TASK 1:In finance, capital structure refers to the way a corporation finances its assets through

some combination of equity, debt, or hybrid securities. A firm's capital structure is then
the composition or 'structure' of its liabilities.
In reality, capital structure may be highly complex and include dozens of sources.
Gearing Ratio is the proportion of the capital employed of the firm which come from
outside of the business finance, e.g. by taking a short term loan etc.
We all know that capital structure is combination of sources of funds in which we can
include two main sources' proportion. One is share capital and other is Debt. All four
theories are just explaining the effect of changing the proportion of these sources on the
overall cost of capital and total value of firm.

Net Income Theory of Capital Structure:-

This theory gives the idea for increasing market value of firm and decreasing overall
cost of capital. A firm can choose a degree of capital structure in which debt is more
than equity share capital. It will be helpful to increase the market value of firm and
decrease the value of overall cost of capital. Debt is cheap source of finance because
its interest is deductible from net profit before taxes. After deduction of interest company
has to pay less tax and thus, it will decrease the weighted average cost of capital.

For example if you have equity debt mix is 50:50 but if you increase it as 20: 80, it will
increase the market value of firm and its positive effect on the value of per share.

High debt content mixture of equity debt mix ratio is also called financial leverage.
Increasing of financial leverage will be helpful to for maximize the firm's value.

For Example: ABC Company gives following information:-

1. Expected rate of return 4%

2. Rate of return on investment 24%
3. Expected investment

10, 00, 000

4. Tax rate

50%

5. Face value

10 Rs.

6. Rate of Interest

10 %

100% Equity

50% Equity and

25% Equity and

50% Debt

75% Debt

2,40,000

2,40,000

50,000

75,000

2,40,000

1,90,000

1,65,000

1,20,000

95,000

82,500

1,20,000

95,000

82,500

1,00,000

50,000

25,000

1.2

1.9

3.3

2,40,000
EBIT
----------Interest

PBT

Less Tax

PAT

Shares

EPS(In Rs)

Traditional Theory of Capital Structure:-

This theory or approach of capital structure is mix of net income approach and net
operating income approach of capital structure. It has three stages which you should
understand:

1st Stage
In the first stage which is also initial stage, company should increase debt contents in its
equity debt mix for increasing the market value of firm.

2nd Stage
In second stage, after increasing debt in equity debt mix, company gets the position of
optimum capital structure, where weighted cost of capital is Minimum and market value
of firm is Maximum. So, no need to further increase in debt in capital structure.

3rd Stage
Company can get loss in its market value because increasing the amount of debt in
capital structure after its optimum level will definitely increase the cost of debt and
overall cost of capital.

Modigliani and Miller :-

MM theory or approach is fully opposite of traditional approach. This approach says that
there is not any relationship between capital structure and cost of capital. There will not
effect of increasing debt on cost of capital.

Value of firm and cost of capital is fully affected from investor's expectations. Investors'
expectations may be further affected by large numbers of other factors which have been
ignored by traditional theorem of capital structure.

TASK 2

Profit & Loss account

of Dabur India
Income
Sales Turnover
Excise Duty
Net Sales
Other Income
Stock Adjustments
Total Income
Expenditure
Raw Materials
Power & Fuel Cost
Employee Cost
Other Manufacturing Expenses
Selling and Admin Expenses
Miscellaneous Expenses
Preoperative Exp Capitalised
Total Expenses

Operating Profit
PBDIT
Interest
PBDT
Depreciation
Other Written Off
Profit Before Tax
Extra-ordinary items
PBT (Post Extra-ord Items)
Tax
Reported Net Profit
Total Value Addition
Preference Dividend
Equity Dividend
Corporate Dividend Tax
Per share data (annualised)
Shares in issue (lakhs)
Earning Per Share (Rs)
Equity Dividend (%)
Book Value (Rs)

------------------- in Rs. Cr. ------------------Mar '11

Mar '10

Mar '09

Mar '08

Mar '07

12 mths

12 mths

12 mths

12 mths

12 mths

3,305.42
30.99
3,274.43
39.16
78.31
3,391.90

2,891.00
23.58
2,867.42
27.95
9.68
2,905.05

2,435.85
27.52
2,408.33
29.30
38.89
2,476.52

2,128.02
34.39
2,093.63
17.92
3.04
2,114.59

1,782.08
36.93
1,745.15
12.46
22.19
1,779.80

1,740.68
42.39
230.84
25.21
589.09
100.15
0.00
2,728.36
Mar '11

1,393.97
35.43
212.34
22.74
557.26
103.84
0.00
2,325.58
Mar '10

1,271.74
36.63
167.32
17.59
425.16
84.68
0.00
2,003.12
Mar '09

1,026.98
38.42
149.69
15.59
400.82
75.32
0.00
1,706.82
Mar '08

800.46
30.59
118.66
8.65
456.11
48.20
0.00
1,462.67
Mar '07

12 mths

12 mths

12 mths

12 mths

12 mths

624.38
663.54
12.93
650.61
37.73
16.60
596.28
0.25
596.53
124.85
471.41
987.68
0.00
200.19
32.82

