Chaitanya Chemicals - Capital Structure - 2018

CAPITAL STRUCTURE
INTRODUCTION
AITS - RAJAMPET Page 1

CAPITAL STRUCTURE
CHAPTER - 1
1.1 INTRODUCTION
The capital structure is said to be optimum when marginal real cost of each available
sources of financing the identical. With an optimum debt and equity mix, the cost of capital is
minimum and the market price per share us maximum. The use of debt in capital structure is
known as financial leverage. It has both benefits as well as costs, while the principal attraction
of debt is the tax benefit, its cost is financial distress, includes a broad spectrum of problems
ranging from relatively Minot liquidity shortage to extreme case of bankruptcy. The problem of
financial distress will magnify with an increase in financial leverage. Beyond a certain point, the
expected cost of financial distress will outweigh the tax benefit. A firm is thus concerned with a
trade- of between risk and return emanating from the use of debt.
Feature of appropriate capital structure:

A sound of appropriate capital structure should have the following features.
1. Profitability
2. Solvency
3. Flexibility
4. Capacity
5. Control
The various means of financing represent the financial structure of an enterprise the
financial structure of an enterprise is shown by left hand side (liabilities plus equity) of the
balance sheet. Traditionally, short-term borrowings are excluded form the list of methods of
financing of the firm’s capital expenditure, and therefore, the long-term claims such as
debentures long-term debt, preference share capital and equity share capital including reserves
and surpluses (i.e., retained earnings) are said to form the capital structure of the enterprises.
Therefore, the composition or proportion of usage of long-term sources of capital structure can
prosper in short run but face considerable difficulties in raising funds and in economizing the use
of their find in the long run.

CAPITAL STRUCTURE
Every company will have to plan its capital structure initially at the time of its promotion
and subsequently whenever funds have to be raised to finance investments. The capital structure
decision is a significant managerial decision is a significant managerial decision as it influences
the share holder’s return and risk. Consequently the market value of the share is affected by the
capital structure decision.
Capital structure refers to a company’s outstanding debt and equity. It allows a firm to
understand what kind of funding the company uses to finance its overall activities and growth. In
other words, it shows the proportions of debt and equity (common or preferred) in the funding.
The purpose of capital structure is to provide an overview of the level of the company’s risk. As
a rule of thumb, the higher the proportion of debt financing a company has, the higher its
exposure to risk will be.
The various means of financing represent the financial structure of an enterprise the
financial structure of an enterprise is shown by left hand side (liabilities plus equity) of the
balance sheet. Traditionally, short-term borrowings are excluded form the list of methods of
financing of the firm’s capital expenditure, and therefore, the long-term claims such as
debentures long-term debt, preference share capital and equity share capital including reserves
and surpluses (i.e., retained earnings) are said to form the capital structure of the enterprises.
Therefore, the composition or proportion of usage of long-term sources of capital structure can
prosper in short run but face considerable difficulties in raising funds and in economizing the use
of their find in the long run.
Every company will have to plan its capital structure initially at the time of its promotion
and subsequently whenever funds have to be raised to finance investments. The capital structure
decision is a significant managerial decision is a significant managerial decision as it influences
the share holder’s return and risk. Consequently the market value of the share is affected by the
capital structure decision.
APPROPRIATE OR OPTIMUM CAPITAL STRUCTURE:

To minimize the cost of capital and to maximize the value of shares the firm’s
management seeks to establish optimum capital structure with proper combination of debt and
equity.

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The capital structure is said to be optimum when marginal real cost of each available
sources of financing the identical. With an optimum debt and equity mix, the cost of capital is
minimum and the market price per share us maximum. The use of debt in capital structure is
known as financial leverage. It has both benefits as well as costs, while the principal attraction
of debt is the tax benefit, its cost is financial distress, includes a broad spectrum of problems
ranging from relatively Minot liquidity shortage to extreme case of bankruptcy. The problem of
financial distress will magnify with an increase in financial leverage. Beyond a certain point, the
expected cost of financial distress will outweigh the tax benefit. A firm is thus concerned with a
trade- of between risk and return emanating from the use of debt.
Feature of appropriate capital structure:

A sound of appropriate capital structure should have the following features.
6. Profitability
7. Solvency
8. Flexibility
9. Capacity
10. Control
Goals of Capital Structure:
1. Determining the proper mix of debt and equity securities that maximizes the value of the
common stock on per share basis.
2. Taking advantage of favorable financial leverage.
3. Taking advantage of leverage offered by corporate taxes.
4. Avoiding a recited high risk structure, are some goals of the capital structure
management.
Financial Leverage – Its Impact on Share Holders Earnings
The use of fixed charges sources of funds, such as debt and preference capital.
Along with the owners equity in the capital structure, is described as financial leverage or trading
equity. The financial process of using borrowed funds to produce gain for the residual owners is
also termed as Trading on equity.
The primary motive of a company in using financial leverage is to magnify the
shareholders earnings under favorable economic conditions. The role of financial leverage in

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magnifying the earnings of shareholders is based on the assumption that the fixed financial
charges can be obtained at a cost lower than the company rate of return on its asses.
Financial leverage may be favourable to unfavoruable. Favorable financial occurs sheen
the earnings per share increases due to the use of debt in capital structure. On the other hand
unfavorable leverage occurs when a firm does not earn as much as the funds cost. Financial
leverage not only tends to magnify shareholder’s return under favorable conditions, but also
exposes them to financial risk.
The financial leverage magnifies the shareholders earnings.The variability of EBIT to
fluctuate within wider rage with dent in the capital structure, i.e., with more debt, EPS raise and
fall in EBIT.
There are two types of risk of financial leverage.
1. Operating risk
2. Financial risk
‘Marshal’ distinguished operating and financial risk in his words as follows. Let us suppose
that two men carrying on similar business, the one working with his own, the other with
borrowed capital. There is one set of risks common to both, which may be described as the trade
risk engaged in business. But there is another set of risks the burden of which has to borne by
the man working either borrowed capital and not by another.
OPERATING RISK:
The operating risk is an unavoidable risk. The operating risk can be defined as the variability of
EBIT. The environment in which a firm operates determines the variability of EBIT. The
variability of EBIT is again determined by in two elements.
1. Variability of sales.
2. Variability of expenses
FINANCIAL RISK:
The variability of EBIT increase with more financial leverage. The variability in EBIT and EPS
caused financial leverage is known as financial risk. The firm’s degree of operating risk can be
differing with respect to financial risk when they finance their assets differently. A firm has no
financial risk, if it finances its assets from equity only. But when debt is used the firm adds

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financial risk. Thus, financial risk is an avoidable risk, if the firm decides not to use any debt in
its capital structure.
SOURCES OF FINANCE:
The sources from which capital is raise may be classified into two categories.
1. External Sources:
External sources are Equity share capital, Preference Share. Debt Capital.
2. Internal Sources:
Internal sources are retained earnings, and undistributed profits of the shareholders.
CAPITAL STRUCTURE THEORIES:
An optimum capital structure would be obtained at that combination of debt and equity
that maximizes the total value of the firm or maximize the weighted average cost capital.
Net Income Approach:

The Net income approach suggested by Durand. According to this approach, the capital
structure decision is relevant to valuation of firm. This approach is based on the conclusion that
is based on the assumption that the use of debt does not change the risk perception of the
investor. As such, the interest rate on debt (Kd) and the equity capitalization rate (Ke) remain
constant to debt. Therefore increased use of debt results in higher market value of share and as a
result, lower overall cost of capital (Ko). This can be measured through the formula.
Ko = Net Operating Earnings
Total Value of Firm
Ke- Ko+ (Ko-Kd) D/V
Where D = Market Value of the Firm.
V = total value of the firm
The assumption if N I approach us that Ke and Kd are constant and Kd is less than Ke.
Therefore Ko will decrease as d/v increase. Ko will approach Ke when D/V = 1.

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Ke
Ko
Kd
Thus the net income approach concludes that there exists an optimum capital structure,
which is reached when the cost of capital is lowest. We can graph the relationship between
various factors (Ko, Kd, Ke) with the degree of leverage (D/V). The degree of leverage is
plotted along the X-axis, while the percentage rate for Ke, Kd and Ko on the Y-axis. It is clear
from the figure that the cost of capital will decline with leverage. However, there is a critical
point beyond which the cost of capital. It may start raising because of increasing in the cost of
debt and equity.
NET OPERATING INCOME APPROACH:

According to this approach the market value of firm is not attached by capital structure
changes. The market value of the firm is found our capitalizing the net operating income at the
overall or the weighted average cost of capital, which is constant. Ke can be defined as follows.
WACC = Ke*E/V+Kd*D/V
It shows that, if Ko and Kd are constant, Ke would increase linearly with debt – equity
ratio, D/S, thus there is no single point or range where the capital structure is optimum. The NOI
approach is graphically shown as in fig.

