

Capital structure refers to the mix of long-term sources of funds. Such as
debentures, longterm 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 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 orderto 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.

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
1) 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 addingadditional cost to
them.
2) 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.
3) 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.
4) 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.
5) 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
.Theinitial

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 continues 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 known 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
1. The cost of debt is usually lower than the cost of performance share
capital and
2. The interest paired on debt is tax deductible.
3.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
relationship 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.
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 longterm 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 nonrecurring 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 longterm
solvency can be judged by using leverage or structural ratios.
There are two aspects of the long-term solvency of a firm:1. Ability to repay the principal when due, and
2. Regular payment of interest, there are thus two different but mutually dependent
and
interrelated types of leverage ratio such as:
3. Ratios based on the relationship between borrowed funds and owners capital,
computed
form balance sheet eg: debt-equity ratio, dividend coverage ratio, debt service
coverage ratio
etc.,
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. These 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:

1.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.
2.The debt capitalization rate is less than the equity capitalization rate (i.e. kd<ke)
3.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 ko, 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 Ke 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 debtholders, 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 firms 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 analyse 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
financing-decision
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
(a) The increased variability in the shareholders earnings and
(b) 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 ULTRA TECH CEMENTS 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
1.From 1995, the Authorized 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 2002-2009 and
subscribed and
paid-up capital is Rs. 1622.93 lacs at Rs.10 each for the period of 2004-2009.

3.There is an increase of 1.38% in the equity from 2005-2010.

RETAINED EARNINGS COMPOSITION
This includes
Capital Reserve
Share Premium Account
General Reserve
Contingency Reserve
Debentures Redemption Reserve
Investment Allowance Reserve
Profit & Loss Account
1. 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.
2. 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.
Capital structure describes how a corporation has organized its capitalhow it
obtains the
financial resources with which it operates its business. Businesses adopt various
capital
structures to meet both internal needs for capital and external requirements for
returns on
shareholders investments. As shown on its balance sheet, a company's
capitalization is
constructed from three basic blocks:
1. Long-term debt. By standard accounting definition, long-term debt includes

obligations that are not due to be repaid within the next 12 months. Such debt
consists
mostly of bonds or similar obligations, including a great variety of notes, capital
lease
obligations, and mortgage issues.
2. Preferred stock. This represents an equity (ownership) interest in the corporation,
but
one with claims ahead of the common stock, and normally with no rights to share in
the increased worth of a company if it grows.
3. Common stockholders' equity. This represents the underlying ownership. On the
corporation's books, it is made up of: (I) the nominal par or stated value assigned to
the shares of outstanding stock; (2) the capital surplus or the amount above par
value
paid the company whenever it issues stock; and (3) the earned surplus (also called
retained earnings), which consists of the portion of earnings a company retains after
paying out dividends and similar distributions. Put another way, common stock
equity
is the net worth after all the liabilities (including long-term debt), as well as any
preferred stock, are deducted from the total assets shown on the balance sheet. For
investment analysis purposes, security analysts may use the company's market
capitalizationthe current market price times the number of common shares
outstandingas a measure of common stock equity. They consider this marketbased
figure a more realistic valuation.

COMPANY PROFILE

Reliance
At a Glance

Reliance Industries Limited (RIL) is Indias largest private sector company

with businesses across the energy and materials value chain and a strong
presence in the rapidly expanding retail and telecommunication sectors.
RIL is the first private sector company from India to feature in Fortune Global 500 list of
Worlds Largest Corporations for the last ten consecutive years. RIL ranked 107th in terms of
revenues and 128th in terms of profits in 2013. RIL's international debt is rated by Moodys at
investment grade Baa2, with positive outlook and by S&P at BBB+ with a negative
outlook, which are one notch and two notches above Indias sovereign rating, respectively.

Reliance is the only Asian company in the oil & gas sector to be rated two notches
above the sovereign by S&P. Reliance is now rated higher than some of its global
emerging market peers demonstrating its strength and competitive position in the
refining and petrochemicals sectors. The rating also underpins Reliances position as
a leading large-scale, integrated and efficient oil refining and petrochemicals
company.
Exploration and Production
In our domestic upstream business, production from the KG-D6 block continued to
decline during the year. The fall in production is mainly attributed to the geological
complexity and natural decline in the fields and higher than envisaged water
ingress. Several activities were therefore undertaken to sustain production and
enhance recovery from the existing producing fields. During the year, two
significant discoveries were made in the KG basin and Cauvery basin. Development
activities in the two CBM blocks is gathering momentum. The new discoveries and
the efforts to enhance recovery will strengthen Indias energy security.
Reliance continued to balance its international portfolio by evaluating new blocks
and assigning existing blocks. Reliances Shale Gas business continued on its
growth path and has now achieved materiality in many respects. Our investments in
the US Shale Gas ventures have started creating value for our shareholders. This
business achieved record revenues and EBITDA for the year with significant growth.
Reliance's share of net sales was at 131 BCFe in CY 2013, a growth of 54% y-o-y on
account of about 1.6 fold increase in number of wells put on production from end of
CY 2012.
Consumer Businesses
We are delighted that our retail business continues to sustain its leadership position
across several formats. It has become Indias largest retailer by revenues. It
achieved the milestone of over 10 million square feet of retail space during the year.
It also achieved break-even on a net profit basis during the year. Our retail offerings
continue to delight our customers reflected in a record number of repeat customers
and a healthy

