babu kpcl final project

A STUDY ON CAPITAL STRUCTURE AT CPCL

CHAPTER 1

INTRODUCTION

THEORETICAL BACKGROUND OF THE TOPIC:

. Among all the sources of finance, cost of equity capital is considered to be 1.1

INTRODUCTION :

Finance is the study of funds and management. Its general areas are business finance,

personal finance, and public finance. It also deals with the concepts of time, money,

risk, and the interrelation between the given factors. It is basically focused on how the

money is spent and budgeted. It is one of the most important aspects in handling

business. Finance addresses the methods wherein business entities used their financial

resources on a certain period of time. It is the application of a set of techniques used

by organizations in managing their financial affairs. The income and expenditure are

emphasized in finance and its differences can easily be indicated.

Nowadays, loans have been packaged for resale. This means that the debt has been

bought by an investor from the bank. These bonds are sold to investors by financial

corporations who have exceeded beyond their expenditures. The investor can now

collect all the interests and be sold again through a secondary market. Banks serve as

facilitators to companies in the provision of credit and mutual funds. Investments are

managed carefully under a financial risk management to control gambling chances of

these financial assets. Financial instruments are also used to secure these assets on

securities exchanges such as stock exchanges and bonds. A bank provokes the

activities of both borrowers and lenders. Lenders pay deposits to banks on which it

pays the interest rates. The central banks are the last resorts that handle the monetary

funds. These banks affect the interest rates being charged such as an increase in the

money supply will result to a decrease in the interest rates.

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Financial capital is a monetary resource allows businesses to purchase items that will

create goods for production and other services. The budget is the documentation of the

entire entrepreneurship. The outline includes the objectives of the business, the target

sets, resulting costs, required investment, planned sales, growth, financing source, and

financial results. It can be directed on long term or on a short term basis. The capital

budget is mainly concerned with the proposed fixed asset requirements. The financing

of the expenditure is also indicated in the capital budget. A detailed plan of all the

sources and cash usage is emphasized in the cash budget. It has six main sections such

as the beginning cash balance, cash collections, cash disbursements, cash excess, cash

deficiencies, financing, the ending cash balance, and the management of current

assets.

1.2 FINANCIAL MANAGEMENT

Financial Management means planning, organizing, directing and controlling the

financial activities such as procurement and utilization of funds of the enterprise. It

means applying general management principles to financial resources of the

enterprise.

Financial management is defined as the management of flow of funds in a firm and it

deals with financial decision making of the firm. Financial management includes any

decision made by an investor that affects his finances. In financial management the

emphasis is laid on optimum utilization of funds. Financial management is important

to all levels of human existence as every entity has to look after its finances. Financial

management is also referred as planning, organizing and controlling the monetary

resources of an organization. Financial management helps in improving the allocations

of working capital within business operations. It reviews the financial health of the

company by using tools like ratio analysis.

OBJECTIVES OF FINANCIAL MANAGEMENT

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The financial management is generally concerned with procurement, allocation and

control of financial resources of a concern. The objectives can be-

1. To ensure regular and adequate supply of funds to the concern.

2. To ensure adequate returns to the shareholders this will depend upon the

earning capacity, market price of the share, expectations of the shareholders.

3. To ensure optimum funds utilization. Once the funds are procured, they should

be utilized in maximum possible way at least cost.

4. To ensure safety on investment, i.e., funds should be invested in safe ventures

so that adequate rate of return can be achieved.

5. To plan a sound capital structure-There should be sound and fair composition

of capital so that a balance is maintained between debt and equity capital.

FUNCTIONS OF FINANCIAL MANAGEMENT

1. Estimation of capital requirements:

A finance manager has to make estimation with regards to capital requirements

of the company. This will depend upon expected costs and profits and future

programmes and policies of a concern. Estimations have to be made in an

adequate manner which increases earning capacity of enterprise.

2. Determination of capital composition:

Once the estimation has been made, the capital structure have to be decided.

This involves short- term and long- term debt equity analysis. This will depend

upon the proportion of equity capital a company is possessing and additional

funds which have to be raised from outside parties.

3. Choice of sources of funds:

For additional funds to be procured, a company has many choices like-

a. Issue of shares and debentures

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b. Loans to be taken from banks and financial institutions

c. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source and

period of financing.

4. Investment of funds:

The finance manager has to decide to allocate funds into profitable ventures so that

there is safety on investment and regular returns is possible.

5. Disposal of surplus:

The net profits decision has to be made by the finance manager. This can be done

in two ways:

a. Dividend declaration - It includes identifying the rate of dividends and

other benefits like bonus.

b. Retained profits - The volume has to be decided which will depend

upon expansion, innovation, diversification plans of the company.

6. Management of cash:

Finance manager has to make decisions with regards to cash management. Cash is

required for many purposes like payment of wages and salaries, payment of

electricity and water bills, payment to creditors, meeting current liabilities,

maintenance of enough stock, purchase of raw materials, etc.

7. Financial controls:

The finance manager has not only to plan, procure and utilize the funds but he

also has to exercise control over finances. This can be done through many

techniques like ratio analysis, financial forecasting, cost and profit control, etc.

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·.

CAPITAL BUDGETING

The first question concerns the firm’s long-term investments. The process of planning

and managing a firm's long-term investments is called capital budgeting. In capital

budgeting, the financial manager tries to identify investment opportunities that are

worth more to the firm than they cost to acquire. Financial managers must be

concerned with how much cash they expect to receive, when they expect to receive it,

and how likely they are to receive it. Evaluating the size , timing , and risk of future

cash flows is the essence of capital budgeting.

.

CAPITAL STRUCTURE

The term capital structure refers to the percentage of capital (money) at work in a

business by type. Broadly speaking, there are two forms of capital: equity capital and

debt capital. Each has its own benefits and drawbacks and a substantial part of wise

corporate stewardship and management is attempting to find the perfect capital

structure in terms of risk / reward payoff for shareholders. This is true for Fortune 500

companies and for small business owners trying to determine how much of their start-

up money should come from a bank loan without endangering the business.

Let's look at each in detail:

Equity Capital: This refers to money put up and owned by the shareholders

(owners). Typically, equity capital consists of two types: 1.) contributed

capital, which is the money that was originally invested in the business in

exchange for shares of stock or ownership and 2.) Retained earnings, which

represents profits from past years that have been kept by the company and used

to strengthen the balance sheet or fund growth, acquisitions, or expansion.

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Many consider equity capital to be the most expensive type of capital a

company can utilize because it’s "cost" is the return the firm must earn to

attract investment. A speculative mining company that is looking for silver in a

remote region of Africa may require a much higher return on equity to get

investors to purchase the stock than a firm such as Procter & Gamble, which

sells everything from toothpaste and shampoo to detergent and beauty

products.

Debt Capital: The debt capital in a company's capital structure refers to

borrowed money that is at work in the business. The safest type is generally

considered long-term bonds because the company has years, if not decades, to

come up with the principal, while paying interest only in the meantime.

Other types of debt capital can include short-term commercial paper utilized by

giants such as Wal-Mart and General Electric that amount to billions of dollars

in 24-hour loans from the capital markets to meet day-to-day working capital

requirements such as payroll and utility bills. The cost of debt capital in the

capital structure depends on the health of the company's – - a triple AAA rated

firm is going to be able to borrow at extremely low rates versus a speculative

company with tons of debt, which may have to pay 15% or more in exchange

for debt capital.

Other Forms of Capital: There are actually other forms of capital, such as

vendor financing where a company can sell goods before they have to pay the

bill to the vendor that can drastically increase return on equity but don't cost

the company anything. This was one of the secrets to Sam Walton's success at

Wal-Mart. He was often able to sell Tide detergent before having to pay the

bill to Procter & Gamble, in effect, using PG's money to grow his retailer. In

the case of an insurance company, the policyholder "float" represents money

that doesn't belong to the firm but that it gets to use and earn an investment on

until it has to pay it out for accidents or medical bills, in the case of an auto

insurer. The cost of other forms of capital in the capital structure varies greatly

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on a case-by-case basis and often comes down to the talent and discipline of

managers.

MEANING OF CAPITAL STRUCTURE

Capital Structure is referred to as the ratio of different kinds of securities raised by a

firm as long-term finance. The capital structure involves two decisions-

a. Types of securities to be issued are equity shares, preference shares and long

term borrowings (Debentures).

b. Relative ratio of securities can be determined by process of capital gearing. On

this basis, the companies are divided into two-

i. Highly geared companies - Those companies whose proportion of

equity capitalization is small.

ii. Low geared companies - Those companies whose equity capital

dominates total capitalization.

For instance - There are two companies A and B. Total capitalization amounts to be

USD 200,000 in each case. The ratio of equity capital to total capitalization in

company A is USD 50,000, while in company B, ratio of equity capital is USD

150,000 to total capitalization, i.e, in Company A, proportion is 25% and in company

B, proportion is 75%. In such cases, company A is considered to be a highly geared

company and company B is low geared company.

FACTORS DETERMINING CAPITAL STRUCTURE

1. Trading on Equity-

The word “equity” denotes the ownership of the company. Trading on equity

means taking advantage of equity share capital to borrowed funds on

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reasonable basis. It refers to additional profits that equity shareholders earn

because of issuance of debentures and preference shares. It is based on the

thought that if the rate of dividend on preference capital and the rate of interest

on borrowed capital is lower than the general rate of company’s earnings,

equity shareholders are at advantage which means a company should go for a

judicious blend of preference shares, equity shares as well as debentures.

Trading on equity becomes more important when expectations of shareholders

are high.

2. Degree of control-

In a company, it is the directors who are so called elected representatives of

equity shareholders. These members have got maximum voting rights in a

concern as compared to the preference shareholders and debenture holders.

Preference shareholders have reasonably less voting rights while debenture

holders have no voting rights. If the company’s management policies are such

that they want to retain their voting rights in their hands, the capital structure

consists of debenture holders and loans rather than equity shares.

3. Choice of investors-

The company’s policy generally is to have different categories of investors for

securities. Therefore, a capital structure should give enough choice to all kind

of investors to invest. Bold and adventurous investors generally go for equity

shares and loans and debentures are generally raised keeping into mind

conscious investors.

4. Capital market condition-

In the lifetime of the company, the market price of the shares has got an

important influence. During the depression period, the company’s capital

structure generally consists of debentures and loans. While in period of boons

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and inflation, the company’s capital should consist of share capital generally

equity shares.

5. Period of financing-

When company wants to raise finance for short period, it goes for loans from

banks and other institutions; while for long period it goes for issue of shares

and debentures.

6. Cost of financing-

In a capital structure, the company has to look to the factor of cost when

securities are raised. It is seen that debentures at the time of profit earning of

company prove to be a cheaper source of finance as compared to equity shares

where equity shareholders demand an extra share in profits.

7. Stability of sales-

An established business which has a growing market and high sales turnover,

the company is in position to meet fixed commitments. Interest on debentures

has to be paid regardless of profit. Therefore, when sales are high, thereby the

profits are high and company is in better position to meet such fixed

commitments like interest on debentures and dividends on preference shares. If

company is having unstable sales, then the company is not in position to meet

fixed obligations. So, equity capital proves to be safe in such cases.

8. Sizes of a company-

Small size business firms capital structure generally consists of loans from

banks and retained profits. While on the other hand, big companies having

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goodwill, stability and an established profit can easily go for issuance of shares

and debentures as well as loans and borrowings from financial institutions. The

bigger the size, the wider is total capitalization.

MEANING OF CAPITAL STRUCTURE

Capital structure is that part of financial structure, which represents long-term

sources. The term capital structure is generally defined to include only long-term debt

and total stockholders’ investment. It is the mix of long-term sources of funds, such as

equity share, reserve and surplus, debenture, long-term debt from outside sources and

preference share capital. To Bogen, “Capital Structure may consist of a single class of

stock, the characteristics of which may vary considerably, i.e.., to the proportion

between debt and equity that make up capitalization. Capital structure indicated by the

following equation.

Capital structure= long-term debt+ Preferred Stock+ Net Worth (or)

Capital structure= Total Assets-Current Liabilities.