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COST OF CAPITAL:
Ke
Ko
Kd
It is clear from the figure that as low cost of debt is used, its advantages are offset by
increased cost of equity in such a way that the cost of capital remains constant. It is also clear
that beyond a high level of leverage, the cost of debt may increase. In such a case of equity will
have to fall to keep the cost of capital function horizontal.
\
TRADITIONAL VIEW:
The traditional view is also known as ‘Intermediate approach’. It is a compromise between the
net income approach and net operating income approach. According to this view the value of the
firm can be increased or a judicious mix of debt and equity capital can reduce the cost of capital.
The relational behind this view is that debt is relatively cheaper sources of funds are compared to
ordinary shares. The statements that debt funds are cheaper than equity funds carries the clear
implication that the cost of debt, plus the increased cost of equity, together on a weighted basis,
will be less than the cost of equity which existed on equity before debt financing.
Ezra Solomon has divided the manner in which the overall cost of capital reaches in to three –
stages.
1. In the first stage the value of the firm ‘V’ increases or the overall list of capital falls with
increasing leverage.

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2. In the second stage, increases in leverage have a negligible effect on the value or the cost
of capital of the firm. At this stage the value of the firm will be maximum or the cost of
capital is minimum.
3. In the third state, the value of the firm decrease with leverage or the cost of capital
increases with leverage.
The overall effect of these three stages is to suggest that the cost of capital is a function of
leverage. It decline with leverage and after reaching a minimum point or range starts raising.The
relationship between cost of capital and leverages is graphically shown in figure.
It is clear from the overall cost of capital, Ko is saucer shaped with horizontal range.
This implies that there is a range of capital structure in which the cost of capital is minimized.
In the figure the cost of capital is shown to be U-shaped. Under such a situation there is
appoint at which the cost of capital would be minimum. This precise point defines the optimum
capital structure.
MODIGLIANI – MILLER APPROACH:

Modigliani – Miller (MM) in their article titled. “The cost of capital, Corporation
Finance and Theory of investment”, published in 1958, in American Economic Review, have
restored and amplified the net operating income position. They concluded that the total market
value of a firm and the cost of capital are independent of the capital structure. In their view, with
every degree of leverage, the advantage of low cost of debt is exactly offset by enough increase
in the cost of equity (Ke) remains constant the therefore the cost of equity increases linearly with
leverage.
Number of theories including Ezra Solomon, have criticized the traditional view, and
they have pointed out that laws which allow the deduction of interest payment before taxes can
result in a higher total value of a company that makes use of favorable financial leverage.
Modigliani and Miller, too, agreed with statements in their article of 1963.
FACTORS INFLUENCING FINANCIAL STRUCTURE:

Capital structure refers to the composition of long term sources of finance. It is always
better that the capital structure should be balances with a sufficient equity cushion to absorb the

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shocks of he business cycle and to offer flexibility. The following factors influence the financial
structure.
COST OF CAPITAL:
Debt is usually least expensive because, this is no tax imposition on the portion of
earnings which are paid as interest on debt capital. “The impact of financing decisions as the
overall cost of capital should be evaluated and the criteria should be minimize the overall cost of
capital or to maximize the value of the firm”.
GROWTH RATE:
Fast growing firms must really more heavily on external capital, rapidly growing trends to use
somewhat more debt than companies of slower growth.
SALES STABILITY:
Sales stability and debt ratio are directly related with greater stability in sales and earnings. A
firm can incur the fixed charges of debt with less risk than it can when its sales are subject to
periodic decline. In the later instance it will have difficulty in meeting its obligations.
ASSETS STRUCTURE:
Assets structure influences the sources of financing in several ways, firms with long lived assets,
especially when demand for their output is relatively assured, use long-term mortgage debt
extensively. Firms whose assets are mostly receivable and inventory whose value is depend on
the continued profitability of the individuals firm – rely less on long- term debt financing and
more on short-term funds.
LENDERS ATTITUDE:
Regardless of management’s analysis of the proper leverage factors for their firms, lender
attitude are frequently important indetermination of financial structure. In majority of cases the
corporation discusses its financial structure with lender and gives much weight to their advices.
LEVERAGE EFFECT ON EARNINGS PER SHARE (EPS):
The use of fixed cost sources of finance, such as best and performance capital to finance the
assets of the company is known as financial leverage or trading equity. If the assets financed by
the debt yield a return greater than the cost of debt, the earning per share increases, without

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increases in owner’s investment. Because of its effect on EPS, financial leverage is one of the
important considerations is planning the capital structure of the company.
FINANCIAL RISK:
The risk attached to the use of leverage is called financial risk. Financial risk is added with the
use increased variability in shareholders earnings and the threat of insolvency. This risk can be
avoided by not taking debt into capital, but shareholders may be derived of the benefit of
expected increase in EPS. Therefore a company should employ debt to the extent financial risk
does not exceed the benefit of increase in EPS.
CASH FLOWS:
One of the features of a sound capital structure is conservatism. Conservatism relates to the
fixed charges created by the use of debt or preference capital in the capital structure and the
firm’s ability generate cash to meet these fixed charges. Whenever a company thinks of raising
additional debt, it should analyze its expected future cash flows to meet the fixed charges.
FLEXIBILITY:
Flexibility is one of the important considerations as for as capital structure is concerned. The
company should be able to raise funds, without undue delay and cost, whenever need to finance
the profitable investment arises. It should also be in a position to redeem its preference capital or
debt whenever warranted by the future conditions. So the financial plan should be so flexible to
change the composition of capital as situation warns.
SIZE OF THE COMPANY:
Size of the business operation may also influence the capital structure because small companies
may find great difficulty in raising long-term funds. Ever if they get long term loans, they may
be at high interest rates. Small companies therefore depend on share capital and earnings for
their long-term funds.A large company has relative flexibilit6y in designing its capital structure.
It can obtained loans at easy terms.
MARKETABILITY AND TIMING:

Marketability may no influence the initial capital structure, but it is an important consideration to
decide about the appropriate timing of security issue. Due to changing market conditions the
company has to decide whether to rise with common shares issues or with a debt issue.

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1.2 INDUSTRY PROFILE

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1.2 INDUSTRY PROFILE

The science of chemistry originated in the 18th century. Chemistry represents a time span
from ancient to the present. By 1000 BC, civilizations used technologies that would eventually
form the basis to the various branches of chemistry.
Examples include extracting metals from ores, making pottery and glazes, fermenting
beer and wine, extracting chemicals from plants for medicine and perfume, rendering fat
into soap, making glass, and making alloys like bronze.
Indian Chemical industry:

Growth of Chemical Industry
The chemical sector has witnessed growth of 13-14% in the last 5 years while petrochemicals have
registered a growth of 8-9% over the same period. The major growth drivers, behind India’s
chemical industry could be listed as follows:
 Structural advantage: With a growing market and purchasing power, the domestic industry
is likely to growth at over 10-13% in the coming years. Growing disposable incomes and
increasing urbanization are fuelling the end consumption demand for paints, textiles,
adhesives and construction, which, in turn, leads to substantial growth opportunity for
chemicals companies.
 High domestic consumption: The chemicals industry in India is the largest consumer of its
own products, consuming 33% of its output. With promising growth trends in the chemicals
industry, this internal consumption is also set to rise.
 Diversified industry: The Indian chemicals industry has a diversified manufacturing base
that produces world-class products. There is a substantial presence of downstream industries
in all segments. Further, this large and expanding domestic chemicals market also boasts of a
large pool of highly-trained scientific manpower.
 Promising export potential: Chemicals constitute ~5.4% of India’s total exports. India
already has a strong presence in the export market in the sub-segments of dyes,

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pharmaceuticals and agro chemicals. India exports dyes to Germany, the UK, the US,
Switzerland, Spain, Turkey, Singapore and Japan.
Government Policies and FDI Investments

Government recognizes Chemical industry as a key growth element of Indian economy. In Chemical
Sector, 100% FDI is permissible. Manufacture of most of chemical products is delicenced. The
entrepreneurs need to submit only IEM with the DIPP provided no locational angle is involved. Only
the following items are covered in the compulsory licensing list because of their hazardous nature.
Hydrocyanic acid & its derivatives
Investment policies:
 Target to increase the share of manufacturing in GDP to at least 25% by 2025 (from current
16%). Investments in manufacturing in the chemical sector are absolutely essential to ensure
growth of the Indian chemical industry
 Government’s proposal to set up of a technology up-gradation fund of ~USD 80 Mn in the

12th plan for chemicals.
 Proposal to establish an autonomous USD 100 Mn chemical innovation fund by securing

10% of the total inclusive national innovation fund set up by the National Innovation Council
to encourage commercialization efforts for innovations generating inclusive growth
Other initiatives:
 Government readiness to provide incentives for bio-based raw materials to reduce

dependence on crude oil, encourage companies to seek “Responsible Care Certification” and
facilitate priority loans to those who meet environment norms
 Government’s plan to expedite the consolidation of multiple legislations governing the

chemical industry into one Integrated Chemical Legislation. This legislation should cover the
entire life cycle of chemicals. This will act as REACH like legislation for safe use of
chemicals for protection of human health & environment
 Chemical industry could be granted tax and duty reductions for specific identified products
such as import duty reduction on inputs like coal, furnace oil, naphtha, etc., inclusion of a

