PRESENTED BY:

DHIREN PATEL (191137)

ISHAN JAIN(191141)

MANAN KOHLI (191145)

PAYAL SAMANTA (191156)

RAHUL JAIN(191159)

RANGOLI JAIN (191162)

CAPITAL STRUCTURE

PROJECT OBJECTIVE

• Analyze and compare the capital structure of firms :

Inter- Industry Intra- Industry ( Each industry with different

nature) Therefore, to obtain a broader perspective of

the market.

PARAMETERS

•PROFITABILITY:

Return on assets (ROA) & Return on investments (ROI)

CAPITAL STRUCTURE: Combination of debt and equity that a firm uses to fund its long

term financing. Debt to equity ratio= total debt/shareholder’s equity.

FINANCIAL LEVERAGE : Degree of financial leverage can be given by :

DFL = % Change in EPS

% Change in EBIT

The financial leverage ratio is also referred to as the debt to equity ratio. This ratio

indicates the extent to which the business relies on debt financing

INDUSTRIES INTO CONSIDERATION

HYPOTHESIS

1. Top firms have low D/E ratio irrespective of industry they are in

2. Firms of same industry follow similar capital structure

3. Firms during expansion mode have high D/E ratio

4. There is a positive correlation between capital structure and return on

investment (ROI)

5. There is a positive correlation between profitability (ROA ) and DFL

FMCG Growth drivers: • Robust GDP growth• Increased income• Increased urbanization • Evolving consumer lifestyle and

buying behavior

Challenges: • Prolonged food inflation• Price wars due to increased

competition• Requirement of constant product

innovation & advertising

IT

Growth drivers : • Highly skilled human resource• Initiatives taken by Government

(implementation of e-governance projects);• Many global players have set-up operations in

India like Microsoft, Oracle, etc

Challenges :• Concentration of IT development in few cities

TELECOMGrowth Drivers:• 3G spectrum• Tax incentives by the Govt. • Increasing access to internet

Challenges:• Decreasing ARPU (average revenue per

user )• Slowing revenue growth and a huge

pressure on profit margins• Rural tele-density is still less than 25%,

while there is saturated urban tele-density.

POWERGrowth Drivers• Tax benefits• Encouraged private investment in

transmission sector through competitive bidding

Challenges• Delay in technology procurements• Delay in environmental clearances, land

acquisition and financial closures• Law and order problems• Shortage of trained manpower and

equipments• Need of huge finance • Fuel unavailability

D / E RATIO

2006-07 2007-08 2008-09 2009-100

0.05

0.1

0.15

0.2

0.25

HULP& GNESTLEDABUR

Testing Hypotheses

Assumption: Top firms according to market capitalizationTest statistic: t-testResult: All top firms don’t have lower D/E Ratio Analysis:• It seems that the type of industry influences the variation in

financial leverage ratio of firms across industries. • This may be due to the fact that both FMCG and IT industry

are relatively less capital intensive as compared to Telecom and Power industry

• Hence top firms in FMCG and IT industry have very low D/E Ratio as compared to top firms in Power and Telecom industry

Hypothesis 1: Top firms have low D/E ratio irrespective of industry they are in

Hypothesis 2: Firms of same industry follow similar capital structureTest statistic: ANOVA

SECTOR RESULT ANALYSIS

FMCG Firms follow similar capital structure

•Relatively low capital intensive•Expenditure mainly for advertising

IT Firms don’t follow similar capital structure

•Higher risks, avoid taking debts•Wipro has taken debts unlike Infosys and TCS

TELECOM Firms don’t follow similar capital structure

•Relatively capital intensive•However, MTNL has zero debt

POWER Firms don’t follow similar capital structure

Capital intensive , still a lot variation in capital structure

Test statistic: t-test for paired sample with equal means Assumption: Firms are in expansion whenever there is increase

in asset by above 25 % over the previous yearResult: There is no correlation between expansion mode and D/E

ratioAnalysis:• A firm may use its equity, or reserves & surplus or debt to

invest in expansion.• Adani power had high D/E ratio while going in for expansion

since power industry is a capital intensive one, however Infosys had zero debt, though it was in expansion phase from 2006-07 to 2007-08.

• Some firms follow Pecking order theory

Hypothesis 3: Firms during expansion mode have high D/E ratio

Test statistic: t-Test Result: There is no correlation between ROI and the debt equity ratio of a firmAnalysis:• Though higher ROI refers to easy availability of debt at low

interest, still a firm having higher ROI may not consider taking debt in order to avoid financial distress. It may be using its share capital and reserves and surplus to increase its ROI.

• e.g. Though HUL and NESTLE have higher ROI, they have very low D/E ratio, while Idea cellular has a very high D/ E ratio its ROI being quite less than that of HUL.

Hypothesis 4: There is a positive correlation between ROI and the debt equity ratio of a firm

Test statistics: t-TestResult: There is a positive correlation between ROA and DFL

Analysis:

• Tax benefits in debt leads to increase in EPS and EAT which leads to increase in ROA.

Hypothesis 5: There is a positive correlation between ROA and DFL

CAPITAL STRUCTURE DEPENDS ON:

• Firm size • Type of industry• Govt. Policies • Objective of the firm

LIMITATIONS

• Only few firms of a sector have

been considered

• We have assumed top firms

based on market capitalization

• Hypotheses have been tested

on few samples

Literature Review

• Modigliani & Miller Theory

• Pecking Order Theory