Capital structure represents the relationship among different kinds of long-term

capital. Normally, a firm raises long term capital and capital through the issue of

shares common shares, sometimes accompanied by preference shares. The share

capital is often supplemented by debenture capital and other long term capital

borrowed. The term ‘capital structure’ refers to the relationship between the various

long-term form of financing such as debenture, preference shares capital and equity

share capital. Financing the firm assets is a very crucial problem in every business and

as a general rule there should be a proper mix of debt and equity share capital in

financing the firm assets.

Thus, the capital structure of a firm consists of shareholders funds and debt. The

inherent financial stability of an enterprise and risk of insolvency to which it is

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exposed are primarily dependent on the sources of its funds as well as the type of

assets it holds and relative magnitude of such assets categories

DEFINITION

According to John J. Hampton, capital structure is the combination of debt and

equity securities that comprises a firm’s financing of its assets.

According to Gerstenberg, capital structure of a company refers to the composition

or make up of its capitalisation and it includes all long-term capital resources, viz.,

loans, reserves, shares and bonds.

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CAPITAL STRUCTURE

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TOTAL CAPITAL

DEBT CAPITAL

TERMLOANS

DEBENTURES

DEFERRED PAYMENT LIABILITIES

OTHER LONG-TERM DEBT

EQUITY CAPITAL

EQUITY SHARE CAPITAL

PREFERENCE SHARE CAPITAL

SECURITIES PREMIUM

RETAINED EARNINGS


OPTIMUM CAPITAL STRUCTURE

The best debt-to- equity ratio for a firm that maximizes its value. The optimal capital

structure for a company is one which offers a balance between the ideal debt-to-equity

ranges and minimizes the firm's cost of capital. In theory, debt financing generally

offers the lowest cost of capital due to its tax deductibility. However, it is rarely the

optimal structure since a company's risk generally increases as debt increases. A

company's ratio of short and long-term debt should also be considered when

examining its capital structure. Capital structure is most often referred to as a firm's

debt-to-equity ratio, which provides insight into how risky a company is for potential

investors. Determining an optimal capital is a chief requirement of any firm's

corporate finance department. Optimal capital structure indicates the best debt-to-

equity ratio for a firm that maximizes its value. Putting it simple, the optimal capital

structure for a company is the one which proffers a balance between the idyllic debt-

to-equity ranges thus minimizing the firm’s cost of capital. Theoretically, debt

financing usually proffers the lowest cost of capital because of its tax deductibility.

However, it is seldom the optimal structure for as debt increases, it increases the

company’s risk.

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PROCESS OF CAPITAL STRUCTURE

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Capital Budgeting Decision

Need to Raise Funds

Capital Structure Decision

Replacement

Modernisation

Expansion

Diversification

Internal Fund

Debt

External Equity

Existing Capital Structure Desired Debt-Equity Mix Payout Policy

Effect on Return Effect on Risk

Effect on Cost of Capital

Optimum Capital Structure

Value of the Firm


BOARD OF DIRECTORS

Shri. Siddaramaiah

Hon. Chief Minister, Govt. of Karnataka

& Chairman, KPC Limited

Shri. MR Kamble, IAS

Managing Director, KPC Limited

Shri. P Bhaskar

Technical Director, KPC Limited

Shri. R Nagaraja

Finance Director, KPC Limited

Dr. Amita Prasad, IAS

Principal Secretary, Energy Dept., Govt. of Karnataka

& Director KPC Limited

Shri. D Narasimha Raju, IAS

Principal Secretary-I to the Hon. Chief Minister,

Govt. of Karnataka & Director KPC Limited

Shri. ISN Prasad, IAS

Principal Secretary (Finance Dept.), Govt. of Karnataka


Shri. D Satya Murty, IAS

Principal Secretary, Water Resources Dept.


Dr. H Basker, IAS

Principal Secretary, DPE,


Shri. G Kumara Naik, IAS

Managing Director, KPTCL


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FRAMEWORK FOR CAPITAL STRUCTURE

The flexibility, Risk, Income, Control, Timing Analysis (FRICT).

A financial structure may be evaluated from various perspectives from owner’s point

of view; return risk and value are important consideration. From the strategic point of

view, flexibility is an important concern and flexibility assumes great significance. A

sound capital structure will be achieved by balancing all these consideration.

Flexibility: the capital structure should be determined within the debt capacity

of the company and this capacity should be flexible. It should be possible for a

company to adapt its capital structure within a minimum cost and delay if

warranted by a changed situation.

Risk: Risk depends on the variability in the firm operation. It may be caused by

macroeconomic factor and industry and firm’s specific factors. The excessive

use of debt magnifies the variability of shareholder’s earning and threatens the

solvency of the company.

Income: The capital structure of the company should be most advantage to the

owner’s of the firm. It should create value; subject to other consideration. It

should generate maximum return to the shareholder’s with minimum additional

cost.

Control: The capital structure should involve the minimum risk of loss of

control of the company. The owner of closely held companies is particularly

concerned about dilution of control.

Timing: The capital structure should be feasible to implement given the current

and future condition of the capital market. The sequencing of source of

financing is important. The current decision influences the future option of

raising capital. The FRICT Analysis provides the general framework for

evaluating firm’s Capital Structure.

PATTERN OF THE CAPITAL STRUCTURE

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Firm’s capital structure may be arrived by use of equity shares capital or preference

shares capital or debt capital (debenture or loans) or combination of them. Use of any

one of these sources does not help to come up an optimal capital structure.

Construction of optimum capital structure is possible only when there is an

appropriate mix of the above sources (debt and equity). Following are the form of

capital structure.

Capital structure with equity shares only.

Capital structure with equity and preference shares.

Capital structure with equity and debentures.

Capital structure with equity, preference shares and debentures.

ELEMENTS OF CAPITAL STRUCTURE

A company formulating its long-term financial policy should, first of all, analyze its

current financial structure. The following are the important elements of the company’s

financial structure the need proper scrutiny and analysis.

Capital mix

Firms have to decide about the mix of debt and equity capital. Debt capital can be

mobilized from a variety of sources. The firm’s and analysis use debt ratio, debt-

service coverage ratios, and the fund flow statements to analyze the capital mix.

Maturity and Priority

The maturity of security used in the capital mix may differ. Equity is the most

permanent capital. Within debt, commercial paper has the shortest maturity and public

debt longest. Similarly, the priorities of the lender’s point of view and the value of

assets backing the debt provide the protection to the lenders.

Terms and Condition

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Firms have choice with regard to the basis of interest payment. They may obtain loans

either at fixed or floating rates of interest. In case of equity, the firm may like to return

income either in the form of large dividends and large capital gains. The financial

manager can protect the firm against interest rates fluctuation through the interest rates

derivatives. There are other important terms and condition that the firm should

consider. Most loan agreements include what the firm can do and what it can’t do.

Currency

Firms in a number of countries have the choice of raising fund from the overseas

markets. Overseas financial markets provide opportunities to raise large amount of

funds. Accessing capital internationally also helps company to globalize its operation

fast.

Financial Innovation

Firms may raise either through the issue of simple securities or through the issue

innovation securities. Financial innovations are intended to make the security issue

attractive to investors and reduce cost of capital. A further innovation could be that the

company may offer higher simple interest on debenture and offer to covert interest

amount equity.

Financial Market Segments

There are several segments of financial markets from where the firm can tap capital.

The firm can raise short-term debt either from banks or by issuing commercial papers

or certificate of deposits in the money market.

COMPONENTS OF CAPITAL STRUCTURE

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The long-term funds can broadly be divided into two categories:

1. Owner’s capital

2. Borrowed capital

Owner’s capital:

Equity shares: Equity share are fundamental and basic source for financing

the activities of a business. They own the company and bear the ultimate risk

associated with ownership the highest, as its holders bear the maximum risk of

the business. The residual remaining after paying claims all the other investors

belongs to equity shareholders.

Preference shares: Those shares which carry following preferential right are

termed as preference share:

A preferential right as to the payment of dividend during lifetime of a

company.

A preferential right as to the return of capital when the company is wound-

up.

These shares carry a right of dividend at a fixed rate prior to any dividend paid to

equity shareholders. They do not normally enjoy voting rights. The preference shares

are similar to equity shares as their holders are also owner of the company. The

dividend on preference shares is not a charge against profit but it is an appropriate of

profit and thus is not a tax deductible payment. The preference share can cumulative

or non cumulative, redeemable or irredeemable, participating or non-participating and

convertible or non-convertible.

Retained earnings: Retained earnings or ploughing back of profits are

considered to be the best sources of internal financing. This type of required to

raise such finance.

This increase net worth without diluting the control of equity shareholders and

does not create a fixed charge and obligation of repayments.

Borrowed capital: Borrowed capital comprise the following:

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Debenture: A debenture is an acknowledgement of debt or loan raised by a

company. Company has to pay interest to debenture holders at an agreed rate

under convertible or non-convertible, registered or bearer, first debenture or

second debenture. Interest paid on debenture is a changed against profit and thus

tax deductible which makes this source of finance more popular during boom

period.

Term Loan: Term loan are loans provided by banks and other financial

institution which carry a fixed rates of interest for a simple. Several financial

institution are IFCI, SIDBI, SFCS etc.., Including IDBI Bank, ICICI Bank, LIC,

GIC, etc.., are engaged presently in the field of providing term loans to the

companies. They provide loans after satisfying regarding the technical,

commercial, financial, economic and managerial feasibility of the project for

which funds are required.

FEATURES OF APPROPRIATE CAPITAL STRUCTURE

Profitability:

The capital structure of the company should be most profitable. The most profitable

capital structure is one that tends to minimize earning per equity shares.

Solvency:

The use of excessive debt threatens the solvency of the company. In a high interest rate

environment, Indian companies are beginning to realise the advantage of low debt;

companies are now launching public issue with the sole purpose of reducing debt. The

recent equity issue of more than Rs. 30 crores by Ballarpur industries were purely

aimed at repaying term loans and retiring debentures.

Flexibility:

The capital structure should be such that it can be easily manoeuvred to meet the

requirement of changing condition.

Conservation:

The capital structure should be conservative in the sense that the debt content in the

total capital structure does not exceed the limit which the company can bear.

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Control:

The capital structure should be so devised that involves minimum risk of loss of control

of the company.

CAPITAL STRUCTURE THEORIES

Capital structure is the major part of the firm’s financial decision which effect the

value of the firm and its leads to change EBIT and market value of the shares. There is

a relationship among the capital structure, cost of capital and value of the firm and to

reduce the cost of capital.

In order to achieve the goal of identifying an optimum debt-equity mix, it is necessary

for the finance manager to be conversant with the basic theories underlying the

relationship between capital structure, cost of capital and value of the firm.

INTRODUCTION TO EQUITY

Equity is the term commonly used to describe the ordinary share capital of a

business.

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Capital Structure Theories

Net Income Approach

Net Operating Income approach

Traditional Approach

Modigliani and Miller Approach


Ordinary shares in the equity capital of a business entitle the holder to all

distributed profit after the holder of debentures and preference share have been

paid.

EARNING PER SHARE (EPS)

Total earning divided by the number of outstanding shares, companies often use a

weighted average of share outstanding over the reporting term. Earning peer share

(EPS) are a way to relate income to ownership on a per share basis, and are used in

evaluating share price.

EPS= Net Earning / Outstanding Shares.

SOURCES OF FUNDS

Security financing:

This includes financing through shares including equity shares, preference shares

and debentures.

Internal financing:

This includes financing through depreciation fund and retained earnings.

Loan financing:

This includes both long term and short term loans.

INDUSTRY PROFILE:

The power sector has registered significant progress since process of planned

development of the economy began in 1950. Hydro-power and cost based thermal

power has been the main sources of generating electricity. Nuclear power

development is at slower pace, which was introduced, in late sixties. The concept of

operating power systems on a regional basis crossing the political boundaries of state

was introduced in the early sixties. In spite of the overall development that has taken

place, the power supply industry has been under constant pressure to bridge the gap

between supply and demand.