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wider range of inputs under CENVAT credit and encouraging companies to set up captive
power plants
 Policies have been initiated to set up integrated petroleum, chemicals and petrochemicals
investment regions (PCPIRs). PCPIR will be an investment region spread across 250 square
kilometers for manufacturing of domestic and export-related products.
 Simplified procedures for FDIs as most of the chemical sector products fall under the
automatic approval route for FDI/NRI investment upto 100%
Chemical industry had to face the brunt of global slowdown in past 2-3 years. Global
economic uncertainty along with recent regulatory issues has resulted in low FDI inflows to the
country. FDI in Chemical industry dropped from USD 749 Mn in FY09 to USD 362 Mn in FY10.
However, FDI inflow picked up in FY11 reaching USD 2,345 Mn and USD 4,041 Mn in FY12.
Indian Chemical industry also managed to lead industrial IIP in FY13. As per CSO sources,
Chemicals IIP for FY13 stood at 3.1% while the overall IIP was 0.8%.
EVOLUTION OF INDUSTRY STRUCTURE
Two principal driving forces have been behind the industry’s growth in the past half of century:
1. Polymer science, which developed the synthetic fibers, resins, adhesives, paints, and coatings that
virtually define “modern” materials; and
2. Chemical engineering. Which made it possible to produce these materials at costs low enough to
ensure their success (Aurora and Gambardella, 1998)?
Petrochemicals are used as starting materials for polymer products. The United States, which has
abundant oil and natural gas reserves, was the first country to develop a petrochemicals industry,
beginning early in the century. World War II had a major impact on technology and the industry’s
structure. As part of the war effort, the U.S. government funded large programs for research and
production of synthetic rubber and created massive demand for oil for aviation fuel. After the war the
demand for cars and gasoline skyrocketed, and by 1950 half of the total U.S. production of organic
chemicals was based on natural gas and oil. By 1960 the proportion was nearly 90 percent (Chapman

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1991). Several oil companies, most notably shell, Exxon, Amoco, BP and Arco, become major producers
of basic and intermediate chemicals derived from petroleum feedstocks.
The chemicals industry in Germany and Britain rebuilt and grew rapidly, shifting its organic
chemical production from coal to petrochemicals nearly as quickly as had the United States. During the
1950s and 1960s, Japan made an astonishingly rapid entry into petrochemicals, leading to a rapid growth
of the chemical industry. Apart from the three main keiretsu (Mitsui, Mitsubishi, and sumitomo), several
other companies, such as Asahi Chemical plants (Hikino et al, 1998).
The technological lead of U.S. chemical producers in petrochemicals was eroded as oil
companies and engineering design firms diffused the technology internationally. Technology for
producing a variety of imported products became more widely available.
Moreover, the development of a world market in oil meant that the oil and natural gas endowments of the
United States did not prove to be an overwhelming of comparative advantage:
By the end of the 1960s, European countries and Japan had successed in closing much of the gap
with the United States. Since then, relative shares in world output have largely remained constant,
although in some sectors, such as pharmaceuticals, some relative changes have occurred. Because most of
the leading companies in the world are highly globalized, one must be cautious in linking the
performance of firms with their so called national industries. With the provision, we also note that the
leading U.S.
By 1992, seven European Countries (Germany, United Kingdom, Italy, France , Netherlands,
Belgium and Denmark) taken as a group produced about 20 percent more than the U.S. chemical industry
output; these figures have been fairly stable during the 1980s and early 1990s. Japan has been increasing
its share of world chemical production.
Even so, Japan’s share of world chemical production is smaller than its share in world
manufacturing. Europe as a whole has a higher share of world chemicals output than it does of world
manufacturing output, while the U.S. share in chemicals the same as its share in manufacturing output.
Examining an output index for chemical subsectors shows that drugs and pharmaceuticals have
grown the fastest of all subsectors in the United States, followed by synthetic Polymer –based sectors
such as rubber and plastic products. Although data for Japan and Europe cannot compared with each

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other or with the United States, tentative conclusions can nonetheless be drawn. In Japan, basic
petrochemicals and aromatic products such as benzene remain the growth sectors.
Following the big technology push in the industry during the 1950s and 1960s, technology
diffused more widely than it ever had before. In addition to the efforts of SEFs, increased competition
and slower demand growth lowered the payoffs to traditional types of innovations. Commercialization
became more expensive and required ever more sophisticated knowledge of customers and the market.
Faced with overcapacity, the industry, drive in part by the relentless pressure from shareholders
and their representatives. Major realignments of the product portfolios of many firms followed, with
many firms followed, with many mergers, divestitures, and acquisitions and the rise of entirely new firms
in the industry.
During this phase, many firms cut down on R&D and refocused R&D expenditures on shorter-
term projects and away from more fundamental research. In the past couple of years, there are some
indications that the industry may be entering a new phase of technological change, and R&D spending
appears to be picking up also, as well as increased activity in transborder acquisitions in addition to
domestic ones.
The adjustment o the new equilibrium was slow and painful. Economies of large-scale
production meant that existing producers had sunk large investments in capacity, especially in the basic
intermediates. The problem was magnified because many chemical and petrochemical operations were
highly integrated, both vertically and horizontall
The process of restructuring illuminates how the strategic importance of different types of
investments. Together with the nature of corporate strategy and corporate governance, changes as a high
technology industry nature. During the first phase of restructuring, the industry rationalized capacity by
phasing out older and less efficient capacity. This phase of the restructuring appears to have been
accomplished in the United States by the mid-1980s. It was followed by a restructuring in the corporate
sector that reached its peak in the United States in the late 1980s, but continues today. Restructuring in
Western Europe appears to have lagged behind the United states by about five years or so.
The process of restructuring has been most marked in the basic and intermediate petrochemicals,
the sectors with the strongest competition. Several traditional chemicals companies in the United States
and Europe are exiting from some of their commodity chemical businesses and moving downstream,

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focusing on businesses where product differentiation based on quality and performance allows for higher
margins. In their place, oil companies such as shell, BP, Exxon, Arco, and Amoco (now BP-Amoco,
soon absorb Arco) and other firms such as Vista, Quantum, Cain, Sterling, and Huntsman have stepped in
many of the latter are new firms that have taken over the exiting commodity chemicals businesses of
firms such as Conoco, Texaco, Monsanto, and USX. In Europe as well, new focused firms such as
Borealis, Clariant, and Montell have been formed by merging businesses of existing companies. The new
companies seem to be separating into those that produce high value added, specialty chemicals and those
that manufacture larger-volume commodity chemicals.
The timing and pattern of restructuring points to the role of capital markets. Restructuring began
in the United States and has taken place for more slowly in Europe, but its pace has been even slower in
Japan (Hikino et al, 1998). The increasing importance of mutual funds and pension funds and the greater
attention to “shareholder value” have pressured management to improve financial performance. The
social welfare implication of the restructuring are unclear, and the debate has been closely tied up with the
broader debate on the virtues and vices of the Anglo-Saxon system of finance versus the bank-based
system of Germany and Japan (Richard, 1998; Da Rin, 1998). Stock markets appear to disfavor
diversified firms with portfolios that include both commodities and specialties. The reason perhaps lie
in the greater difficulties of managing such firms as well as the greater difficulties in evaluating the
performance of the management of a diversified company , particularly when the company has a mix of
research –intensive and less research –intensive businesses.
Our book traces in the greater detail how factors external and internal to the firms ,at differing
times, affected the economic performance of their industries as well as the firms and in most cases, of
their countries .In some cases , the non –technological factors dominate : in others, they may discourage
growth and innovation. It is not easy to quantify all the effects ,and that is why the historical account
must be largely qualitative .(See also Mowery ,ed.,1999) But that doesn’t mean useful conclusions
cannot be drawn for general policy and institutional environments external to firms that favor growth
and innovation.

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Chemical Industry Map in India

CAPITAL STRUCTURE
1.3 COMPANY PROFILE

Chaitanya Chemicals
 Established in 1991 , Chaitanya Chemicals today is the largest manufacturer of Barium Chloride
 The company is led by the co-founders Mr. S.V. Rama Moorthy and Mr. G.V. Chandra Mouli
 Chaitanya Chemicals today manufactures Barium Chloride, Barium Carbonate,
Barium Nitrate, Barium Hydroxide, Barium Sulphate, Barium Sulphide, Sodium Hydro Sulphide
and Sodium Sulphide
 Chaitanya Chemicals is currently exporting to quality conscious consumers in USA ,Japan,

Jordan ,Singapore , Dubai , Saudi Arabia ,Germany ,Taiwan and Europe .Till to date all barium
chloride leaving Indian shares is manufactured at Chaitanya Chemicals
 Chaitanya Chemicals is located at Kadapa, Andhra Pradesh in South India. India is the second
largest producer of Barytes (raw material for all Barium Salts) and all of that Barytes is mined at
Kadapa, our home town .The availability of the best quality raw material ( free of strontium &
other heavy metals) ,commitment of the management for excellence and spirited team work of all
the work force have made Chaitanya Chemicals stand at par with the best suppliers in the world
in terms of quality and competitiveness.
CHAITANYA LOCATION:

 India is the second largest producer of Barites in the world Kadapa is the only place in
India. Where mining is done for barites are Kadapa has the single largest deposit of
barites in the world. This district contributes to nearly 30% of the world barites
production.
 Kadapa is 250kms away from Chennai and Banglore.Chennai port is the nearest port to
kadapa. A domestic airport is being renovated and is due to be competed with the end of
2012.Kadapa is well connected with all the cities by road and railway network. Kadapa is
the major stop for all trains between Mumbai and Chennai.
 Chaitanya Chemicals are located in this hometown of barites and we have the best
quality and unlimited supply of barites to process. These home advantages combined
with our dedication to produce the best quality material made us stand at par with the
best quality, quantity and competitiveness

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History of Chaitanya Chemicals

