Project 6th Sem Capital Structure

Background of the company

The company celebrates its centenary in 1997. In 1897 a young man named Ardeshir

godrej gave up law turned to lock making. Ardeshir went on to make safes and security

equipments of the highest order and then stunned the world by creating toilet soap from

vegetable oil. His brother Pirojsha godrej carried Ardeshir’s dream forward leading

godrej towards becoming a vibrant, multi-business enterprise. Pirojsha laid the

foundation for the sprawling industrial garden township now called Pirojshanagar in the

suburbs of Mumbai. Godrej touches the lives of millions of Indians everyday. To them, it

is a symbol of enduring ideals in a changing world.

Godrej Malaysia, godrej Singapore and godrej Vietnam are closely held constituents of

godrej group, a conglomeration established and operative for over one hundred years

with extensive international ramifications and connections the group has a total

consolidated turnover of US $ 875 million.

Godrej Malaysia, Singapore, and Vietnam are companies that are export oriented and

derive a preponderant portion of their revenue from the export of their product range of

steel office equipment. Godrej Malaysia, Singapore, and Vietnam have been in

existence for nearly 30 years and have been exporting to the following countries.

1. Australia and Newzeland

2. Papua and New guinea

3. Fiji

4. Male and Mauritius

5. Oman, Bahrain, Saudi Arabia, Kuwait, Qatar, UAE & Yemen

6. Tanzania

7. Sweden

8. Bangladesh

These companies have developed a reputation in the quality of their product assembly,

the adequacy of their service and the proven satisfaction of the end user.

Godrej group:

Godrej Industries Limited

Godrej Agrovet

Godrej & Boyce

Godrej consumer products

Godrej hicare

Godrej InfoTech

Godrej properties

Godrej Sara lee

Godrej Efacec

Geometric limited

Time line:

1897 – Godrej & Boyce mfg.company established.

1918 – Godrej soaps limited incorporated.

1961 – Godrej started manufacturing forklifts trucks in India.

1971 – Godrej Agrovet limited began as an animal feeds division of godrej soaps.

1974 – Vegetable oil division in India in wadala, Mumbai acquired.

1990 – Godrej properties limited, another subsidiary, established.

1991 – Foods business started.

1994 – Transelektra domestic products acquired.

1995 – Transelektra forged a strategic alliance with Sara lee USA.

1999 – Transelektra renamed Godrej Sara Lee limited.

2001 – Godrej consumer a product was formed as a result of a demerger of Godrej

soaps ltd. Godrej Soaps renamed GIL.

2002 – Godrej tea limited setup.

2003 – Entered the BPO solution and service space with Godrej Global Solution

limited.

2004 – Godrej hicare limited setup to provide a safe healthy environment to

customer by providing professional past management service.

2004 – Godrej Fashion Hair Color (GFHC) was launched in the light of growing

fashion-consciousness in India.

2006 – Food business was merged with Godrej Tea & Godrej Tea renamed Godrej

Beverages & Foods limited.

2007 – Godrej Beverages & Foods limited formed a JV with the Hershey company

of north America & the company was renamed Godrej Hershey Foods &

Beverages limited.

2008 – Godrej relaunched itself with new colorful logo & fresh identity music.

Detailed about Godrej Industries Limited

Godrej Industries Limited is India’s leading manufacturer of oleo chemicals & makes

more than hundred chemicals for use in over two dozen industries. It also operates

business in medical diagnostics and real estate.

GIL is a member of the Godrej group, which was established in 1897 and has since

grown into a US$1.875 billion conglomerate with a workforce of 18,000. The company’s

business was originally part of Godrej soaps limited, which had a consumer products

division. That division was emerged, and Godrej soaps limited renamed as Godrej

Industries Limited, on 1st April, 2001.This led to the formation of two separate corporate

entities:

1. Godrej Consumer Product

2. Godrej Industries Limited

Godrej Industries Limited has three divisions – the chemical, the food division, and the

medical division. Besides its three businesses, Godrej Industries also runs four divisions

— Corporate Finance, Corporate HR, Corporate Audit and Assurance and Research

and Development — which operate on behalf of the entire Godrej Group.