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The gears of enterprise in Karnataka powered nascent industrial activity as early as the

year 1800, when the first sugar unit was set up. In 1902, Karnataka recorded another

“mega watt sized project first” - Asia’s first Hydro Electric Power Station in

Shivanasamudram, on the banks of river Cauvery

In fact, Karnataka’s pioneering spirit in the field of power has been translated into

several major milestones. Karnataka was the first to embark on Alternating current,

when Bangalore City’s lighting scheme was completed.

Karnataka had the longest transmission line in the world in 1902, from

Shivanasamudram to KGF, covering a distance of 147 km. and Karnataka was the first

state in the country to conceive and set up a professionally managed Corporation to

plan, construct, operate and maintain power generation projects in the state. That’s the

legacy that KPCL started with and built on

HISTORY

Although electricity had been known to be produced as a result of the chemical

reactions that take place in an electrolytic cell since Alessandro Volta developed the

voltaic pile in 1800, its production by this means was, and still is, expensive. In 1831,

Michael Faraday devised a machine that generated electricity from rotary motion, but

it took almost 50 years for the technology to reach at commercially viable stage.

In 1878, in the US, Thomas Edison developed and sold a commercially viable

replacement for gas lighting and heating using locally generated and distributed direct

current electricity.

The world’s first public electricity supply was produced in late 1881, when the streets

of the Surrey Town of Godalming in the UK were lit with electric light. This system

was powered from a water wheel on the River Way, which drove a Siemens alternator

that supplied a number of arc lamps within the town. This supply scheme also

provided electricity to a number of shops and premises.

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Coinciding with this, in early 1882, Edison opened the world’s first steam powered

electricity generating station at Holborn Viaduct in London, where he had entered into

an agreement with an agreement with the City Corporation for a period of three

months to provide street lighting. In time he had supplied a number of local consumers

with electric light. The method of supply was direct current (DC).

It was later on in the year in September 1882 that Edison opened the Pearl Street

Power Station in New York City and again it was a DC supply. It was for this reason

that the generation was close to or on the consumer’s premises as Edison had no

means of voltage conversation. The voltage chosen for any electrical system is a

compromise. Increasing the voltage reduces the current and therefore reduces resistive

losses in the cable. Unfortunately it increases the danger from direct contact and also

increases the required insulation thickness. Furthermore some load types were difficult

or impossible to make for higher voltages.

Additionally, Robert Hammond, in December 1881, demonstrated the new electric

light in the Sussex town of Brighton in the UK for a trial period. The ensuing success

of this installation enabled Hammond to put this venture on both a commercial and

legal footing, as a number of shop owners wanted to use the new electric light. Thus

the Hammond Electricity Supply Co. was launched. Whilst the Godalming and

Holborn Viaduct Schemes closed after a few years the Brighton Scheme continued on,

and supply was in 1887 made available for 24 hours per day.

Nikola Tesla, who had worked for Edison for a short time and appreciated the

electrical theory in a way that Edison did not, devised an alternative system using

alternating current. Tesla realized that while doubling the voltage would halve the

current and reduce losses by three- quarters, only an alternating current system

allowed the transformation between voltage levels in different parts of the system.

This allowed efficient high voltages for distribution where their risks could easily be

mitigated by good design while still allowing fairly safe voltages to be supplied to the

loads. He went on to develop the overall theory of his system, devising theoretical and

practical alternatives for all of the direct current appliances then in use, and patented

his novel ideas in 1887, in thirty separate patents.

EWCM/RNG/RSB


In 1888, Tesla’s work came to the attention of George Westinghouse, who owned a

patent for a type of transformer that could deal with high power and was easy to make.

Westinghouse had been operating an alternating current lighting plant in Grea

Barrington, Massachusetts since 1886. While Westinghouse’s system could use

Edison’s lights and had heaters, it did not have a motor. With Tesla and his patents,

Westinghouse built a power system for a gold mine in Telluride, Colorado in 1891,

with a water driven 100 horsepower (75kw) generator powering a 100 horsepower

(75kw) motor over a 2.5-mile (4 km) power line. Almarian Decker finally invented the

whole system of three-phase generating in Redlands, California in 1893. Then ,in a

deal with General Electric, which Edison had been forced to sell, Westinghouse’s

company went on to construct a power station at the Niagara Falls, with three 5000

horsepower (3.7 MW) Tesla generators supplying electricity to an aluminium smelter

at Niagara and the town of Buffalo 22 miles (35 km) away. The Niagara power station

commenced operation on April 20, 1895.

Tesla’s alternating current system remains the primary means of delivering electrical

energy to consumers throughout the world. While high-voltage direct current (HVDC)

is increasingly being used to transmit large quantities of electricity over long distances

or to connect adjacent asynchronous power systems, the bulk of electricity generation,

transmission, distribution and retailing takes place using alternating current Growth of

Indian Power Sector, power development is the key to the economic development. The

power sector has been receiving adequate priority ever since the process of planned

development began in 1959.

The power sector has been getting 18-20% of the total public sector outlay in initial

plan periods. Remarkable growth and progress have led to extensive use of electricity

in all the sectors of economy in the successive five years plans. Over the years (since

1950) the installed capacity of power plants (utilities) has increased to 109092 MW

(2004-05) from 1713 MW in 1959, registering a 63 fold increase in 54 years.

Similarly, the electricity generation increased from about 5.1 billion to 440 billion

units -86 fold increases. The per capita consumption electricity in the country also

increased from 15 KWH in 1950 to about 395 KWH in 2004-05, which is about 26

EWCM/RNG/RSB


times. In the field of rural electrification and pump set energization, country has made

a tremendous progress, 88% of the village have been electrified except far flung areas

in North Easter states, where it is difficult to extend the grid supply.

`

INDUSTRY SCENARIO

It is a process of analyzing possible future events by considering alternative possible

outcomes (sometimes called "alternative worlds"). Thus, the scenario analysis, which

is a main method of projections, does not try to show one exact picture of the future.

Instead, it presents consciously several alternative future developments. Consequently,

a scope of possible future outcomes is observable. Not only are the outcomes

observable, also the development paths leading to the outcomes. In contrast to

prognoses, the scenario analysis is not using extrapolation of the past. It does not rely

on historical data and does not expect past observations to be still valid in the future.

Instead, it tries to consider possible developments and turning points, which may only

be connected to the past. In short, several scenarios are demonstrated in a scenario

analysis to show possible future outcomes. It is useful to generate a combination of an

optimistic, a pessimistic, and a most likely scenario. Although highly discussed,

experience has shown that around three scenarios are most appropriate for further

discussion and selection. More scenarios could make the analysis unclear

MACRO AND MICRO – RELATING TO THE INDUSTRY OF THE

DISSERTATION:

MACRO

EWCM/RNG/RSB

http://en.wikipedia.org/wiki/Extrapolation

http://en.wikipedia.org/wiki/Prediction


KPCL come out with new power generation plants like wind mills around Karnataka

in hill forest areas and as well as they gain lots of shares compare to previous financial

year with a huge profit margin.

MICRO

KPCL encouraging young entrepreneurs in engineering colleges by offering them to

do projects with their own ideas to develop the company example how better we can

use our solar energy.

CHAPTER 2

PROFILE OF THE ORGANIZATION

INDUSTRY PROFILE:

The power sector has registered significant progress since process of planned

development of the economy began in 1950. Hydro-power and cost based thermal

power has been the main sources of generating electricity. Nuclear power

development is at slower pace, which was introduced, in late sixties. The concept of

operating power systems on a regional basis crossing the political boundaries of state

was introduced in the early sixties. In spite of the overall development that has taken

place, the power supply industry has been under constant pressure to bridge the gap

between supply and demand.




Shivanasamudram, on the banks of river Cauvery

EWCM/RNG/RSB









legacy that KPCL started with and built on

HISTORY

Although electricity had been known to be produced as a result of the chemical

reactions that take place in an electrolytic cell since Alessandro Volta developed the

voltaic pile in 1800, its production by this means was, and still is, expensive. In 1831,

Michael Faraday devised a machine that generated electricity from rotary motion, but

it took almost 50 years for the technology to reach at commercially viable stage.

In 1878, in the US, Thomas Edison developed and sold a commercially viable

replacement for gas lighting and heating using locally generated and distributed direct

current electricity.

The world’s first public electricity supply was produced in late 1881, when the streets

of the Surrey Town of Godalming in the UK were lit with electric light. This system

was powered from a water wheel on the River Way, which drove a Siemens alternator

that supplied a number of arc lamps within the town. This supply scheme also

provided electricity to a number of shops and premises.

Coinciding with this, in early 1882, Edison opened the world’s first steam powered

electricity generating station at Holborn Viaduct in London, where he had entered into

an agreement with an agreement with the City Corporation for a period of three

months to provide street lighting. In time he had supplied a number of local consumers

with electric light. The method of supply was direct current (DC).

EWCM/RNG/RSB


It was later on in the year in September 1882 that Edison opened the Pearl Street

Power Station in New York City and again it was a DC supply. It was for this reason

that the generation was close to or on the consumer’s premises as Edison had no

means of voltage conversation. The voltage chosen for any electrical system is a

compromise. Increasing the voltage reduces the current and therefore reduces resistive

losses in the cable. Unfortunately it increases the danger from direct contact and also

increases the required insulation thickness. Furthermore some load types were difficult

or impossible to make for higher voltages.

Additionally, Robert Hammond, in December 1881, demonstrated the new electric

light in the Sussex town of Brighton in the UK for a trial period. The ensuing success

of this installation enabled Hammond to put this venture on both a commercial and

legal footing, as a number of shop owners wanted to use the new electric light. Thus

the Hammond Electricity Supply Co. was launched. Whilst the Godalming and

Holborn Viaduct Schemes closed after a few years the Brighton Scheme continued on,

and supply was in 1887 made available for 24 hours per day.

Nikola Tesla, who had worked for Edison for a short time and appreciated the

electrical theory in a way that Edison did not, devised an alternative system using

alternating current. Tesla realized that while doubling the voltage would halve the

current and reduce losses by three- quarters, only an alternating current system

allowed the transformation between voltage levels in different parts of the system.

This allowed efficient high voltages for distribution where their risks could easily be

mitigated by good design while still allowing fairly safe voltages to be supplied to the

loads. He went on to develop the overall theory of his system, devising theoretical and

practical alternatives for all of the direct current appliances then in use, and patented

his novel ideas in 1887, in thirty separate patents.

In 1888, Tesla’s work came to the attention of George Westinghouse, who owned a

patent for a type of transformer that could deal with high power and was easy to make.

Westinghouse had been operating an alternating current lighting plant in Grea

Barrington, Massachusetts since 1886. While Westinghouse’s system could use

Edison’s lights and had heaters, it did not have a motor. With Tesla and his patents,

EWCM/RNG/RSB


Westinghouse built a power system for a gold mine in Telluride, Colorado in 1891,

with a water driven 100 horsepower (75kw) generator powering a 100 horsepower

(75kw) motor over a 2.5-mile (4 km) power line. Almarian Decker finally invented the

whole system of three-phase generating in Redlands, California in 1893. Then ,in a

deal with General Electric, which Edison had been forced to sell, Westinghouse’s

company went on to construct a power station at the Niagara Falls, with three 5000

horsepower (3.7 MW) Tesla generators supplying electricity to an aluminium smelter

at Niagara and the town of Buffalo 22 miles (35 km) away. The Niagara power station

commenced operation on April 20, 1895.

Tesla’s alternating current system remains the primary means of delivering electrical

energy to consumers throughout the world. While high-voltage direct current (HVDC)

is increasingly being used to transmit large quantities of electricity over long distances

or to connect adjacent asynchronous power systems, the bulk of electricity generation,

transmission, distribution and retailing takes place using alternating current Growth of

Indian Power Sector, power development is the key to the economic development. The

power sector has been receiving adequate priority ever since the process of planned

development began in 1959.

The power sector has been getting 18-20% of the total public sector outlay in initial

plan periods. Remarkable growth and progress have led to extensive use of electricity

in all the sectors of economy in the successive five years plans. Over the years (since

1950) the installed capacity of power plants (utilities) has increased to 109092 MW

(2004-05) from 1713 MW in 1959, registering a 63 fold increase in 54 years.