Chaitanya Chemicals was started humbly in 1991 with the production of Barium Sulphide. As a
result of their perseverance to quality since inception with highly motivated work force and with
inception, with highly motivated work force and Cutting edge management led by Mr. S.V.Rama
Moorthy and Mr. G.V. Chandra Mouli, Chaitanya chemicals today is the largest producer of barium
chloride and Sodium Hydro Sulphide in India. With the state of the art technology in the production line
and an excellent R&D to complement, Chaitanya Chemicals now export it products to countries in the
North America, Europe and the Middle Europe and the Middle East and has become a synonym to
Barium chloride and sodium Hydro Sulphide in India.
Established in 1991 Chaitanya chemicals today is the largest manufacturer of Barium Chloride (15000
MT per annum) and sodium Hydro (10000 MT per annum) in India. The company is led by the co-
founders of Mr.Rama moorthy and Mr. Chandra mouli.
Chaitanya chemicals today manufacture
 Barium Chloride
 Barium carbonate
 Barium nitrate
 Barium Hydroxide
 Barium sulphide
 Sodium Hydro sulphide &
 Sodium sulphide.
Chaitanya chemicals are currently exporting to quality conscious customers in USA, Japan, Singapore,
Middle East, France, Taiwan, Germany etc. Till to dates all Barium chloride leaving Indian shores is
manufactured at Chaitanya Chemicals
Chaitanya Chemicals is located at Kadapa, Andhra Pradesh in South India. India is the second largest
producer of Barytes (raw material for all Barium Salts) and all of that Barytes is mined at Kadapa,our
home town .The availability of the best quality raw material ( free of strontium & other heavy metals)
,commitment of the management for excellence and spirited team work of all the work force have made
Chaitanya Chemicals stand at par with the best suppliers in the world in terms of quality and
competitiveness.

CAPITAL STRUCTURE
CHAITANYA CHEMICAL (NEW UNIT)
Year of Establishment: 2009
Products: Barium chloride, Barium Carbonate, Barium sulphide, Sodium hydrosulphide,

Sodium sulphide
Capacity: Barium chloride -10,000 MT per annum

Barium Carbonate-5000 MT per annum
Barium Sulphide-20,000 MT per annum
Sodium Hydrosulphide-3000 MT per annum
Sodium sulphide- 3000 MT per annum
Certificates: In process
No of employees: 75
Location: Plot # 5 &6, IDA, Kadapa, Andhra Pradesh
This is the latest addition to our manufacturing plants. This plant is equipped with state of the art infrastructure.
Production line is totally automated thus avoiding human errors. This plant is equipped to handle the materials
from ore till the finished product.

CAPITAL STRUCTURE
CHAITANYA CHEMICALS
Year of
1987
Establishment:
Products: Barium chloride (dihydrate and anhydrous), Sodium hydrosulphide, Sodium sulphide
Capacity: Barium chloride -5000 MT per annum Sodium Hydrosulphide-1500 MT per annum
Certificates: ISO 9001:2000,
No of employees: 75
Location: Rami reddy kottalu, vallur mandal, Kadapa, Andhra Pradesh
This is the first of our plants. We have been exporting Barium chloride from this plant for the past six years.

CAPITAL STRUCTURE
CHAITANYA INDUSTRIES
Year of Establishment:
 2004
Products:
 Barium sulphide (BaS)
Capacity:  Barium sulphide-9000 MT per annum
Certificates:  ---
No of employees:  45
Location:  Plot # 9, IDA, Kadapa, Andhra Pradesh
 This plant caters the raw material needs of Chaitanya chemicals and RCS chemicals.

CAPITAL STRUCTURE
RCS CHEMICALS
Year of
2003
Establishment:
Products: Barium sulphate precipitated, Barium Nitrate, Barium Hydroxide, Sodium

hydrosulphide, Sodium sulphide
Capacity: Barium sulphate -3600 MT per annum

Barium Nitrate-2000 MT per annum
Barium Hydroxide-2000 MT per annum
Sodium Hydrosulphide-1000 MT per annum
Certificates: ISO 9001:2000,
No of employees: 70
Location: Plot # 3, IDA, Kadapa, Andhra Pradesh

CAPITAL STRUCTURE
Quality of Chaitanya chemicals products
 Since its establishment Chaitanya chemicals has been maintaining highest standards in
quality control .To keep up the standards chaitanya chemicals has a committed team of
personnel monitoring the manufacturing process and manufactured products. We at
chaitanya chemicals are totally committed to customer satisfaction .we shall deliver
products of exceptional quality and tailor made to the specifications of our customers.
 Chaitanya chemicals believe that every person is the organization is important and we
create an environment where all employee contribution to contentious improvement of
our business process. Chaitanya chemicals wish to be the most reliable supplier of
barium salts in India and abroad. We wish to achieve our goal by delivering our
customers products excellent quality delivered right on time, through our commitment to
continual improvement of the business process thus cutting down costs and improving
competency in the goal

CAPITAL STRUCTURE
Chaitanya Chemicals Product Profile
 Barium chloride dehydrate
 Barium chloride dehydrate high pure grade
 Barium chloride anhydrous

CAPITAL STRUCTURE
 Barium carbonate
 Barium nitrate
 Barium sulphate
Chaitanya Chemicals Products

CAPITAL STRUCTURE
1. Barium Chloride Hydrous (BaCI2, 2H2O)
Description: White crystalline powder free flowing production capacity is 5000 tones per annum.
Applications:
 Water treatment such as –Removal of sulphate Ion from brine solutions in chlor-Alkali
plants
 Used in pigmnents
 Used in manufacture of sterates ,Hydroxides and peroxides
 Used as a catalyst in petrochemical products
Specifications:
Purity Min 99%
Sodium Max 0.03%
Calcium as ca Max 0.003%
Magnesium Max 0.01%
Sulphur as s Max 0.02%
Iron as fe Max 0.005%
Strontium Max 0.005%

CAPITAL STRUCTURE
2. Barium chloride Anhydrous (Bacl2):
Description: White crystalline powder free from moisture and is free flowering.
Applications:
 As one of the ingredibe in heart treatment salts.
Has almost the same specifications as the Barium Chloride hydrous material. The moisture content is
less than 0.5%
3. Sodium Hydro Sulphate (NaHS or NaSH)
Description:
 Clear lemon yellow solution free from any suspension impurities.

 Production capacity of 400 tons per month.
 As 31% solution, As 71% flakes (yellow)
Applications:
 As source of Hydrogen Sulphide

 Used in tanneries for Dehairing of hides
 As a reducing agent in chemical processes
Specifications:
NaSH solution flake Min 31%,Min71%
Na2s content Less than1%
Iron as Fe Less than 0.1%
Colour Lemon yellow transparent
Ammonia ,Caustic and Mercaprians Almost free

CAPITAL STRUCTURE
4. Sodium Sulphide flakes (Na2s Flakes)
Description:
 Clear lemon yellow solutions free from any suspension impurities..

 Production capacity of 400 tons per month.
 As 31% solution, As 71% flakes (yellow)
Applications:
 Used in dyes, intermediate and in tanning industry
Specifications:
Na2S% 58-60 Grade I
50-52 Grade II
Both red and yellow (iron Free) Flakes Available
5. Barium Sulphate precipitated (BaSO4):
Commercially called as Balance Fixe. Production capacity of 350 tones per month. We produce Nano
scale Barium sulphate with the average particle size less than0.8 microns.
Applications:
 Used in powder coatings.

 Used in paints and pigments.
 Used in batteries
 Printing links.
We produce different grades of Barium Sulphate for different applications .Please contact us for
specification and further details.

CAPITAL STRUCTURE
6. Barium sulphate precipitated (Epoxy putty grade):
This material has flower oil absorption and has higher bulk density when compared to powder
coating grade
Applications:
As a filter in epoxy putties
Color White powder free from order
PH Between 6.5 and 8
Oil Absorption per 100 ml 12gmd to 15gmd
Bulk Density 1.4 to 1.65
Mesh in BSS -0-100 0.3%
100-200 0.7%
200-300 2.5%
Carbonates Nil
We also process heavier grades and natural grades of Barium sulphate which are used as filters in
paints, powder coating and corckeries.

CAPITAL STRUCTURE
7. Barium Nitrate:
This material is the form of clean White crystal free from foreign matter. The particle size of the material
will be as per the requirement.
Applications:
o Used in explosive and pyrothecnic compositions.
SpecIfications:
Moisture 0.5%
Matter insoluble in water (total) 0.5%
Matter insoluble in water (organic) 0.1%
Hygroscopicity 0.5%
Chloride (as NaCI) 0.25%
Chlorates To pass net
Nitrites (KNO2) 0.03%
Sodium compounds 0.5%
Ammonium compounds (as NH3) 0.01%
Calcium compounds (as calcium Nitrate) 0.05%
Barium Nitrate content as Ba (No3)2 99.00%

CAPITAL STRUCTURE
Chaitanya Chemicals Vision:
Is to be the most reliable and reputed supplier of Barium salts in the world we wish to achieve
through our commitment to quality and spirit of team work. Our vision is to the best suppler in the field of
barium chemicals in India and to be the one stop for all barium chemicals. To realize this we are in the
persuit increasing our range of products and we hope to increase our presence in the world market with a
promise of the best quality ,unlimited quantity the best quotation and the best service

CAPITAL STRUCTURE
CHAPTER - 3
3.RESEARCH METHODOLOGY
3.1 NEED FOR THE STUDY
 The study is on internal financing pattern of the Capital Structure, which deals with
determining the size of Capital Structure made to achieve long term operating goals.
Therefore, an analysis is to be made to know the reasons & find out the measures to be
taken to make the organization more successful.