Refining and Marketing

RIL is among the top ten private players in the refining business globally. RIL's
Jamnagar Complex has become the petroleum hub of the world and represents
about 2% of global crude processing capacity. This asset has placed both RIL, as
well as India, high on the world energy map.
Core Strengths & Key Advantages
Large
128

scale and highly complex refinery

different grades of crude processed which is over 40% of world-traded crude

More

than 50% of total refinery crude diet is "advantaged"

World-class
Strategic
Efficient
Global

logistics infrastructure

location, port-based, fully-integrated manufacturing facility

crude sourcing

reach with product storages at key destinations

Refinery
Energy

utilisation rates consistently surpassing global averages

efficient refiner - operating cost per barrel among the lowest in the world

Flexibility

to alter the product slate/adapt to the changing market dynamics

Petrochemicals
RIL is one of the leading petrochemicals producers, globally, with state-ofthe-art, world-scale petrochemical plants. RIL has carved a niche for itself in
terms of product quality and customer service. Its product portfolio includes
Polymers, Polyester & Fibre intermediates and Chemicals & Elastomer.
Core Strengths & Key Advantages
Fully-integrated

operations

Balanced

portfolio of naphtha and gas-based crackers along with matching downstream

capacities

Leading

market share in various products

Manufacturing
Among
Focus

operations across 11 locations in India

the lowest operating costs in the industry

on high growth markets

Capital

expenditure plans to enhance production capacity by more than 60% to service

the large growing domestic market

Likely

to be among the top five petrochemical producers by capacity, globally, post

completion of petrochemical and fibre expansion plans

Exploration and Production

RIL is Indias largest private sector E&P operator with robust domestic as well as
international asset portfolio. Its assets include KG-D6, Panna-Mukta, Tapti and two
CBM blocks in addition to several domestic and international blocks. Additionally,
RIL has three joint ventures in North America in shale gas with Pioneer Natural
Resources, Chevron and Carrizo.
Core Strengths & Key Advantages
Strong

off-shore capabilities in India

Strategic

partnership with BP for domestic upstream business

Leveraging

the existing infrastructure, knowledge and experience

Outstanding

growth pace in unconventional shale gas business

Balanced

portfolio consisting of conventional and unconventional, deepwater and shallow

water, onshore and off-shore, hydrocarbon resource play

Retail
RIL is fulfilling the vision of creating an inclusive growth framework by forging
enduring bonds between millions of farmers, consumers and small retailers,
supported by a world-class supply chain. In-store initiatives, wide product choices
and value merchandising are key enablers for robust growth.
Core Strengths & Key Advantages
Pan

India store network 20 states

Leveraging

world-class supply chain in creating partnerships with kiranas and small

shopkeepers

Association

with leading international renowned brands

Committed

to deliver quality products and services

Market

leaders in digital, lifestyle and value formats

Continuous

focus on own label products

Major achievement for the year by the company

RIL's Chairman and Managing Director, Shri Mukesh D. Ambani, received the
'NDTV 25 Greatest Living Legends of India' Award from the Honourable
President of India, Shri Pranab Mukherjee

CSR
Oliver Kinross Asia Oil & Gas Award 2013 for Corporate Social Responsibility Company of the Year (RIL KG-D6)
Best ART (Anti-Retroviral Therapy) Centre Award 2013 by Gujarat State AIDS
Control Society (GSACS) on World AIDS Day (Hazira Manufacturing Division)

Quality
CII Six-Sigma National Award for 2013 in the Continuous and Bulk
Organizations category (Vadodara Manufacturing Division)
Health, Safety and Environment
Golden Peacock National Award for Occupational Health & Safety 2012-13 in
the petrochemical sector (Nagothane Manufacturing Division)
International Safety Award 2014 with distinction for Health and Safety
Management System performance for 2013 (Jamnagar SEZ Refinery)
Technology & Innovation
l 3rd National Award, 2013, for Technology Innovation in Petrochemical &
Downstream Plastic Processing Innovation award from Ministry of Chemicals
& Fertilizers, Government of India (Reliance Technology Group)
Retail
Asian Human Capital Award 2013 - Special Commendation Prize for Work
Smart - A Business Excellence and Workforce Enablement Programme
(Reliance Retail Academy)
Star Retailer Award 'Consumer Durables Retailer of the Year 2013' (Reliance
Digital)
Sustainability
CII-ITC Sustainability Awards 2013 - Indias Most Sustainable Companies
(Hazira Manufacturing Division)

Golden Peacock Award for Sustainability 2013 (Nagothane Manufacturing

Division)