Similarly, the electricity generation increased from about 5.1 billion to 440 billion

units -86 fold increases. The per capita consumption electricity in the country also

increased from 15 KWH in 1950 to about 395 KWH in 2004-05, which is about 26

times. In the field of rural electrification and pump set energization, country has made

a tremendous progress, 88% of the village have been electrified except far flung areas

in North Easter states, where it is difficult to extend the grid supply.

EWCM/RNG/RSB


`

COMPANY PROFILE:

Since Independence the Power Sector in India has shown a significant rise. However,

with the growth in power demands the Indian power sector is required to produce

more electricity to meet the consumer requirements. Over the years, it has been

observed that the power generation of India is considerably lower that the

premeditated targets set by the government, chiefly due to the lack of availability of

fuel.

Indian Power Sector witnessed power deficit in the year 2009-2010 which increased to

12.6% from 11.9% in 2008-09. The power requirement in India for the years 2010-11

and 2011-12 is expected to be 906316GWh and 968659GWh respectively. While on

the other hand, the Central Electricity Authority has anticipated peak energy scarcity

of 14.98 GW in the FY 2009-10.To cope up with the energy requirements India is

EWCM/RNG/RSB


setting mega power projects which would not only elevate power supply but would

also increased per capita consumption by 1000 units. Each plant will have a yearly

competence of 4 GW and would infuse 12GW extra captive energy into the network.




Shivanasamudram, on the banks of river Cauvery.








legacy that KPCL started with and built on.

EWCM/RNG/RSB


The Karnataka power Corporation is mainly involved in the generation of power and

is the sole administrator for the power generation in the state. It was formed on 20 th

July 1970 as a sister concern to Karnataka Electricity Board (KEB) in order to

eradicate the power famine of the state. From the Mysore Power corporation Limited

of 1970 (A successor of the Hydro Electric Construction Department of Mysore state)

to Karnataka Power Corporation Limited of 21st century it has been a long, rewarding

journey of three decades.

For over three decades, the Karnataka Power Corporation has been a prime mover and

catalyst behind key power sector reforms in the state - measures that have spiralled

steady growth witnessed in both industrial and economic areas.

Right from the year of inception, in 1970, KPCL set its sights on “growth from

within” meeting growing industry needs and reaching out to touch the lives of the

common man, in more ways than one .

KPCL today has an installed capacity of 5509.82 MW of hydel, thermal and wind

energy, with 4000 MW in the pipeline. The 1470 MW Raichur Thermal Power Station

located in Raichur dist is accredited with ISO 14001-2004 certification for its

environment protection measures. From an industry vantage point, KPCL has raised

the bar on the quality of deliverables and is constantly working at lowering the cost

per megawatt - a commendable cost-value equation that has become a benchmark on

the national grid. KPCL’s stock in trade is industry proven - well-established

infrastructure & modern, progressive management concepts and a commitment to

excel, helping it meet the challenges of the rising energy demands of Karnataka.

The leverage point of KPCL initiatives are its resource management strengths – right

across planning, financing and project engineering. KPCL also has a high rating in

terms of project completion and commissioning within the implementation calendar.

EWCM/RNG/RSB


VISION

“ Ensuring energy security for Karnataka through diversified energy portfolio.”

MISSION

Identifying and developing opportunities in power generation.

Establishing and operating power plants.

Constant up gradation of technical competence and systems.

Developing human resource capabilities and empowerment.

To become a world class organization emphasizing efficiency, cost effectiveness and

harmony with environment.

Products & Services

Besides producing electricity KPCL is engaged in other activities also . KPCL today

has the capability to undertake large scale power projects from concept to

commissioning. It can also operate the plant on an EPC basis, with a host of exclusive

auxiliary services.

KPCLs Consultancy and Engineering Services Division, an offshoot of its core

competency, offers its clients a wide spectrum of consultancy inputs across the

complete cycle of power project development. It has the expertise in analysis and

design of structures using STADPRO – 2006, NISA – Finite Element package,

AUTOCAD – 2006, micro station and in-house developed software packages for

reservoir operation, Stability of Dams etc.

These include:

Feasibility studies / evaluation and the compilation of detailed project reports

EWCM/RNG/RSB


Design, Engineering, procurement and construction services

Consultancy on both Thermal and Hydel Power Stations, including handling of

international competitive bids

Project Management from project scheduling to preparation of final invoice

and certification.

Supervision of erection, commissioning and operation of civil, electrical,

mechanical systems and equipment.

Operation and maintenance services,

Rehabilitation of dams in distress

Renovation, modernization and updating of hydro stations

Overall project and performance management.

The year 2008 – 09 was also an important year for KPCL - CESD as it obtained the

consultancy service for Upper Bhandra Project of Karnataka Neeravari Nigama

Limited @ a Consultancy cost of Rs. 50.00 million. Previously i.e. during the year

2007-08 KPCL – CESD had bagged the consultancy works for 3 * 40 MWcapacity

Rammam Stage – III Hydro Electric Project of NTPC Ltd. , with consultancy charges

being Rs. 85.50 Million.

During the present year KPCL – CESD achieved a turnover of Rs.179.49 Lakhs. The

consultancy work in progress during the year 2009 – 10 are as follows:

NTPC – Rammam Stage – III HEP in West Bengal State,

Upper Bhandara Project of Karnataka Neeravari Nigama Limited,

Various Lift Irrigation Schemes of Krishna Bhagya Jala Nigama Limited,

Kalasa & Bandur Nala Diversion Schemes of Karnataka Neeravari Nigama

Limited,

Bangalore Water Supply & Sewerage Board – Stability analysis of Chamaraja

Sagar Dam,

Badanvalu Lift Irrigation Scheme of Cauvery Neeravari Nigama Limited.

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Projects under KPCL

KPCL currently has 34 dams & 25 power stations across the State with profiles that

range from 0.35 MW to 1035 MW.

The total installed capacity logged by KPCL is 5509 MW across a project canvas that

covers expansions, renovations and upgrading of existing plants.

EWCM/RNG/RSB


GENERATION PERFORMANCE

During the year there were several challenges to be met by the Karnataka Power

Corporation Limited due to difficult coal supply position on the domestic front and the

low hydel inflows into the reservoirs. Despite all these odds, the Corporation could

achieve high performance in both hydel and thermal generation.

A generation of 25080.36 MU against target of 22035 MU.

Highest thermal generation of 11717.45 MU as against target of 10302 MU.

Highest ever annual capital expenditure – Rs.1238 crores.

Hydel generation of 12897.84 MU as against target of 11479 MU.

Wind Power generation of 13.89 MU.

Generation from Diesel plant 451.18 MU as against target of 240 MU.

Plant Load Factor (PLF) of 81.68% at Raichur Thermal Power Station with

availability of 89.38%.

Highest capacity addition of 600 MW.

Highest ever Annual Turnover of Rs.4148 Crores,

Commissioning of Unit - 7 at RTPS in 25 Months - A National record,

Sharavathi Generating station has achieved a record generation of 23.264 MUs

which is highest generation so far in a single day,

Sharavathi Generating station has achieved highest annual generation of

5825.434 MUs against previous highest generation of 5732.080 MU,

Varahi Underground Power House has achieved a record annual generation of

1401.021 MU surpassing the previous highest annual generation of 1340.343

MUs,

Mani Dam Power House made a record annual generation of 41.873 MU

surpassing the previous highest annual generation of 37.697 MUs,

Almatti Dam Power House has achieved a record generation of 664.21 MUs

surpassing the previous annual generation of 630.23 MUs

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SOCIAL CONTRIBUTION

Maintaining aesthetic gardens at Kidwani oncology Hospital, project locations,

corporate office and park with an attractive water fountain in front of Vidhana

Soudha,

Passing on the benefit of cost cutting in construction, finance and operations to

the consumers,

High performance levels to reduce cost and ensure reliable power supply,

Making available corporation-run schools, hospital and community centres for

the general public in the project area,

Maintaining interior roads near project locations,

Strict compliance to environmental laws, regulations and norms.

ENVIRONMENTAL MANAGEMENT

KPCL’s power generation blueprint has a clear-cut policy on environment

management. Building in green-mapping concepts such as sustainable development ,

which creates the framework for improving the quality of life. sustainable

development goes hand-in-hand with 'environment protection. KPCL has a

comprehensive action plan in place that enables environment management, pollution

monitoring and the implementation of specific environment projects.

All KPCL projects have the assurance of a comprehensive Environmental Impact

Study to evaluate the impact of the project on the environment. It also prepares an

Environmental Management Plan complying with all the conditions stipulated by

KSPCB/MOEF. KPCL's Raichur Thermal Power Station has been accredited with ISO

14001 -2004 for its efforts towards environment protection management.

The following innovative and new measures to aid the process of environment control

have been put in place.

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A unique Ayurvedic greenhouse has been developed at Kadra Project.

Fish fingerlings in power generation reservoirs to maintain aqua-balance.

Eco-friendly control measures adopted such as controlled blasting.

Construction of colonies with least destruction to ecology.

Installation of Electro Static Precipitators in Thermal Plants.

Measures across the board to minimize pollution.

Fuel supply agreement with collieries to ensure high grade coal supplies.

Monitoring measures for ash minimisation, ash emission control, ash

utilisation and ash disposal.

Recycling of water from ash ponds for alternative use.

Modernization of sewerage treatment plant.

Continuous monitoring of air quality in work environments & environment

management measures.

AFFORESTATION AND GREENBELT DEVELOPMENT

The project concerning afforestation and green belt development around the Bellary

Thermal Plant has been entrusted to UAS Dharward. The afforestation work was

planned ahead of the project commencement and of the entire 220 hectare landscape,

close to 50 % has already been covered under the programme. This affirms KPCL's

commitment for protecting the surrounding environment.

COMPETITORS

National Thermal Power Corporation (NTPC)

Reliance Energy

Tata Power

Torrent Power

Magnum Power Generation Limited

GMR Energy

EWCM/RNG/RSB


CHAPTER 3

RESEARCH DESIGN

INTRODUCTION

A research design is a method and procedure for acquiring information needed to

solve the problem. A research design is the basic plan that helps in the data collection

or analysis. It specifies the type of information to be collected the sources and

collection procedure.

Research in common parlance refers to a search for knowledge. Research can also be

defined as a scientific and systematic search for pertinent information on specific

topic. We can also say that research as an art of scientific investigation.

In analytical research, the researcher has to use facts or information already available

and analyze these to make a critical evaluation of the material.

Research starts with the researcher, the position where you stand, the world around

you, your ethics, etc. The conceptions of the researcher influence the research topic

and the methodology with which it is approached. Research is not just a matter of

technique or methods.

What is specific to social-science research, as compared to say journalism, is the quest

to examine and understand social reality in a systematic way. What is observed is as

important as how it is observed.

General outline of a research: theory, conceptualization of theoretical constructs into

concepts, formalization of relationships, operationalization, measurement or

observation, data analysis or interpretation, report.

3.2 REVIEW OF LITERATURE

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The ultimate objective of every company is to increase firm’s performance which in

fact, associated with firm’s strategic decisions. Decisions regarding choice

of leverage are one of the strategic decisions; firms often take this type of decisions to

increase their performance.

Capital structure is the composition of the liability of a firm or particularly is the

proportional participation of the numerous financing sources. Such as the equity, and

debt it included the short term and long term debt Brealey and Myers (1992), Weston

& Brigham (2000) and Gitman (1997).

Modigliani and Miller (1958) argued that capital structure its theories and relationship

with firms performance has been creating issue in accounting and corporate

finance literature. They further argued that under preventive assumptions of capital

market capital structure is unsuitable in determining firm performance or value.

According to this intention, firm value is not the combination of the securities it issue

but it is determined by real assets.

1. According to Franco Modigliani and Merton Miller:

"Forms the basis for modern thinking on capital structure, though it is generally

viewed as a purely theoretical result since it disregards many important factors in the

capital structure process. The theorem states that, in a perfect market, how a firm is

financed is irrelevant to its value. This result provides the base with which to examine

real world reasons why capital structure is relevant, that is, a company's value is

affected by the capital structure it employs. Some other reasons include agency

costs, taxes, and information asymmetry. This analysis can then be extended to look

at whether there is in fact an optimal capital structure: the one which maximizes the

value of the firm.