CAPITAL STRUCTURE
3.2 OBJECTIVES OF THE STUDY
 Study is to evaluate the Capital Structure and its performance.

 To Study the capital structure of Chaitanya Chemicals through EBIT-EPS
analysis.
 Study debt/equity ratio of Chaitanya Chemicals for 2013-2018.

CAPITAL STRUCTURE
3.3 METHODOLOGY OF THE STUDY

 Research involves getting tools, ideas from texts, journals, books, records, and websites.
The collection of data is an important aspect of Research.
Secondary data:
 The data which is collected from the published sources that is for the first time is called
secondary data. The secondary data for the study is collected from the annual reports of
Chaitanya Chemicals from 2013-14 to 2017-18.

CAPITAL STRUCTURE
3.4 SCOPE OF THE STUDY
An extensive study is done on the investment made by Chaitanya Chemicals, on its

Capital Structure &its adequacy, and the factors determining that investment.
Also the study concentrates on the liquidity position of the firm, and a brief study is made
on the techniques used by firms for the management of its Current Assets and the sources
through which the finance for Capital Structure is availed for the firm.

CAPITAL STRUCTURE
3.5 LIMITATIONS OF THE STUDY
 Considering the information provided by the company to be true And the correct the
study works conducted
 Study is being done for the period of 5 finanical years only.
 Study is only on Capital structure management.The information available in the
Balance Sheets has been taken from the published Annual Reports,

CAPITAL STRUCTURE
CHAPTER - 4
4.DATA ANALYSIS AND INTERPRETATIONS
The following are the tool used for analysis of data:

 Ratio Techniques
 Earning per share analysis
 Cost of Capital
 Valuation of firm under Net Income Approach
THE RATIO TECHNIQUES:

Ratio analysis is the process of determining and interpreting numerical relationship based
on financial statements. A ratio is a statistical yardstick that provided a measure of relationship
can be percent or as quotient. Such ratios may be calculated in respect of different items of the
same period drawn from the same or different items of the same period drawn from the same or
different items of the same period drawn from the same or different statements. Such analysis is
called vertical analysis. Since it reflects the relationship or items at a given movement or time it
could be called a static type of analysis. It reflects the change that has been taken place during
the period under review. It is known as the trend analysis.
Some writers have contend that there are as man as 239 ratios. It is futile to calculate a
large number of ratios as possible at a minimum the standards for these selected ratios are also
determined so that they measure the significance of each ratio calculated.
Financial ratios may be classified in various ways. The customary and convenient
classification will be profitability ratios, activity ratios and capital structure ratios.

CAPITAL STRUCTURE
DEBT EQUITY RATIO:

Debt equity ratio indicates the relationship describing the lenders contribution for each rupee of
the owner’s contribution is called debt -equity ratio. Debt equity ratio is directly computed by
dividing total debt by net worth. Lower the debt – equity ratio higher the degree of protection.
A debt – equity ratio higher the degree of protection.A debt – equity ratio of 2:1 is considered
ideal.
DEBT EQUITY RATIO = Total Debt

Net Worth
YEARS Debt Equity Debt Equity Ratio
2013-14 36052.53 17690.27 2.03
2014-15 39548.16 21140.61 1.87
2015-16 21985.92 20686.48 1.06
2016-17 25386.04 19376.87 1.31
2017-18 25714.55 22548.41 1.14

CAPITAL STRUCTURE
Graph :
Debt Equity Ratio

2.5
2.03
2 1.87
1.5
1.31
1.14
1.06 Debt Equity Ratio
1
0.5
0
2013-14 2014-15 2015-16 2016-17 2017-18
Interpretation :
The proportion of debt over equities increasing year by year it has reached beyond the standard.
Organization should take some preventive actions to overcome this difficulty.

CAPITAL STRUCTURE
PROPRIETARY RATIO :
A variant of debt to equity ratio is the proprietary ratio which shows the relationship between
shareholders funds total funds of the firm. This ratio is worked out as under. The idle ratio for the
proprietary ratio is 1:3 i.e., one third of the total liabilities should be outsiders funds.It focuses
the attention on the general financial strength of the business enterprise.
Proprietary Ratio = Shareholders Funds

Total Assets
YEARS Shareholders funds Total Assests Proprietary Ratio
2013-14 17690.27 53742.80 0.32
2014-15 21140.61 60688.77 0.34
2015-16 20686.48 94111.05 0.21
2016-17 19376.87 90560.57 0.21
2017-18 22548.41 101814.81 0.22

CAPITAL STRUCTURE
Graph :
Proprietary Ratio
0.4
0.34
0.35 0.32
0.3
0.25 0.22
0.21 0.21
0.2
Proprietary Ratio
0.15
0.1
0.05
0
2013-14 2014-15 2015-16 2016-17 2017-18
Interpretation :
The proportion of proprietary ratio is decreasing year by year and it has reached beyond the
standard. Organization should take some preventive actions to over come this difficulty.

CAPITAL STRUCTURE
EARNING PER SHARE ANALYSIS :

EPS analysis is method to study the affect of leverage essentially involved the
comparison of alternatives method of financing under various assumption of EBIT a firm has
choice to raise funds for financing its investments proposals from different sources.
Particulars 2013-14 2014-15 2015-16 2016-17 2017-18
EBIT 1311.9 972.4 736.8 612.7 1242.6
Less: Interest 252.6 226.9 578.6 604.2 549.0
EBT 886.6 552.4 -41.7 -213.3 414.2
Less: Tax 300.4 138.2 -2.2 -82.3 27.2
PAT 579.4 420.3 -39.5 -131.0 387.0
No of Shares 3976.4 3976.4 3976.4 3976.4 3976.4
Earnings Per 14.57 10.57 -0.99 -3.29 9.73

Share

CAPITAL STRUCTURE
Graph :
Earnings Per Share

16
14.57
14
12
10.57
9.73
10
6
Earnings Per Share
4
0
2013-14 2014-15 2015-16 2016-17 2017-18
-2 -0.99
-4 -3.29
-6
Interpretation :
The above graph show that the earning per share is fluctuating year by year it was it was
verifying from 14.57 to- 3.29 during the study period it is having highest value of 14.57 in the
year 2014-18 and lowest value shows that the company is not having sufficient funds to satisfy
the expected returns of the share holders.

CAPITAL STRUCTURE
COST OF EQUITY :
The minimum rate of return or return would necessary to attract funds form equity shareholders
is the cost of equity. In other world the requited rate or return as per expectation of the
shareholders it the cost of equity. How to measure it? The earning yield which id obtained by
dividing earning per share by market value per share is indicator of the cost of shares it can be
represented by Ke. It can be calculated by the following formula.
COST OF EQUITY (Ke) = Dividend X 100

Share Capital
YEARS Dividend Share Capital Cost Of Equity %
2013-14 569.3 3976.36 14.31
2014-15 410.6 3976.36 10.32
2015-16 0 3976.36 0
2016-17 0 3976.36 0
2017-18 376.9 3976.36 9.47

CAPITAL STRUCTURE
Graph :
Cost Of Equity %
16
14.31
14
12
10.32
10 9.47
8
Cost Of Equity %
6
2
0 0
0
2013-14 2014-15 2015-16 2016-17 2017-18
Interpretation :
The above chart shows that except in the year 2014-18 the cost of equity remains same i.e.,
14.31% during the study period in 2015 & 2016 the value was 0%. It includes that the company
is not giving constant dividend to the shareholders.

CAPITAL STRUCTURE
COST OF DEBT :
For any debt to raise the company has to bear the cost of interest payable to the under that is a
person bank or any financial institution. It is represented by annual interest rate on such a loan
as for tax purposes in other words interest is treated as expense for arriving the profit of the firm
to be taken at calculated as under.
COST OF DEBT (Kd) = (1-T) I
YEARS Tax Rate % Interest Rate Cost Of Debt

2013-14 33 19.25 12.89
2014-15 25 23.33 17.49
2015-16 0 78.52 78.52
2016-17 0 98.61 98.61
2017-18 6.5 44.18 41.30

CAPITAL STRUCTURE
Graph :
Cost Of Debt
120
98.61
100
78.52
80
60
Cost Of Debt
41.3
40
17.49
20 12.89
0
2013-14 2014-15 2015-16 2016-17 2017-18
Interpretation :
The cost of debt is increasing from 2015-16 to 2016-17.The highest ratio shows that the
company is paying more interest than compared to the lowest ratios. It is due to the increase in
creditors of that corresponding year are increased.

CAPITAL STRUCTURE
COST OF RETAINED EARNINGS :

Undistributed funds belonging to shareholders these must be employed in such a way to
earn the retained rate of return. To shareholders as in the firm can be reel industry it on their
behalf of one more point to be kept in the mind is that the tax extent to which current earnings
are retained the share holders tax liabilities are reduced. There fore share holders in high tax
brokerage of dividends by the company which gives them tax free income when bonus share are
issued as well as future higher dividends due to retain earnings being reinvesting the company. It
can be calculating by using following formula.
COST OF RETAINED EARNINGS (R) = Ke (1-T) (1-B)
YEARS Ke Tax rate Brokerage Cost Of Retained

Earnings
2013-14 14.31 33 0 9.58
2014-15 10.32 25 0 7.74
2015-16 0 0 0 0
2016-17 0 0 0 0
2017-18 9.47 6.5 0 8.85

CAPITAL STRUCTURE
Graph :
Cost Of Retained Earnings

12
10 9.58
8.85
8 7.74
6
Cost Of Retained Earnings
0 0
0
2013-14 2014-15 2015-16 2016-17 2017-18
Interpretation :
The cost of retained earnings is fluctuating during the study period. The company is having the
highest value of 7.3 in the year 2013-14 and the lowest value of 0 in the years 2015 & 16.

