PRESENTED BY: DHIREN PATEL (191137) ISHAN JAIN(191141) MANAN KOHLI (191145) PAYAL SAMANTA (191156) RAHUL JAIN(191159) CAPITAL STRUCTURE
Nov 22, 2014
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