2. According to James c. Van Horse:

"The mix of a firm's permanent long term financing represented by debt, preferred

stock, and common stock equity".

3. According to Prasanna Chandra:

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"The composition of a firm's financing consists of equity, preference, and debt".

4. According to Gerstenbeg: "Capital structure of a company refers to the composition or make-up of its

capitalization and it includes all long-term capital resources viz: loans, reserves,

shares and bonds".

5. According to Jean Murray:

The capital structure of a business is the mix of types of debt and equity the company

has on its balance sheet. The capital or ownership of a business can be evaluated by

knowing how much of the ownership is in debt and how much in equity. The

company's debt might include both short-term debt and long-term debt (such as

mortgages), and equity, including common stock, preferred shares, and retained

earnings.

Review 1:

CAPITAL STRUCTURE IN A PERFECT MARKET

Consider a perfect capital market (no transaction or bankruptcy costs; perfect

information); firms and individuals can borrow at the same interest rate; no taxes; and

investment decisions are not affected by financing decisions. Modigliani and Miller

made two findings under these conditions. Their first 'proposition' was that the value

of a company is independent of its capital structure. Their second 'proposition' stated

that the cost of equity for a leveraged firm is equal to the cost of equity for an

unleveraged firm, plus an added premium for financial risk. That is, as leverage

increases, while the burden of individual risks is shifted between different investor

classes, total risk is conserved and hence no extra value created.

Their analysis was extended to include the effect of taxes and risky debt. Under a

classical tax system, the tax deductibility of interest makes debt financing valuable;

that is, the cost of capital decreases as the proportion of debt in the capital structure

increases. The optimal structure, then would be to have virtually no equity at all, i.e. a

capital structure consisting of 99.99% debt.

EWCM/RNG/RSB

http://en.wikipedia.org/w/index.php?title=Classical_tax_system&action=edit&redlink=1

http://en.wikipedia.org/wiki/Tax

http://en.wikipedia.org/wiki/Perfect_information

http://en.wikipedia.org/wiki/Perfect_information

http://en.wikipedia.org/wiki/Bankruptcy

http://en.wikipedia.org/wiki/Transaction_costs


Review 2:

CAPITAL STRUCTURE'SLONG-TERMIMPACT

Capital structure affects a company's overall value through its impact on operating

cash flows and the cost of capital. Since the interest expense on debt is tax deductible

in most countries, a company can reduce its after-tax cost of capital by increasing debt

relative to equity, thereby directly increasing its intrinsic value. While finance

textbooks often show how the tax benefits of debt have a wide-ranging impact on

value, they often use too low a discount rate for those benefits. In practice, the impact

is much less significant for large investment-grade companies (which have a small

relevant range of capital structures). Overall, the value of tax benefits is quite small

over the relevant levels of interest coverage. For a typical investment-grade company,

the change in value over the range of interest coverage is less than 5 percent.

The effect of debt on cash flow is less direct but more significant. Carrying some debt

increases a company's intrinsic value because debt imposes discipline; a company

must make regular interest and principal payments, so it is less likely to pursue

frivolous investments or acquisitions that don't create value. Having too much debt,

however, can reduce a company's intrinsic value by limiting its flexibility to make

value-creating investments of all kinds, including capital expenditures, acquisitions,

and, just as important, investments in intangibles such as business building, R&D, and

sales and marketing.

Managing capital structure thus becomes a balancing act. In our view, the trade-off a

company makes between financial flexibility and fiscal discipline is the most

important consideration in determining its capital structure and far outweighs any tax

benefits, which are negligible for most large companies unless they have extremely

low debt.

Mature companies with stable and predictable cash flows as well as limited investment

opportunities should include more debt in their capital structure, since the discipline

that debt often brings outweighs the need for flexibility. Companies that face high

EWCM/RNG/RSB


uncertainty because of vigorous growth or the cyclical nature of their industries should

carry less debt, so that they have enough flexibility to take advantage of investment

opportunities or to deal with negative events.

Not that a company's underlying capital structure never creates intrinsic value;

sometimes it does. When executives have good reason to believe that a company's

shares are under- or overvalued, for example, they might change the company's

underlying capital structure to create value either by buying back undervalued shares

or by using overvalued shares instead of cash to pay for acquisitions.

Other examples can be found in cyclical industries, such as commodity chemicals,

where investment spending typically follows profits. Companies invest in new

manufacturing capacity when their profits are high and they have cash. Unfortunately,

the chemical industry's historical pattern has been that all players invest at the same

time, which leads to excess capacity when all of the plants come on line

simultaneously. Over the cycle, a company could earn substantially more than its

competitors if it developed a countercyclical strategic capital structure and maintained

less debt than might otherwise be optimal. During bad times, it would then have the

ability to make investments when its competitors couldn't.

Review 3:

IMPORTANCE OF CAPITAL STRUCTURE

One of the most important topics in the finance literature is the determination of an

optimal capital structure. For an equity investor, a strong balance sheet is an important

consideration for investing in a company’s stock and capital structure is one of the

important measures of evaluating the strength of the balance sheet which reflects the

important of capital structure.

Capital structure of the company basically shows the composition of company’s long

term capital which consists of mixture of debt and equity. Its very necessary that

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companies should have optimal capital structure that can maximize the price of the

company’s stocks. Companies can choose a mix of financing options to finance its

assets but it is very necessary that they are choose the financing options that maximize

its overall value. This is called the optimal capital structure of the company.

When companies don’t have debt in their capital structure, then they are unlevered

while on the other hand if the company have debt in their capital structure then they

are called leveraged firm. So we can say that in unlevered company total assets are

always equal to total equity and it is the total value of the company there are also

deferent factor that influenced capital structure decision of the company such as

company’s business risk, financial flexibility, managerial attitude, company’s tax

position etc

Review 4:

3.2.4 Capital structure

Capital structure is a combination of a firm’s long-term debt, its specific short-term

debt, its common equity and preferred equity. It is used to determine how an

origination finances its overall operation and growth, by using different source of

funds. The debt part of the structure comes in the form of bond issues or long-term

notes payable, while equity is classified as retained earnings, common or preferred

stock. Stock-term debt, which includes working capital requirements, is also

considered to be part of the capital structure.

The optimal corporate structure involves the combination of the following factors:

Debt ratio

Cost of equity

Bond rating

Interest rate on deposits

After-tax debt

Firm value

EWCM/RNG/RSB


Review 5:

3.2.5 The capital structure Decision of new firms

Contrary to widely held beliefs that startup companies rely heavily on funding from

family and friends, a Kauffman Foundation research paper released today reported that

external debt financing such as bank loan are the more common source of funding of

many companies during their first year of operation. According to the study , nearly 75

percent of most firm startup capital is made up in equal part of owner equity and bank

loan and/or credit card debt, understanding the importance of liquid credit market to

the formation and success of new firms.

Interestingly, the capital structure paper also found that high-tech firms are more likely

to get outside equity investment in their first year of operation than any other type of

company. According to the data, high tech firms received an average of $31,216 in

this type of financing, compared with firms overall, which received only $7000 on

average.

Review 6:

3.2.6 An Empirical Model of optimal capital structure

The authors provide a reasonably user friendly and intuitive model for arriving at a

company’s optimal, or value maximizing, leverage ratio that is based on the estimation

of company specific cost and benefits function for debt financing, The benefit function

are downward sloping , reflecting the drop in the incremental value of debt with

increase In the amount used. The cost function are upward sloping, reflecting the

increase in costs associated with increased in leverage. The cost function very among

companies in ways that differences in corporate characteristics such as size,

profitability ,dividend policy, book-to-market ratio, and assets collateral and redeploy

ability.

The authors use those cost and benefits function to produce an estimate of a

company’s optimal amount of debt. Just as equilibrium in economics textbooks occurs

where supply equals demand, optimal capital structure occurs at the point where the

EWCM/RNG/RSB


marginal benefit of debt equals the marginal cost. The articles illustrate optimal debt

chaises for companies such as Barnes & Noble, coca-cola, six Flags, and performance

Food Group. The author also estimate the net benefit of debt usage (in terms of the

increase in firm or enterprise value) for companies that are optimally levered , as well

as the net cost of being underleveraged for companies with too little debt, and the cost

of overleveraging for companies with too much. One critical insight of the model is

that costs associated with overleveraging appear to be significantly higher, at least for

some companies, then the cost of being underleveraged.

STATEMENT OF PROBLEM:

“The project has been dealing with an empirical study on capital

structure and its management" of Karnataka Power Corporation

Limited based on the historical data for evaluating its contribution

towards wealth maximization.”

OBJECTIVE OF THE STUDY:

To analyze, capital structure of KPCL Limited.

To analyze the working capital and earnings per share of KPCL

Limited.

To find out the optimal capital structure of the company.

To know the profitability of the company.

To know about the capital efficiency of the company.

EWCM/RNG/RSB


HYPOTHESIS:

Hypothesis test on earning per share of KPCL.

H1-There is no effective from earning per share of KPCL.

Hypothesis test on profitability of the company.

H0-There is a more profitability of the company.

SCOPE OF STUDY:

The study is confined to understand and analyze the changes in earning per share,

dividend policy, and managerial decisions due to the changes in capital structure of

KARNATAKA POWER CORPORATION LIMITED

OPERATIONAL DEFINITIONS OF CONCEPT

1. Equity Share: Equity shares are those shares which are ordinary in the course

of company’s business. They are also called as ordinary shares. These shares

holders do not enjoy preference regarding payment of dividend and repayment

of capital. Equity shareholders are paid dividend out of the profit made by a

company. Higher the profits, higher will be the dividend and lower the profit,

lower will be the dividend.

2. DEBENTURES: A type of debt instrument that is not secured by physical

assets or collateral. Debentures are backed only by the general creditworthiness

and reputation of the issuer. Both corporations and governments frequently

EWCM/RNG/RSB


issue this type of bond in order to secure capital. Like other types of bonds,

debentures are documented in an indenture.

3. DIVIDENDS: A distribution of a portion of a company’s earnings, decided by

the board of directors, to a class of its shareholders. The dividends is most

often quoted in terms of the rupees amount each share receives (dividends per

share). It can also be quoted in terms of a percent of the current market price,

referred to as dividend yield.

4. SHARE HOLDERS: Any person, company, or other institution that owns at

least one share in a company

5. EARNINGS BEFORE INTEREST AND TAX: An indicator of a company’s

profitability calculated as revenue minus expenses, excluding tax and interest.

EBIT is also referred to as “operating earnings”, “operating profit” and “

operating income”,

6. OUTSTANDING SHARE: Stock currently held by investors, including

restricted shares owned by the company’s officers and insiders, as well as

those held by the public. Shares that have been repurchased by the company

are not considered outstanding stock.

7. SALES: total amount collected for goods and services provided. While

payment is not necessary for recognition of sales on company’s financial

statements. There are strict accounting guidelines stating when sales can be

recognized.

The basic principle is that a sale can only be recognized when the transaction is

already realized, or can be quite easily realized. This means that the company

should have already received a payment, or the chances of receiving a payment

EWCM/RNG/RSB


are high. In addition, delivery of the good or service should have taken place

for the sale to be recognized.

6 RESRARCH METHODOLOGY

TYPES OF STUDY

The nature of the study of this project will be Descriptive study. In Descriptive study,

one has to use facts or information’s which are already available and analyze these to

make critical evaluation of the material. The objective of this research is to generate

new ideas.

SOURCES OF DATA

Secondary data: published data and the data collected in the past is called secondary

data.

By using company journals, reports and documents.

By using the Annual reports of the company.

By using company website.

TOOLS AND TECHNIQUES USED FOR ANALYSIS

Various tools and techniques used for the analysis are as follows.

Financial analysis to know the company strength and weakness.

Interpret financial statements and ratios.

Calculation of earnings per share at least for 5 financial plans.

Estimation of working capital.

EWCM/RNG/RSB


DATA ANALYSIS

The data collected will be classified and tabulated for the purpose of the study.

The analyzed data will be represented in the form of tables, charts and graphs.

Making use of financial tools such as averages and percentages for the better

understanding of the study.