CAPITAL STRUCTURE
VALUE OF EQUITY :
Equity value is the value of a company available to owners or shareholders.

It is the enterprise value plus all cash and cash equivalents, short and long term
investments, less all short –term debt, long debt and minority interests.
VALUE OF EQUITY (E) = NET INCOME

COST OF EQUITY
YEARS Net Income Cost Of Equity VALUE OF

EQUITY
2013-14 1311.9 14.31 9167.71
2014-15 972.4 10.32 9422.24
2015-16 736.8 0 0
2016-17 612.7 0 0
2017-18 1242.6 9.47 13121.43

CAPITAL STRUCTURE
Graph:
VALUE OF EQUITY
14000 13121.43
12000
10000 9167.71 9422.24
8000
VALUE OF EQUITY
6000
4000
2000
0 0
0
2013-14 2014-15 2015-16 2016-17 2017-18
Interpretation:
The value of equity is decresing in years 2015-16& 2016-17 it came to normal position in 2013-
14.

CAPITAL STRUCTURE
VALUE OF DEBT :
Debt instruments include mortgage assets, bank loans, short term or long term, debentures,
commercial papers and a wide variety of interest bearing financial instruments debt.
VALUE OF DEBT (D) = INTEREST

COST OF DEBT
YEARS Interest Cost Of Debt Value Of Debt
2013-14 252.6 12.89 1959.65
2014-15 226.9 17.49 1297.31
2015-16 578.6 78.52 736.88
2016-17 604.2 98.61 612.71
2017-18 549.0 41.30 1329.29

CAPITAL STRUCTURE
Graph:
Value Of Debt
2500
1959.65
2000
1500 1329.29
1297.31
Value Of Debt
1000
736.88
612.71
500
0
2013-14 2014-15 2015-16 2016-17 2017-18
Interpretation:
The value of equity is increasing percentages in years 2013-14& 2017-18 it came to normal
position in 2017-18.

CAPITAL STRUCTURE
VALUE OF THE FIRM :

The Net income approach suggested by Durand According to this approach the capital
structure decision is relevant to valuation of firm. This approach is based on the conclusion that
the firm can lower it is cost of capital by using debt. This is based on the assumption that the use
of debt does not change the risk perception of the investor. As such, the interest rate on debt
(Kd) and the equity capitalization rate (Ke) remain constant to debt. Therefore increased use of
debt results in higher market value of share and as result, lower overall cost of capital (Ko).This
can be measured through the formula.
VALUE OF THE FIRM = VALUE OF EQUITY+VALUE OF DEBT
(OR)
V = E+D
Years Value Of Equity Value Of Debt VALUE OF

THE FIRM
2013-14 9167.71 1959.65 11127.36
2014-15 9422.24 1297.31 10719.55
2015-16 0 736.88 736.88
2016-17 0 612.71 612.71
2017-18 13121.43 1329.29 14450.72

CAPITAL STRUCTURE
Graph :
VALUE OF THE FIRM

16000
14450.72
14000
12000 11127.36
10719.55
10000
8000
VALUE OF THE FIRM
6000
4000
2000
736.88 612.71
0
2013-14 2014-15 2015-16 2016-17 2017-18
Interpretation :
The value of the firm is in 2013-14 & 2017-18 increased and it is fluctuating and
decreasing year by year and in 2015 & 16.

CAPITAL STRUCTURE
COST OF CAPITAL:
Cost of capital plays an important role in building the capital structure Cost Capital is
defined as ‘Inspirational terms cost of capital is the discount rate for evaluating an investment
project and is defined as minimum rate of return that’s firm must earn on its investment for the
market value of the firm to remain un – changed’.
Net Operating Earnings

Ko = ---------------------------- X 100
Total value of firm
YEARS Net operating Value of the Cost of capital %

income firm
2013-14 1311.9 11127.36 11.78
2014-15 972.4 10719.55 9.07
2015-16 736.8 736.88 1
2016-17 612.7 612.71 1
2017-18 1242.6 14450.72 8.59

CAPITAL STRUCTURE
Graph :
Cost of capital %
14
11.78
12
10 9.07
8.59
8
Cost of capital %
6
2 1 1
0
2013-14 2014-15 2015-16 2016-17 2017-18
Interpretation :
The cost of equity is 1 in 2013 & 14, and remaining years were 11.78 % on share capital expect
in 2017.

CAPITAL STRUCTURE
WEIGHTED AVERAGE COST OF CAPITAL :

Weighted Cost Of Capital (WACC) is a calculation of a firm’s cost of capital in
which each category of capital is proportionately weighted.All soures of
capital,including equity shares,preferred shares,bonds and anyother long-term
debt,are included in WACC.
WACC = COST OF EQUITY* EQUITY WEIGHT+ COST OF DEBT*

DEBT WEIGHT
WACC = Ke*E/V+Kd*D/V
Years COST EQUITY COST OF DEBT WACC

OF WEIGH DEBT WEIGHT
EQUITY T
2013-14 14.31 0.823 12.89 17.61 14.04
2014-15 10.32 0.878 17.49 12.10 11.17
2015-16 0 0 78.52 1 78.52
2016-17 0 0 98.61 1 98.61
2017-18 9.47 9.08 41.30 9.19 46.18

CAPITAL STRUCTURE
Graph :
WACC
120
98.61
100
78.52
80
60
WACC
46.18
40
20 14.04 11.17
0
2013-14 2014-15 2015-16 2016-17 2017-18
Interpretation :
The weighted average cost of capital is fluctuating year by year. i.e., the overall cost of capital is
very less in the year 2013 and very high in 2014 & 15.Due to more debt the organization is liable
to control the cost.

CAPITAL STRUCTURE
5.1 FINDINGS
 The company’s earning per share is fluctuating year by year. In the study period
company in the year 2013-14 is 14.73 in the year 2014 & 15 EPS is decreased and it
is the least share negative and the company earning per share increased 9.73 to in the
year 2015-16.
 In debt equity ratio debtors are increased year by year from 2012 up to 2013 than in
the year 2014 decreased to approximately 41 percent than it takes increasing like past
years.
 The cost of equity in the study period except in the year 2013.I found that the
company had not paid dividend to the share holders in 2013&2014.
 The cost of retained is at the year starting 2013-10 is 9.58 and it be decreased step by
step upto 2013 & 14 than again it increased in 2015. Here I found that the company
does not maintain standard performance.
 The cost of Debt Company having more from 2013 & 2014 and it decreased in the
year 2014-15 and again it takes continually like past years.
 The value of the firm in the study periods in 2015-16 & 2016-17 is high.
 The firm’s cost of capital is very high 2017-18.
 Weighted average cost of capital very high in 2013-14 & 2017-18.
I founded that the company was paying high interest to creditors because of
increasing debt for company.
It is found that the company is not having maintain standard ratios

CAPITAL STRUCTURE
SUGGESTIONS
 The earnings per share is fluctuating year by year, the management should concentrate to
build optimum capital structure to maximize the earnings per share.
 The debt promotion is more than the idle ratio 2:1. The debt equity ratio is going beyond
the idle ratio during the study period, therefore the management should think over their
capital structure and its suitability of their objectives.
 The management should relay more on internal funds than external funds which makes
the company strong financial solvency.
 The proportions of debt funds are increasing rapidly than the increment of owner’s funds.
 The firm is investing most of the debt funds in improving the fixed assets. It will be
suggestible to continue the same to have a financial soundness.

CAPITAL STRUCTURE
CONCLUSIONS
The following conclusions are arrived at based on the observations made on the present study:-
 Except of the first year of the study of period, funds were utilized for financing the
capital structure requirements.
This various Ratio like debt equity ratio, proprietary ratio, earning per share, indicating that the
over all financial position of the Chaitanya Chemicals is not satisfactory. However there is scope
for improving and in the area of cash management and capital structure management.