551.52
579.47
13.28
566.19
31.91
5.66
528.62
-0.19
528.43
93.70
433.33
931.61
0.00
173.60
29.50

444.10
473.40
14.47
458.93
27.42
3.94
427.57
-0.72
426.85
51.44
373.55
731.38
0.00
151.39
25.73

389.85
407.77
10.92
396.85
25.75
5.67
365.43
-0.86
364.57
48.40
316.77
679.85
0.00
129.60
22.03

304.67
317.13
4.43
312.70
21.98
6.49
284.23
-0.13
284.10
32.15
252.08
662.21
0.00
122.13
17.13

17,407.24
2.71
115.00
6.33

8,675.86
4.99
200.00
8.64

8,650.76
4.32
175.00
8.53

8,640.23
3.67
150.00
6.11

8,628.84
2.92
175.00
4.67

Balance Sheet of
Dabur India

------------------- in Rs. Cr. ------------------Mar '11

Mar '10

Mar '09

Mar '08

Mar '07

12 mths

12 mths

12 mths

12 mths

12 mths

174.07
174.07
0.00
0.00
927.09
0.00
1,101.16
17.57
235.78
253.35
1,354.51
Mar '11

86.76
86.76
0.14
0.00
662.48
0.00
749.38
24.27
81.80
106.07
855.45
Mar '10

86.51
86.51
0.00
0.00
651.69
0.00
738.20
8.26
130.72
138.98
877.18
Mar '09

86.40
86.40
0.00
0.00
441.92
0.00
528.32
16.45
0.24
16.69
545.01
Mar '08

86.29
86.29
0.00
0.00
316.90
0.00
403.19
19.28
0.26
19.54
422.73
Mar '07

12 mths

12 mths

12 mths

12 mths

12 mths

Application Of Funds
Gross Block
Less: Accum. Depreciation
Net Block
Capital Work in Progress
Investments
Inventories
Sundry Debtors
Cash and Bank Balance
Total Current Assets
Loans and Advances
Fixed Deposits
Total CA, Loans & Advances
Deffered Credit
Current Liabilities
Provisions
Total CL & Provisions
Net Current Assets
Miscellaneous Expenses
Total Assets

766.88
269.32
497.56
11.92
519.23
460.58
202.46
26.08
689.12
461.81
166.33
1,317.26
0.00
539.05
535.36
1,074.41
242.85
82.95
1,354.51

687.23
236.28
450.95
23.31
348.51
298.44
130.48
48.80
477.72
348.94
115.11
941.77
0.00
471.73
440.10
911.83
29.94
2.74
855.45

518.77
210.45
308.32
51.71
232.05
261.72
112.36
32.16
406.24
455.65
111.53
973.42
0.00
381.87
315.10
696.97
276.45
8.64
877.17

467.93
189.77
278.16
16.26
270.37
201.15
100.46
67.36
368.97
206.94
0.90
576.81
0.00
345.16
265.41
610.57
-33.76
13.95
544.98

404.30
168.97
235.33
3.71
145.35
157.37
60.98
49.04
267.39
129.19
1.21
397.79
0.00
301.78
77.49
379.27
18.52
19.82
422.73

Contingent Liabilities
Book Value (Rs)

1,075.89
6.33

173.48
8.64

174.15
8.53

171.24
6.11

153.25
4.67

Sources Of Funds
Total Share Capital
Equity Share Capital
Share Application Money
Preference Share Capital
Reserves
Revaluation Reserves
Net worth
Secured Loans
Unsecured Loans
Total Debt
Total Liabilities

Analysis of Capital structure of Dabur on the basis of Net Income Theory of

Capital structure:All equity in cr.
EBIT

609.21

Less interest

12.93

PBT

596.28

Less TAX

124.85

PAT

471.43

Shares(in lakhs)

17,407.24

EPS

2.71 Rs

New capital structure of Dabur when we change the ratio of Equity and Debt

All Equity in cr.

50%equity
50% debt in cr.

EBIT

609.21

and 25%

equity

75% debt in cr.

609.21

609.21

5.371

04.02

LESS INTEREST

---------------

PBT

609.21

603.839

605.19

LESS TAX

127.50

126.383

126.666

PAT

481.71

477.456

478.524

NO. OF SHARES

17407.24

8703.62

4351.81

EPS

2.71Rs

5.49 Rs

10.99 Rs

and

Conclusion:

EPS is increasing as we are decreasing the content of equity and

increasing the debt and increasing the debt ratio from 0 to 50% and then 75%. Hence
the capital structure having 75% debt and 25% equity is best for the company.