LIMITATION OF THE STUDY

Optimal capital structure can be confined to stipulated combinations.

Optimal capital structure decision should be confined by managerial decisions.

Any change in dividend policy and managerial decisions will have major

impact on capital structure which will be difficult to analyze with in a

stipulated time.

CHAPTER SCHEME

Chapter One: Introduction

Chapter Two: Profile of the Organizations

Chapter Three: Research and Design

Chapter Four: Data analysis and Interpretation

Chapter Five: Summary of Findings, Conclusions and Suggestions.

EWCM/RNG/RSB


CHAPTER 4

ANALAYSIS AND INTERPRETATION

INTRODUCTION:

The term Financial Analysis and Interpretation refers to the process the process of

determining financial strengths and weaknesses of the firm by establishing a strategic

relationship between the components of financial statements and other operating data.

The purpose of financial analysis is to diagnose the information contained in financial

statements so as to judge the profitability and soundness of a firm. Financial analysis

means simplifications of financial data by methodical classification of data given in

the financial statements. Interpretation means explaining the meaning of and

significance of data so simplified. The analysis and interpretation of financial

statements is used to determine the financial position and results of operations as well.

The basic objective of capital structure and management is to realize the twin

objective of profitability of the operation and to maintain adequate to meet the

obligation in time. This chapter makes an analysis of capital management in Karnataka

Power Corporation Limited. It includes

Capital Structure And Management

The Overall Efficiency Of Capital Structure I.E., Ratios

Inventory Management

Financial Performance

Cash Management

Reserves And Surplus.

Assets And Liabilities.

The following figures will give an idea regarding the capital structure in KPCL.

EWCM/RNG/RSB


Particulars As at 31st march 2013

As at 31st March 2012

Number (in Lakhs) Number (in Lakhs)AuthorisedEquity Shares of Rs 1000 each

4,10,00,000 4,10,000 3,10,00,000 3,10,000

IssuedEquity shares of Rs 1000 each

3,12,69,686 3,12,,697 2,28,19,686 2,28,197

Subscribed & Paid upEquity Shares of Rs 1000 each fully paid

3,12,69,686 3,12,,697 2,28,19,686 2,28,197

A) Reconciliation of number of equity shares outstandingParticulars Equity Shares Equity Shares

Number (Rs in Lakhs) Number (Rs in Lakhs)Shares outstanding at the beginning of the year

2,28,19,686 2,28,197 1,74,32,622 1,74,326

Shares Issued during the year

84,50,000 84,500 53,87,064 53,871

Shares outstanding at the end of the year

3,12,69,686 3,12,697 2,28,19,686 2,28,197

B) Share Holding patternName of the Share Holder

No. of Shares held

% of Holding No. ofShares held

% of Holding

Government of Karnataka

3,12,69,686 100 2,28,19,686 100

Note No.1 : SCHEDULE-A SHARE CAPITAL

EWCM/RNG/RSB


Note No. 2 :

SCHEDULE-B RESERVES AND SURPLUS



(Rs in Lakhs) (Rs in Lakhs)a.Capital ReservesOpening Balance 472 472(+) Current year transfer - -Closing Balance 472 472b. Special Reserve for Replacement of Plant and MachineryOpening Balance 6,489 6,202(+) current year Transfer from General Reserve

6 287

Closing Balance 6,495 6,489 c. General ReservesOpening balance 3,45,065 3,45,533(+) Net Profit/(net Loss) For the current year

233 11,470

(-) Proposed Dividends (incl. of Dividend Taxes)

(3,657) (2,651)

(-) Special Reserve for Replacement of Plant and Machinery

(6) (287)

Closing Balance 3,50,635 3,54,065Total 3,57,602 3,61,026

ANALYSIS

An appropriation of 2.5% of distributable profits is made to Special reserve

annually for replacement of machinery and also for the Renovation, Modernization

and up rating schemes of the Corporation including other Capital works that may be

undertaken by the corporation on a contingent basis. An appropriation of `5.83

Lakhs is made towards special Reserve during current year (Prev. year ` 286.75

Lakhs)

EWCM/RNG/RSB


CHART SHOWING SHARE CAPITAL

CHART SHOWING RESERVES AND SURPLUS

EWCM/RNG/RSB


RESERVES AND SURPLUS

3.44

3.46

3.48

3.5

3.52

3.54

3.56

3.58

3.6

20132012

Sources: Primary data

INTERPRETATION:

Dividend has been recommended by the directors of KPCL at 1% on share capital

for the year 2012-13 and consequently dividend appropriated from accumulated

profit is at ` 3127 Lakhs (Prev. year `2282 Lakhs) Dividend tax on distributed

profits is at ` 530 lakhs (Prev. year `369 Lakhs)

NOTE 3

SCHEDULE-A SHARE CAPITAL

EWCM/RNG/RSB




Number (in Lakhs) Number (in Lakhs)AuthorisedEquity Shares of Rs 1000 each

31,000,0000 310000 20,000,000 200000

IssuedEquity shares of Rs 1000 each

22,819,686 228197 17,432,622 174326

Subscribed & Paid upEquity Shares of Rs 1000 each fully paid

22,819,686 228197 17,432,622 174326

A) Reconciliation of number of equity shares outstandingParticulars Equity Shares Equity Shares

Number (Rs in Lakhs) Number (Rs in Lakhs)Shares outstanding at the beginning of the year

17,432,622 174326 12,432,622 124326

Shares Issued during the year

5,387,064 53871 5,000,000 50000

Shares outstanding at the end of the year

22,819,686 228197 17,432,622 174326

B) Share Holding patternName of the Share Holder

No. of Shares held

% of Holding No. ofShares held

% of Holding

Government of Karnataka

3,12,69,686 100 2,28,19,686 100

NOTE 4

SCHEDULE-B RESERVE AND SURPLUS

EWCM/RNG/RSB




(Rs in Lakhs) (Rs in Lakhs)a.Capital ReservesOpening Balance 472 472(+) Current year transfer - -Closing Balance 472 472b. Special Reserve for Replacement of Plant and MachineryOpening Balance 6,202 4,890(+) current year Transfer from General Reserve

287 1,312

Closing Balance 6,489 6,202 c. General ReservesOpening balance 3,45,065 3,45,533(+) Net Profit/(net Loss) For the current year

11,470 11,470

(-) Proposed Dividends (incl. of Dividend Taxes)

2,651) (2,651)

(-) Special Reserve for Replacement of Plant and Machinery

(287) (1,312)

Closing Balance 3,54,065 3,45,533Total 3,61,026 3,52,206

ANALYSIS

1.An appropriation of 2.5% of distributable profits is made to Special reserve

annually for replacement of machinery and also for the Renovation, Modernization

and up rating schemes of the Corporation including other Capital works that may

be undertaken by the corporation on a contingent basis. An appropriation of

`286.75 Lakhs is made towards special Reserve during current year (Prev year

`1312.00 Lakhs)


EWCM/RNG/RSB


SHARE CAPITAL0

0.5

1

1.5

2

2.5

3

3.5

20122011


EWCM/RNG/RSB


RESERVE AND SURPLUS

3.44

3.46

3.48

3.5

3.52

3.54

3.56

3.58

3.6

20122011

Sources : Primary data

INTERPRETATION

1. Dividend has been recommended by the directors of KPCL at 1% on share capital

for the year 2011-12 and consequently dividend appropriated from current year

profit is at `2281.96 Lakhs (Prev year `3486.52 Lakhs) Dividend tax on distributed

profits is at `369.13 Lakhs (Prev year `565.60 Lakhs)

2. A balance of `8532.33 Lakhs (Prev year `47116.15 Lakhs) is taken to General

Reserves for retained earnings

EWCM/RNG/RSB


NOTE:5




Number NumberAuthorisedEquity Shares of Rs 1000 each

20,000,000 20,000,000

Issued Subscribed & Paid upEquity shares of Rs 1000 each 17,432,622 12,432,622

SHARE CAPITAL DEPOSIT:Share Deposit(Received from Government Of Karnataka as Equity for development of power generating stations)

5,387,064 5,000,000

TOTAL 22,819,686 17,432,622

NOTE:6

EWCM/RNG/RSB



Particulars As at 31st march 2011 As at 31st March 2010

(Rs in Lakhs)

(Rs in Lakhs)

A.Capital ReservesBalance as per last Balance sheet Add. Current year additions

46896255 47151

46896- 46896

B. Special Reserve for Replacement of Plant and MachineryBalance as per last Balance sheet Add: Transferred from P&L account

489031131200 620231

379969109062 489031

C.GENERAL RESERVESBalance as per last Balance sheet Add: Transferred from P&L account

298416454711617 34553262

258791453962500 29841645

TOTAL 35220644 30377572

DATA ANALYSIS AND INTERPRETATION

During the year 50,00,000 equity shares of Rs.1000/- each have been allotted at par to

the Government of Karnataka.

Capital Reserves Includes:

2,34,49,119 being the difference between assets and liabilities on merger of

Viswaveswaraya Vidyut Nigama limited and to the corporation

Karnataka EMTA Coal Mines Ltd. has issued 13,00,000 shares if Rs 10/-each fully

paid up for consideration other than cash.

Karnataka EMTA Collieries Ltd. has issued 25,500 shares of Rs 10/-each full paid up

for consideration other than cash.


EWCM/RNG/RSB


SHARE CAPITAL0

0.5

1

1.5

2

2.5

20112010

(Rs i

n La

khs)


EWCM/RNG/RSB


SHARE CAPITAL0

0.5

1

1.5

2

2.5

20112010

(Rs i

n La

khs)

INTERPRETATION

Authorised capital of the company has been enhanced from Rs 2000 crores to 3100

crores on 19.05.2011

NOTE 7.


EWCM/RNG/RSB


(Rs.'000)



Number NumberAuthorisedEquity Shares of Rs 1000 each

20,000,000 20,000,000

Issued Subscribed & Paid upEquity shares of Rs 1000 each

12,432,622 7,432,622

SHARE CAPITAL DEPOSIT:Share Deposit(Received from Government Of Karnataka as Equity for development of power generating stations)

5,000,000 5,000,000

TOTAL 17,432,622 12,432,622

NOTE 8.


EWCM/RNG/RSB


(Rs.'000)

Particulars As at 31st march 2010 As at 31st March 2009

(Rs in Lakhs)

(Rs in Lakhs)

A.Capital Reserves

Balance as per last Balance sheet

46896 46896

B. Special Reserve for Replacement of Plant and MachineryBalance as per last Balance sheet Add: Transferred from P&L account

379969109062 489031

31064569324

379969

C.GENERAL RESERVES

Balance as per last Balance sheet Add: Transferred from P&L account

258791453962500 29841645

233494372529708 25879145

TOTAL 30377572 26306010

ANALYSIS

During the year 50,00,000 equity shares of Rs 1000/-each have been allotted at par to

the Government of Karnataka.


EWCM/RNG/RSB


SHARE CAPITAL0

2

4

6

8

10

12

14

16

18

20102009

(Rs i

n La

khs)


2.4

2.5

2.6

2.7

2.8

2.9

3

3.1

20102009

(Rs i

n La

khs)

EWCM/RNG/RSB


INTERPRETATION

Capital Reserves include Rs 2,34,49,119 being the difference between assets and

liabilities transferred from the erstwhile KEB to erstwhile VVNL and subsequently to

the corporation w.e.f. 1.04.2006.

REMTA has issued 13,00,000 shares of Rs 10-each fully paid up for consideration

other than cash. This has been accounted as Capital Reserve.

YEAR NO. OF EQUITY SHARES

(IN LAKHS)

AMOUNT OF DEBT ( IN

LAKHS)

EWCM/RNG/RSB


2009 115 16,568.07

2010 200 17,522.52

2011 200 22,377.62

2012 310 26,774.84

2013 410 44,765.48

TABLE NO 1: TABLE DEPICTING THE RESULTS FROM THE

SOURCES WITH REGARDS TO CAPITAL STRUCTURE FROM

2009-2013

ANALYSIS:

As it could be observed in table 1, among all the year of Karnataka Power

Corporation Ltd, the number of equity shares has increased every year and in

Amount of Debt there is a slight increase in every year. In the year 2013 debt is high

(44,765.48) and low in 2009 (16,568.07). In future it is expected to increase more.