CAPITAL STRUCTURE
Chaitanya chemicals Profit &loss A/C 1-4-2013 to 31-3-2014

Particulars Amount Particulars Amount
0peningstock 66,40,600.00 Sales accounts 11,02,90,970.00

Purchase accounts 8,41,61,371.15 Sale of barium 2,72,06,120.00
Barium carbonate 29,000.00 Sale of chloride 4,60,52,369.00
Barites 1,27,56,586.50 Sale of sodium 3,70,32,481.00
Blackash 1,14,3,576.00 43,55,400.00
Caustic sodalye 1,77,76,771.50
Coal 1,05,75,828.14
Coconut shell powder 70,77,600.00
Consumable stores 51,047.00
Diesel 3,98,217.26
Fire wood 33,48,180.25
Furnace oil 91,84,065.25
Gas 7,18,523.00
Hydrochloric acid 36,07,756.25
Sodium sulphide 18,36,688.00
Spent caustic 53,70,532.00
direct exp 1,75,22,242.55
bonus 4,20,098.00
electricity bill 17,23,325.00
gratuity 66,705.00
job work charges 41,08,000.00
repairs and machinery 9,98,631.55
salaries 30,66,976.00
salaries to patners 3,00,000.00
transport charges 1,73,142.00
transport chargesof ash 1,12,101.00
transport charges coal 15,67,308.00
transport charges shell 7,13,580.00
transport charges cslye 10,24,752.00
transport charges oil 73,800.00
transport charges hcl 29,73,059.00
wages 2,70,165.00
wages charges 4,30,600.00 63,22,156.30
11,46,46,370.00 Gross profit 11,46,46,370.00

CAPITAL STRUCTURE
Indirect incomes 63,22,156.30

Profit in chit 92,400.00 1,32,400.00
Rent 40,000.00
Indirect expenses 58,61,433.58
Advertisement charges 7,109.00
Audit fees 16,854.00
Bank charges 1,25,548.20
Commission 56,968.00
Contract services 67,500.00
Depreciation 12,03,588.00
Employees insurance 1,57,666.00
Income tax 2,61,884.00
Premium 85,049.00
Intrest 11,82,006.83
Interest to patners 4,40,790.00
Taxes 1,09,825.00
Misllenious expen 39,015.00
Packing materials 8,98,662.00
Postage charges 81,136.00
Printing&stationary 62,776.00
Provident fund 3,87,162.00
Staff welfare exp 1,52,487.00
Contributions 77,013.00
Telephonecharges 2,10,320.55
Travelling exp 72,927.00
5,93,122.72
Vehiclemaintains 1,65,147.00
Total 64,54,556.30 Total 64,54,556.30

CAPITAL STRUCTURE
Chaitanya chemicals balance sheet 1-4-2009to 31-3-2014
Liabilities Amount Assets Amount

Capital accounts 47,67,164.29 Fixed Assets 83,04,313.39
Chandramouli 14,03,406 Computers 43,142.41
.05 cycle 263.00
Lalitha 11,91,887.45 equipment 64,771.89
Ramalakshmi 4,46,491.85 file equip 2,662.23
Rama moorthy 2,45,182.95 99,99,942.09 furniture 1,22,852.65
Parasunamba 14,80,195.99 gypsy 6,986.76
Loans l equipment 1,966.03
Bank od 99,99,942.09 2,92,48,927.11 land&buil 12,47,449.60
Current liabilities motor cycle 52,197.22
Sundry creditors 2,51,29,097.81 plant&machi 59,37,311.70
g.lalitha 6,16,612.00 tanker 6,62,398.05
Chandra mouli 7,69,603.70 tools 4,294,05
Net profit tractor 1,58,017.69
opening bl 5,93,122.72 current assets 3,57,11,720.10
current period 5,93,122.72 closing stock 43,55,400.00
dep0sits 30,09,395.94
loans 2,76,21,925.86
sundrydebt 2,76,21,925.86
cash-in-hand 2,82,992.42
bank accou 2,40,828.90
Total 4,40,16,033.49 Total 4,40,16,033.49

CAPITAL STRUCTURE

0peningstock 43,55,400.00 Sales accounts 8,64,60,006.6

Purchase accounts 6,87,15,159.44 Sale of barium 49,41,950.00
Barium carbonate 1,14,000.00 Sale of chloride 1,39,63,380.00
Barytes 1,35,63,182.00 Sale of sodium 3,32,55,312.93
Blackash 67,42,749.00 Sales of sulphi 1,43,000.00 95,95,300.00
Caustic sodalye 1,29,70,900.50 Closing stock
Coal 1,08,72,363.98
Coconut shell powder 7,20,000.00
Consumable stores 64,871.00
Diesel 2,28,847.97
Fire wood 13,59,006.00
Furnace oil 1,52,03,216.00
Gas 9,41,727.95
Hydrochloric acid 51,52,700.42
Sodium sulphide 4,63,256.00
Spent caustic 20,450.00
Barium chloride 2,77,888.00
direct exp 1,54,33,631.37
bonus 5,08,276.3
electricity bill 10,17,584.00
job work charges 23,21,000.00
repairs and machinery 12,23,142.00
salaries 36,03,565.00
salaries to patners 3,754.00
transport charges 9,513.00
transport chargesof ash 68,220.00
transport charges coal 16,88,069.00
transport charges shell 25,740.00
transport charges cslye 10,62,803.00
transport charges oil 3,92,200.00
transport charges hcl 26,84,800.00
wages 6,87,555.00
wages charges 1,02,480.00
sodium hydro 34,930.00 9,60,55,306.68
75,51,115.87
gross profit c/o 9,60,55,306.68 75,51,115.87
Gross profit b/f
Indirect incomes
Mislenious incomes 7,500.00 7,500.00

CAPITAL STRUCTURE
Indirect expenses 71,20,032.52

Advertisement charges 54,887.00
Audit fees 17,648.00
Bank charges 1,45,911.32
Commission 1,04,835.00
Contract services 1,35,899.00
Depreciation 14,04,658.66
Employees insurance 1,87,734.00
Income tax 57,130.00
Premium 1,00,000.00
Intrest 1,56,566.00
Interest to patners 57,469.00
Taxes 5,72,059.69
Loan 11,45,752.62
Misllenious 4,77,250.00
Packing materials 4,44,643.00
Postage charges 87,127.00
Printing&stationary 46,581.55
Provident fund 4,50,368.00
Staff welfare exp 3,00,000.00
Contributions 1,96,735.00
Telephonecharges 1,29,435.00
Travellingexp 2,90,756.93
Vehiclemaintains 15,790.00
Loss inchit 3,51,516.17
Licences 75,584.00
Staff welfare charg 50,237.00
Other exp 63,458.00 4,38,583.35
Total 75,58,615.87 Total 75,58,615.87

CAPITAL STRUCTURE
Chaitanya chemicals balance sheet 2014-15

Capital accounts 55,30,520.33 Fixed Assets 90,85,919.73
Chandramouli 13,82,830.61 Computers 36,671.05
Lalitha 16,09,531.44 cycle 223.63
Ramalakshmi 16,78,249.17 equipment 98,475.71
Rama moorthy 5,47,787.54 file equip 2,262.90
Parasunamba 3 ,12,321.57 3,51,24,326.10 furniture 1,82,179.40
Loans gypsy 5,938.75
Bank od 3,14,23,691.00 l equipment 1,671.13
Lalitha 6,22,205.40 land&buil 11,62,640.89
Chandra mouli 5,79,011.10 motor cycle 44,367.64
Parasuram 13,64,315.60 plant&machi 67,99,035.30
Ramalakshmi 8,16,315.00 tanker 5,94,486.34
Rama moorthy 3,18,929.00 tools 3,649.95
Current liabilities 2,52,03,876.55 tractor 1,34,315.04
Sundry creditors 2,52,03,876.56 current assets 5,67,72,803.26
closing stock 95,95,300.00
dep0sits 37,02,700.35
Net profit loans 1,53,946.98
opening bl 4,38,583.35 sundrydebt 4,32,66,294.89
current period 4,38,583.35 cash-in-hand 11,962.71
bank accou 42,598.32
Total 6,58,58,722.98 Total 6,58,58,722.98

CAPITAL STRUCTURE

0peningstock 959530.00 Sales accounts 134900969.54

Barium carbonate 38500.00 Net sale value 121077382.54
Barium hydroxide 53261.00 Excise duty 9439233.00
Barytes 21403344.00 Sales tax 2232678.00
Blackash 1167400.00 Sale of chloride 1912500.00
Caustic sodalye 16018918.42 Sale of sodium 196988.00
Coal 24140084.00 Sales of sulphi 42188.00
Coconut shell powder 2057100.00
Consumable stores 92896.00 Job work charges 1000000.00
Diesel 117549.00
Gas 3537117.00 Profit in chit fund 297747.20
Fire wood 25500.00
Diesel 247500.00 Closing stock 15706000.00
bonus 117988.00
Furnace oil 40750.00
Gas 7501983.00
Hydrochloric acid 5080924.56
Sodium sulphide 968629.80
Spent caustic 17446489.50
Barium chloride 25478.00
bonus 12500.00
electricity bill 9636221.00
job work charges 2274866.00
repairs and machinery 5289428.00
salaries 108960.00
salaries to patners 755642.00
transport charges 3800999.00
electricity charges coal 1783325.50
wages 299020.00
Gross profit 1778109296
151904716.74
151904716.74

CAPITAL STRUCTURE
5169375.52 Gross profit 17781092.96

Insurance premium 663662.43
Taxes 41402.00
Packing material 61579.00
Postage charges 182039.14
Printing 264396.00
Provident fund 238162.00
Salaries 207105.00
Staff welfare 126000.00
Contribution 95411.00
Traveling exp 210566.50
Tour allowances 38943.00
Depreciation 1017299.00
Interest 94397.00
Interest to patners 114664.00
Advertaisement 544142.00
Audit fee 600000.00
Bank comssion 326545.00
discount 36695.00
state insurance 239182.91
income tax 80297.00
packing material 348946.80
taxes 63000.00
depreciation 6242515.45
staff exp 774497.21
net profit
Total 17781092.96 total 17781092.96