EWCM/RNG/RSB


GRAPH NO 1: GRAPH REPRESENTING THE EVALUATED VALUES OF

TABLE 1 2009-2013

2009 2010 2011 2012 20130

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

No of Debt

INTERPRETATION:

As we have seen in the above graph 1, among all the year of Karnataka Power

Corporation Ltd, there is continuous increase in debt. By increasing in the debt value

at moderate levels, the same will depict the enhancement in the long term liabilities

which are repayable in a long duration. This is turn helps the firm in mobilizing the

appropriate funds for the required purpose.

EWCM/RNG/RSB


TABLE NO 2: TABLE DEPICTING THE RESULT FROM THE SOURCE

WITH REGARD TO EARNING PER SHARE BY TAKING EARNING

BEFORE INTEREST AND TAX FROM 2009-2013

YEAR EPS BASIC FORMULA (RUPEES IN

LAKHS)

2009 373

2010 351

2011 349.76

2012 52.34

2013 41.75

Earnings per share = profit/No of equity shares

2013=17120/410=41.75

2012=16228/310=52.34

2011=69985/200=349.76

2010=70200/200=351

2009=42895/115=373

ANALYSIS:

As it could be observed in table 2, among all the year of Karnataka Power corporation

Ltd, the ratio of Earnings per share by taking Earnings before interest and tax is high

in the year 2009 when compared to all other years. In future either it may increase or

decrease based on the profit.

EWCM/RNG/RSB



TABLE 2 FROM THE YEAR 2009-2013

2009 2010 2011 2012 20130

50

100

150

200

250

300

350

400

Chart Title

YEAR

RUPE

ES

INTERPRETATION:


Corporation Ltd, there is fluctuation in the EPS by taking Earnings before interest and

tax. If the Earning per share is a measure and investors will watch carefully and

consider it. While deciding the market value of the Equity share it is assumed that the

company has earned good profit and investors will be ready to invest in the company.

If the EPS decreases than the company is not earning good profits and the company

will have bad reputation among investors and financial institution. In 2012 EPS is low

because paid up capital is more.

EWCM/RNG/RSB


TABLE NO 3: TABLE DEPICTING THE RESULT FROM THE SOURCE

WITH REGARD TO EARNING PER SHARE BY TAKING EARNING AFTER

INTEREST AND TAX FROM 2009-2013

YEAR EPS NET INCOME FORMULA

(RUPEES IN LAKHS)

2009 27.47

2010 19.01

2011 16.98

2012 18.68

2013 12.22

ANALYSIS:

As it could be observed in table 3, among all the year of Karnataka Power Corporation

Ltd, the ratio of EPS by earnings taking after interest and tax is high and high in the

year 2009 (40.46) and decreasing continuously from 2010 to 2013

(19.01,16.98,18.68,12.22). In future it is accepted to increase more.

EWCM/RNG/RSB


GRAPH NO 3 : GRAPH REPRESENTING THE EVALUATED VALUES OF

TABLE 3 FROM THE YEAR 2009-2013

1 2 3 4 50

5

10

15

20

25

30

EPSYEAR

YEAR

RUPE

ES

INTERPRETATION:


Corporation Ltd, there is decrease in Earnings per share by taking Earnings after

interest and tax in the year 2013. If the EPS decreases due to the economic factors

such as moderate performance and also the political influence in the state due to the

tax rate has been increased so it has major impacts on EPS. If the company pays more

of its income towards tax rate it decreases the EPS. If the Company starts booming

and less interference of political factor then EPS will increase in any financial year.

EWCM/RNG/RSB


GRAPH NO 5: REPRESENTING THE EVALUATED VALUES OF TABLE 5

FOR THE YEAR 2010-2011

1 2 3 4 58.9

9

9.1

9.2

9.3

9.4

9.5

9.6

9.7

9.8

Capital structure on EPS on 2010-2011

EPSYEAR

FINANCIAL PLAN

RUPE

ES

INTERPRETATION:

As we have seen in the above graph 5, among all the plans of Karnataka power

Corporation Ltd, plan 4 is good because of 100% Equity shares. In this regard to this

plan it can increase the earnings per share and also excess profit can be retained in the

company for the further expansion activities, but the risk increases for the company. If

the company follows plan 2 there is decrease in EPS due to 100% Debt so the

company has to give more interest rate to the investors. Combination of this Equity

and Debentures will be the good option for the company.

EWCM/RNG/RSB


TABLE NO 6: TABLE DEPICTING THE EARNING AVAILABLE TO

EQUITY SHAREHOLDERS FOR THE YEAR 2012-2014

FINANCIAL PLANS EQUITY CAPITAL DEBT CAPITAL

1 100 0

2 0 100

3 50 50

4 70 30

5 30 70

ANALYSIS:

As it could be observed in table 6, it shows the various plans which can be utilized by

of Karnataka Power Corporation Ltd to increase the maximum profits and earnings per

share for the long run survival of the company. Based on this projected earnings for

the equity share holders will be made for three years from 2012-2014. By doing this

projected analysis company will be able to select the best plans for future.

EWCM/RNG/RSB


GRAPH NO 6: GRAPH REPRESENTING THE VALUES OF TABLE 6 FOR

THE YEAR 2012-2014

1 2 3 4 50

20

40

60

80

100

120

capital structure from 2012-2014

EQUITYDEBT

FINANCIAL PLAN

PERC

ENTA

GE

INTERPRETATION:

As we have seen in the above graph 6, among all the plans of Karnataka Power

Corporation Ltd, in this regard to plan 1. In regard to plan 2 it is acceptable for the

companies earning greater than the rate of interest which they are paying on the

debentures. In regard to plan 3 earning per share may reduce due to risk involved and

overall cost of capital increase. In regard to plan 4 the management and control of the

company becomes difficult due to majority of equity in the capital structure. Smooth

functioning of organisation is no possible. In regard to plan 5 the earning per share of

the increase due to more debt percentage in the capital and also have great control over

the management.

EWCM/RNG/RSB


TABLE NO 7: TABLE DEPICTING THE CALCULATION FOR NUMBER OF

OUTSTANDING SHARE

ANALYSIS

As it could be observed in table 7, it shows the various financial plan with the

additional capital to find out the number of outstanding shares. Based on this

outstanding share the projected analysis for the year 2012 to 2014 will be made, as we

can see from the table 7 plans 1 has got more outstanding shares of (5450000), and

plan 2 has got less outstanding shares (50000000).

EWCM/RNG/RSB

PLAN 1 PLAN 2 PLAN 3 PLAN 4 PLAN 5

Initial capital 5000000 5000000 5000000 5000000 5000000

+ Addition 450000 NIL 225000 135000 315000

No. of outstanding

shares

5450000 5000000 5225000 5135000 5315000

Sources: working has been performed in MS_EXCEL from the data available in annual reports

of the company concerned.



TABLE 7 FOR THE YEAR 2012-2014

PLAN 1 PLAN 2 PLAN 3 PLAN 4 PLAN 54700000

4800000

4900000

5000000

5100000

5200000

5300000

5400000

5500000

Capital structure from 2012-2014

12345

FINANCIAL PLAN

NO

OF

OUT

STAN

DIN

G SH

ARES

INTERPRETATION

As we have seen in the above graph 7, among the outstanding shares of the company

of Karnataka Power Corporation Ltd, the increase in outstanding shares of the

company can shift fundamentals position of the stock such as ownership percentage,

voting control, earning per share, or the value of individual shares and it reduce an

investors stock price below the initial purchase price. The decrease in the outstanding

shares the company a magical increase in period-to-period EPS will result. It will

increase the price of the stock, increased floating rate; income tax charged on dividend

is less.

DIRECTORS’ REPORT

EWCM/RNG/RSB


The Board of Directors take immense pleasure in presenting the 43rd Annual Report

on the business and operations of the Corporation with the audited statement of

accounts for the year ended March 31, 2013.

I. Financial Performance

Financial Results For the year ended

March 31. 2013

(Rs in crores)

For the year ended

March 31. 2012

(Rs in crores)

Gross income from sale of energy

Less: Advance against

Less: Infirm Power

Net income from sale of energy

5622

43

152

5426

5242

41

------

5201

Other income 967 541

Total income 6393 5742

Operating Expenditure 4857 4409

Operating profit 1537 1333

Finance charges, Dpn., and prior

period adjustments

1366 1171

Profit before tax 171 162

Analysis and Interpretation

• Profit before tax during the year was at Rs 171 crores as against Rs 162 crores during

the previous year. Turnover during the year was 5622 crores as against `5242 crores

during the previous year, due to decrease in energy sales in Thermal and decrease

from Hydro Stations. Generation during the year was 24382 mus as against 28239 mus

during the previous year. A dividend of `10 per share as in previous years has been

proposed. The total dividend outgo will be `31.27 crores.An amount of `0.06 crores,

equivalent to 2.5% of the profit after tax is transferred to a separate reserve to meet the

contingencies in operation and maintenance of the plants. GoK has contributed an

amount of `400 crores during the year towards Equity for setting up power generation

plants by KPCL.

EWCM/RNG/RSB


Table 19: Cash flow statement for the year ending 31st march 2013

(in crores)

Sl No Particular 2012-13 2011-12

A

B

c

CASHFLOWS FROM OPERATING ACTIVITIES

Net profit before tax & prior period items

17120 16228

Adjustments for:

Bad debts &expenses written off deferred expenses/other losses

3 105

Depreciation including withdrawals (net)

56618 40467

Loss on sale/scrapping of assets 2 104Loss on sale of stock 54 326

Prior period items(excl depreciation) 0 (480)Other Adjustments

Finance charges 88987 77109profit on sale of assets (9) (144)

interest receipts received in cash. (357) (362)

Operating profit before working capital changes

162418 133353

Adjustments for:

Adjustments for inventory (8118) (5611)Adjustments for sundry debtors 65144 (106302

)Adjustments for loans & advances 2012-13

288 (5659)

Adjustments for other current assets & Non Current Advances

(267624)

(40426)

Adjustments on account of current liabilities

207374 38674

Adjustments on account of other liabilities & provisions

(1202) (4138) 7302 (112058)

EWCM/RNG/RSB


Cash generated from operations 158280 21295

Direct taxes + dues 4382 11617

NET CASH FROM OPERATING ACTIVITIES (A) 153898

CASHFLOW FROM INVESTMENT ACTIVITIES

Interest receipts 356 362

Net additions to fixed assets and capital WIP

(121643)

(81579)

Net increase in investment (1404) (730)

Net cash used in investment activities(B)

(122691) (81947)

CASHFLOWS FROM FINANCING ACTIVITIES

Receipt from issue of equity share capital

40000 62500

Receipt from secured loan (net) 5680 53716

Payment of Finance charges (Net) (88988) (77110)

Payment of Dividend (2282) (3487)Payment of Corporate Dividend Tax () (373) (566) NET CASH USED IN FINANCING ACTIVITIES (C)

(45963) 35053

Net increase/decrease in cash & cash equivalents( A+B+C)

(14696) (36660)

Cash & cash equivalents (opening balance)

23933 60594

Cash & cash equivalents (closing balance)

9237 23934

2012-13 2011-12

Notes : 1) Closing Cash and Cash Equivalents consist of the following

a) cash on Hand 6 5

b) Imprest 0 0

EWCM/RNG/RSB


c) Cash at Bank- Scheduled Banks 8733 23665

d) FDR/CDR/NSC as per Contra 430 200

e) Deposit with Bank 68 64

Total 9237 23934

2) Cash Flow has been prepared under indirect metod as per accounting standard -3 pertaining to presentation on cash Flow Statement

Analysis and interpretation:

Profit before tax during the year was at `171 crores as against `162 crores

during the previous year. Turnover during the year was `5622 crores as

against `5242 crores during the previous year, due to decrease in energy

sales in Thermal and decrease from Hydro Stations. Generation during

the year was 24382 mus as against 28239 mus during the previous year.