CAPITAL STRUCTURE

Capital accounts Fixed Assets
Chandramouli 1554699.60 Computers 2715865.00
Lalitha 3257574.65 cycle 7298790.88
Ramalakshmi 2028421.48 equipment 60147817.34
Rama moorthy 1963445.72 file equip 179276.41
furniture
254441.76
Loans gypsy
Lalitha 314958.10 l equipment 3102.46
Chandra mouli 1364174.00 land&buil 1923.47
Parasuram 726148.60 motor cycle 1420.46
Ramalakshmi 5277.00 plant&machi 63536.14
Rama moorthy 618011.40 tanker 662433.39
Sundry creditors 39658944.85
Un secured loans 8591728.00 deposits
Working capital loan closing stock 60000.00
State bank of india 9151480.77 dep0sits 1638247.00
State bank of india 29096670.74 loans 1000.00
sundrydebt
14505.00
Term loan cash-in-hand
State bank of india 20558004.03 bank accou 196145.00
tele phone deposit 647.04
T.d.s deposit 697785.50
S.d deposit 5823.00
Excise duty 4627110.64
T.c.s 37500.00
Cenvat 111601.97
Hp gas deposit 5000.00
Indu sindu bank 1800000.00
Ans enterprises 1271811.33
Mutual fund
135837.48
Ap vat
Bank balance 23863179.65
sundry debtors 15706000.00
Cash in hand 373276.54
Total 121874077.46 Total 121874077.46

CAPITAL STRUCTURE


Barium hydroxide 61900.00 Excise duty 10278073.00
Barytes 32812753.00 Sales tax 2745862.00
sulphate 204642.04
Caustic sodalye 28522576.90
Coal 25349332.08
Coconut shell powder 2080986.00
Soda ash 6481989.00
Diesel 2247820.00 Closing stock 16058200.00
Consumable stores 175604.00 Profit on export 521591.59
Fire wood 523354.00
Diesel 3573496.00
bonus 7116167.53
Gas 1181631.65
Sales tax 2745862.00
Salaries wages 7536668.00
bonus 784222.90
water charges 215200.00
17903502.09
186309863.03
Gross profit 186309863.03
Interest 6319219.71 Gross profit 17903502.09
Intest patners 1096641.59 Profit vijaya durga chit fund 144205.00
Adver taisement charg 11000.00 Interest received 20680.68
Audit fees 80000.00
Bank commission 247718.25
Employee state insurance 326957.00
Income tax 445730.00
Allowance 187000.00
Taxes 149852.00
Printing 145261.00
Salaries 758058.00
Insurance 69000.00
Bank charges 3223449.50
Net profit 843657.72

CAPITAL STRUCTURE
18068387.7 TOTAL 18068387.77

TOTAL

Capital accounts Fixed Asset
Chandramouli 3777995.09 land&building 1661338.40
Lalitha 3655215.15 cycle 1 9343771.39
Parasuram 2316563.60 furniture
2637.09
gypsy
Patners current account l equipment 1634.95
land&buil 1207.39
Lalitha 304994.10 motor cycle 86688.22
Chandra mouli 1364174.00 plant&machi 563068.39
Parasuram 1022609.60 land 2715865.00
Ramalakshmi 613817.40 buildings 653422533
Rama moorthy 588636.20 plant 47871634.55
Sundry creditors 49976080.88 furniture 9139.95
Un secured loans 18408000.00 deposits
Working capital loan closing stock 60000.00
State bank of india 38863341.40 dep0sits
1676247.00
loans
sundrydebt 1000.00
Term loan cash-in-hand 14505.00
State bank of india 13272577.58 bank accou 1876145.00
T.d.s deposit 1285184.50
S.d deposit 5823.00
Excise duty 5239016.64
T.c.s 80000.00
Cenvat 111601.97
Indu sindu bank
1200000.00
Ans enterprises
Mutual fund 659973.82
Ap vat 3404106.26

CAPITAL STRUCTURE
Total 139891210.44 Total 139891210.44

CAPITAL STRUCTURE


Barium hydroxide 1730000.00
Barytes 46721084.00
sulphate 39294134.68
Caustic sodalye 28109134.00
Coal 9046881.00
Coconut shell powder 423045.00 Closing stock 6521800.00
Soda ash 310000.00 Profit on export
Diesel 1443301.00
Consumable stores 81336.00
Fire wood 608091.00
Diesel 2863042.50
bonus 12790939.00
Gas 1220111.50
Sales tax 3026583.00
Salaries wages 8800.00
bonus 13461526.00
water charges 7224047.00
3534225.00
807130.00
Gross profit 34443947.03
252453034.60 252453034.60

CAPITAL STRUCTURE
7540692.00
Interest 1857477.50 34443947.03
Intest patners 14170.00 Gross profit 239643.00
Adver taisement charg 20000.00 Profit margadarsi chit fund 70782.17
Audit fees 439414.49 Interest received
Bank commission 480475.00
Employee state insurance 759050.00 Exchange rate 93335.00
Income tax 180000.00
Allowance 335845.00
Taxes 180000.00
Printing 202278.00
Salaries 1020000.00
Insurance 39498.00
Bank charges 286326.00
Loss in mutual fund 79121.00
Audit fee 1128773.00
Tour allowance 97322.84
Depreciation 12572116.83 34847707.20
Net profit 1709277.04

CAPITAL STRUCTURE
Total 34847707.20 Total

CAPITAL STRUCTURE

Capital accounts Fixed Asset
Chandramouli 9469802.86 land&building 2746258.52
Lalitha 9271787.71 cycle 24618821.73
Parasuram 7192666.52 furniture
1905.30
gypsy
Patners current account l equipment 1181.25
land&buil 872.34
Lalitha 41110.10 motor cycle 87187.12
Chandra mouli 188374.00 plant&machi 2591934.37
Parasuram 165408.60 land 2279245.00
Ramalakshmi 446171.40 buildings 6095808.81
Rama moorthy 294392.20 plant 36904791.39
Sundry creditors 58328482.01 furniture 7403.35
Un secured loans high bridge 1292455.00
Working capital loan deposits
State bank of india 19515674.35 dep0sits coromondal
60000.00
Working capital loan 30161781.00 apsdcl
Credit loan 5017955.00 sundrydebt 1924247.00
Term loan T.d.s deposit 1876145.00
State bank of india 129545.36 S.d deposit 80000.00
Hdfc bank car loan 516688.00 Excise duty 25000.00
Mahendra finance 153050.00 T.c.s 5000.00
Cenvat 27359.00
Indu sindu bank 131183.50
Ans enterprises 2126027.14
Mutual fund
5038328.82
Ap vat
Closing stock 6473816.00
Total 158660872.80 Total 158660872.80

CAPITAL STRUCTURE
BIBLIOGRAPHY
 Anunual reports of Chaitanya Chemicals.

 M.Y Khan and P.K. Jain “Finance Management”.3rd Edition Tata Mc
Graw Hill publishing company Ltd, New Delhi .
 I.M. Pandey “Finance Management”. 9th Edition Vikas publishing House

PVT, Ltd. New Delhi
 Prasana Chandra 2002 “Finance Management” 5th Edition , Tata Mc Graw

Hill publishing company Ltd, New Delhi.
www.chaitanyachemicals.com\
www.wikipedia.com
www.google.com

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CAPITAL STRUCTURE

AITS - RAJAMPET Page 1

Feature of appropriate capital structure:

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APPROPRIATE OR OPTIMUM CAPITAL STRUCTURE:

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Feature of appropriate capital structure:

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Net Income Approach:

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NET OPERATING INCOME APPROACH:

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MODIGLIANI – MILLER APPROACH:

FACTORS INFLUENCING FINANCIAL STRUCTURE:

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MARKETABILITY AND TIMING:

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1.2 INDUSTRY PROFILE

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1.2 INDUSTRY PROFILE

Indian Chemical industry:

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Government Policies and FDI Investments

 Government’s proposal to set up of a technology up-gradation fund of ~USD 80 Mn in the

 Proposal to establish an autonomous USD 100 Mn chemical innovation fund by securing

 Government readiness to provide incentives for bio-based raw materials to reduce

 Government’s plan to expedite the consolidation of multiple legislations governing the

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EVOLUTION OF INDUSTRY STRUCTURE

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Chemical Industry Map in India

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1.3 COMPANY PROFILE

 Chaitanya Chemicals is currently exporting to quality conscious consumers in USA ,Japan,

AITS - RAJAMPET Page 20

History of Chaitanya Chemicals

Chaitanya chemicals today manufacture

AITS - RAJAMPET Page 21

CHAITANYA CHEMICAL (NEW UNIT)

Year of Establishment: 2009

Products: Barium chloride, Barium Carbonate, Barium sulphide, Sodium hydrosulphide,

Capacity: Barium chloride -10,000 MT per annum

Location: Plot # 5 &6, IDA, Kadapa, Andhra Pradesh

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Certificates: ISO 9001:2000,

Location: Rami reddy kottalu, vallur mandal, Kadapa, Andhra Pradesh

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Capacity:  Barium sulphide-9000 MT per annum

Location:  Plot # 9, IDA, Kadapa, Andhra Pradesh

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Products: Barium sulphate precipitated, Barium Nitrate, Barium Hydroxide, Sodium

Capacity: Barium sulphate -3600 MT per annum

Certificates: ISO 9001:2000,

Location: Plot # 3, IDA, Kadapa, Andhra Pradesh

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Quality of Chaitanya chemicals products

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