A dividend of `10 per share as in previous years has been proposed. The

total dividend outgo will be `31.27 crores. An amount of `0.06 crores,

equivalent to 2.5% of the profit after tax is transferred to a separate

reserve to meet the contingencies in operation and maintenance of the

plants. GoK has contributed an amount of `400 crores during the year

towards Equity for setting up power generation plants by KPCL.

CHAPTER 5

FINDINGS, CONCLUSIONS AND SUGGESTIONS

FINDINGS

The study is undertaken for the purpose of finding out the efficiency of Capital

structure and Management of KPCL. The following are the summary of findings

arrived after analysis.

EWCM/RNG/RSB


1. The Net capital has been constantly increasing in all 3 years due to increase in

debtors, loans & advances and decrease in creditors etc.

2. In the year 2012-2013 more than 80% of the current assets are locked up in

sundry debtors which may affect the liquidity position of the company.

3. Current ratio shows an increasing trend which is 9.94 in the year 2010-2011 and

is way more than the standard ratio 2:1. Based on this data it can be said that the

liquidity position of the company is good.

4. Liquid ratio also shows an increasing trend which is 9.43 in the year 2010-2011

and is way more than the standard ratio 1:1. This ratio reflects the financial

soundness of the firm in terms liquidity.

5. As per debtors turnover ratio the liquidity position of the company is poor as it is

less than the standard ratio 1:1. Debtor’s turnover ratio shows a decreasing trend

from 1:01 to 0.98 and 0.73 in the last 3 years.

6. Working capital turnover ratio shows a decreasing trend over the past 3 years.

The ratio has reduced from 0.93 to 0.61. This clearly shows that the working

capital is under utilized in generating net sales.

7. The sales of the company have been increasing through all 3 years.

8. Stock turnover ratio shows an increasing trend as the sales are constantly

increasing. The ratio has increased from 8.53 to 11.59 over the last 3 years.

9. Investment in inventories has gone down from 486.05 crores to 335.51 in the

year 2009-10 and has slightly increased in the next year to 397.99 crores.

.

RECOMMENDATIONS AND SUGGESTIONS

On the basis of analysis, the recommendations to further improve the

management of capital structure, which would level the company to greater

heights.

KPCL depends on one customer KPTCL, in future it is advisable to

look out for more customers.

EWCM/RNG/RSB


The management should take effective measures to recover the

outstanding of KPCL.

Management should take measures to reduce the debtors collection

period.

KPCL depends largely in borrowing to finance its fixed assets. In

future, the company should use its own earnings to reduce the payment

of interest burdens.

KPCL should also revise their old tariff of Hydel and thermal to

increase their profitability.

The cash balance of the company is required to be improved in order

to have immediate liquidity position. But at the same time precautions

should be taken to see that too many funds are not locked up in cash

balance, which ultimately may lead to improper utilization of funds.

The improvement in credit collections and selling will boost their sales

and will record them in cash inflow management. The effective and

efficient cash inflow provides an opportunity to co-ordinate with cash

outflow. Proper co-ordinate cash inflow and outflow management will

help in maintaining sound and better working capital management. If

the company circulates its output and reduces capital expenditure then

the company will be more profitable.

The company should follow Modigliani Miller approach to maximize the debt to get good ratio between debt and equity.

If the company manages to effective management of materials it can increase the profitability ratio.

CONCLUSIONS

Based on the study made at KPCL, on capital structure and management, the

following conclusions were made.

Debtors are forming a large part of current assets.

EWCM/RNG/RSB


Analysis was made on assets and liabilities of the company to find out the

gross capital. It was found that the capital in good position and was

constantly increasing.

The liquidity position of the company is very good as revealed by the

current ratio. The company’s ability to meet their obligations is high.

Debtors turnover ratio shows decreasing trend and the collection period is

very high.

Inventory levels were showing decreasing trend as less investment is made

in inventories.

Cash levels are showing increasing trend.

Debtors form a major part of current assets.

There is considerable scope of improving capital structure at KPCL by

incorporating much effective policies and practice with regard to capital

management.

The company is performing its operations successfully and its overall

performance is very good.

BIBLIOGRAPHY

1. Financial Management- Prasana Chandra Tata McGraw-Hill

Published co ltd

EWCM/RNG/RSB


6th Edition

2. Financial management- Ravi M Kishore Taxman Publications

7th Edition

WEBSITES

www.karnataka power.com www.indianpowersector.com

EWCM/RNG/RSB


ANNEXURES

Karnataka Power Corporation LimitedStatement of Profit and Loss for the year ended 31st March 2013 (` in Lakhs)

Particulars NoteNo.

As at 31stMarch 2013

As at 31stMarch 2012

I. Revenue From operations 22 5,42,596 5,20,130II. Other income 23 96743 54,098

III. Total Revenue (I + II) 6,39,339 5,74,228 IV. Expenses:

Cost of materials consumed

24 3,83,137 3,45,337

Royalty 4,224 5,885Operation and Maintenance Expenses

25 20,333 19,725

Employee benefits expenses

26 70,644 63,093

Finance costs 27 88,987 77,110Depreciation and amortization expenses

28 56,618 40,442

Other expenses 29 7,213 6,023Total expenses 6,31,156 5,57,615

V. Profit before exceptional and extraordinary items and tax(III-IV)

8,183 16,613

VI. Exceptional items 30 60,8,183 555VII. Profit before

extraordinary items and tax (V - VI)

46 16,058

VIII.

Extraordinary Items 31 (9043) 286

IX.Prior period Items 32 17,120 (456)

X. Profit before tax (VII- VIII)

16,228

XI. Tax expense:(1) Current tax 3,448 3,504(2) Deferred tax 13,439 1,254

XII. Profit (Loss) for the period (VII-VIII)

233 11,470

EWCM/RNG/RSB


XIII.

Earnings per equity share: 33

(1) Basic 0.75 50(2) Diluted 0.75 48

Table 1:

Balance Sheet as on 31st March 2013

(in Lakhs )

Particulars Note No. As at 31st March 2013

As at 31sTMarch

2012 EQUITY AND LIABILITIES

1 Shareholders’ funds

(a) Share capital 1 3,12,697 2,28,197

(b) Reserves and surplus 2 3,57,602 3,61,026

2 Share application money pending

allotment

3 18,000 62,500

3 Non-current liabilities

(a) Long-term borrowings 4 292019 2,86,339

(b) Deferred tax liabilities (Net) 5 59456 46,017

(c) Other Long term liabilities 6 28,057 29,354

(d) Long-term provisions 7 23,576 23,482

4 Current liabilities

(a) Short-term borrowings 8 7,28,250 5,57,884

(b) Trade payables 9 93,251 57,787

(c) Other current liabilities 10 59,495 56,754

(d) Short-term provisions 11 15,264 16,381

EWCM/RNG/RSB


Total

19,87,667 17,25,681

Ii ASSETS

1 Non-current assets

(a) Fixed assets

(i) Tangible assets 12 6,90,213 5,32,938

(ii) Intangible assets 12 24 46

(iii) Capital work-in-progress-Tangible

Asset

13 1,55,365 2,47,594

(b) Non-current investments 14 35,365 34,020

(d) Long-term loans and advances 15 44,317 14,191

(e) Other non-current assets 16 5,26,334 1,72,298

2 Current assets

(b) Inventories 17 53,529 45,411

(c) Trade receivables 18 4,26,159 4,91,302

(d) Cash and cash equivalents 19 9,237 23,934

(e) Short-term loans and advances 20 22,066 22,353

f) Other current assets 21 25,058 1,41,594

Total

19,87,667 17,25,681

EWCM/RNG/RSB


Table:2


(`in Lakhs)

Particulars Note No. As at 31st March 2012

As at 31st March

2011 EQUITY AND LIABILITIES

1 Shareholders’ funds

(a) Share capital 1 228,197 174,326

(b) Reserves and surplus 2 361,026 352,206

2 Share application money pending

allotment

3 62,500 53,871

3 Non-current liabilities

(a) Long-term borrowings 4 789,639 735,923

(b) Deferred tax liabilities (Net) 5 46,017 44,764

(c) Other Long term liabilities 6 29,369 29,370

(d) Long-term provisions 7 23,482 10,000

4 Current liabilities

(a) Short-term borrowings 8 54,490 50,781

(b) Trade payables 9 57,787 35,811

(c) Other current liabilities 10 56,793 52,747

(d) Short-term provisions 11 16,381 7,439

Total

1,725,681 1,547,244

Ii ASSETS

1 Non-current assets

(a) Fixed assets

(i) Tangible assets 12 532,937 555,951

EWCM/RNG/RSB


(ii) Intangible assets 12 46 53

(iii) Capital work-in-progress-Tangible

Asset

13 247,,593 182,875

(b) Non-current investments 14 34,020 33,289

(d) Long-term loans and advances 15 14,191 8,977

(e) Other non-current assets 16 174,655 165,232

2 Current assets

(b) Inventories 17 45,411 39,800

(c) Trade receivables 18 491,302 385,001

(d) Cash and cash equivalents 19 23,934 60,595

(e) Short-term loans and advances 20 21,376 15,681

f) Other current assets 21 140,216 99,790

Total 1,725,681 1,547,244

EWCM/RNG/RSB


Table:3


(Rs '000)

Sl

no

Particulars S

C

H

31.03.2011 31.03.2010

I Sources of funds

1. shareholder's

funds:

a) share capital

b) reserve & surplus

2. load funds

a)secured loans

b) unsecured loans

3. Deferred tax

liability(Net)

4.Advance against

Depreciation

A

B

C

D

2281968

6

3522064

4

5804033

0

1743262

2

3037757

2

4781019

4

3839429

8

4535579

0

8375008

8

3552012

8

3829963

5

7381976

3

4476393

684213

4136721

-

TOTAL 1469510

24

1257666

76

II Application of funds:

1.Fixed assets

a)Gross Block

b) Less: Depreciation

c) Net Block

d) capital work in

E

F

1014042

81

4580391

1

9142444

5

4313903

8

EWCM/RNG/RSB


progress

2. Investments

3. current assets, loans

& advance

A. current Assets

a) inventories

b) sundry debtors

c) cash & bank

balance

B. Loans & Advances

Total

(A)

G

H

I

5560037

0

1836543

3

7396580

3

4828540

7

2041452

2

6869992

9

3979990

6380187

4660594

78

3328988

3355190

5204198

0

6948310

63500

7384134

2

3588303

6234548

0

3219598

7742964

5

6556507

8

4. CURRENT

LIABILITIES &

PROVISIONS

a) current liabilities

b) provisions

Total

(B)

J

6837579

946310

7924402

667631

7783889 8592033

EWCM/RNG/RSB


NET CURRENT

ASSETS (A-B)

5.Miscellaneous

expenditure to the

extent not written off

or adjusted

i) Deferred revenue

expenditure

a) Expenditure-

Afforestation

6964545

6

10477

5697304

5

30204

TOTAL 1469510

24

1257666

78

Table:4

BALANCE SHEETS AS ON 31st MARCH 2009, 2010

(Rs.000)

EWCM/RNG/RSB


EWCM/RNG/RSB

Sl no Particulars 2009-2010 2010-2011

I Sources of funds

1. shareholders funds

a) share capital

b) reserve & surplus

2. Load Funds

a)secured loans

b) unsecured loans

3. Deferred Tax Liability (Net)

4.Advance Against

Depreciation

1743.26

3037.75

3552.01

3829.96

413.67

0

2281.96

3522.06

3839.42

4535.57

447.63

68.42

TOTAL 12576.65 14695.06

II Application of funds

1.Fixed Assets

a) net block

b) capital work in progress

2. Investments

3. Current Assets, Loans &

Adv

A. current assets

a) inventories

b) sundry debtors

c) cash & bank balance

B. loans & advances

Total (A)

4828.54

2071.45

6.35

335.51

5204.19

694.83

291.95

5560.03

1836.54

332.89

398

6380.18

605.94

358.83

6526.5 7742.96

4. Current Liability & Provisions

a) current liabilities

b) provisions

Total (B)

NET CURRENT ASSETS (A-

B)

1. miscellaneous

expenditure

792.44

66.76

683.75

94.63

859.2 778.38

5667.3

3.02

6964.57

1.04

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