The Chemicals division of Godrej Industries Ltd. is a leading manufacturer of oleo

chemicals like fatty acids, glycerin, and fatty alcohols, and surfactants like alpha olefin

sulphonate. The chemicals division has a strong distribution network in India and

abroad and it caters to a wide range of industries, among them detergents, cosmetics,

pharmaceuticals, and plastics. The division has a strong and committed management,

and its continuous effort to enhance customer satisfaction levels has resulted in it

undertaking a comprehensive e-CRM initiative .

The Food division of godrej Industries Limited is leading manufacture and marketer of

processed foods and oils. It makes wide range of cooking oils, such as refined

sunflower oil; micro-filter groundnut oil refined palmolein and vanaspati and refined

blended oil. The company also produces a range of fruit beverages, under the jumpin

and Xsbrand names, as well as Godrej tomato purees. The division has two factories; at

Wadala in Mumbai and at Mandideep near Bhopal.

The Medical division of Godrej Industries Limited was established in 1992and used to

be known as the biotechnology division. It is in the business of distributing equipment

and consumable to the medical community. The medical diagnostic division has tie-ups

with Becton Dickinson (USA).

GIL has built a strong manufacturing base capable of delivering international quality

product at competitive price. It operates two parts, one at Valia in Gujarat and second

Vikhroli in the suburban Mumbai. The company’s products are exported to 40 countries

in north & South America, Asia, Europe, Australia, & Africa and it leads the India’s

market in production of fatty acid, fatty alcohol, & AOS. (Alpha Olefin Sulphonate).

Godrej Industries has a modern, integrated factory at Valia in the Indian state of Gujarat

where vegetable oils are converted into fatty acids, glycerin, fatty alcohols, alpha

olefins, and alpha olefin sulphonates. The plant has an installed capacity of 30,000

tones per annum for making natural fatty alcohols from feedstock such as palm stearine

and palm kernel oil, both renewable vegetable-based raw materials.

Godrej Industries Limited, Valia which formally used to be known as Gujarat Godrej

Innovative Chemicals Limited (GGICL) was, incorporated in the year 1989? In the year

1994 Godrej Soap Ltd. (GSL) was merged with GGICL and named Godrej Soap Ltd

valia. In the year 2001 the chemical business of godrej soaps ltd valia was merged and

named as Godrej Industries Limited (GIL). The plant started its operation in 1990. The

plant is controlled with Tata Honeywell TDS 3000 distributed controlled system lyric,

Germany designs. The plant based on its fatty acid hydrogen process and engineered

by Davy power India limited.

At GIL valia, vegetable oils are converted in to fatty alcohols and glycerin. Varieties of

fatty alcohols are exported to the industry and for industrial application around the

world. The grades of fatty alcohols manufactured include lauryl alcohol, stearyl alcohol,

and biphenyl alcohol. There are exported through agents to U.S., European, Asian,

Australian, and African countries. The valia plant is ISO 9001-14001 certified.

Products from the plant are exported to North and South America, Asia, Europe,

Australia and Africa. The Valia plant has a workforce of 350 people. It is ISO 9002

certified and has been Kosher certified for manufacturing fatty alcohols and glycerin.

VISION AND MISSION STATEMENT

VISION

To become a global force in field of oleo-chemicals and surfactants, growing profitability

through customize solution and innovation through out the value chain.

MISSION

Godrej Industries Limited is in the business of oleo chemicals and surfactants.

Our objectives are:

To maintain leadership in our business in India.

To constantly improve our economic value addition

To keep increasing our exports.

The company will achieve these objectives through excellence in areas of:

Customer satisfaction

Quality

Cost reduction

Corporate value:

Commitment to quality

Customer orientation

Dedication and commitment

Discipline

Honesty and integrity

learning organization

Openness and transparency

Respect, care and concern for people &Trust

Milestones since inception

Godrej group has won international PI audit sustained performance and received

prestigious awards.

1. GIL valia is the first in India to manufacture alcohol from fatty acid.

2. Godrej has received several awards from WWF.

3. Nisarga Mitra Award from rotary.

4. Man of the tree award.

5. Lok shree award for social commitment.

6. India Gandhi paryavaran praskar of the government of India.

7. President K.P.Narayan released a postage sample.

8. In 1995, TQM (Total Quality Maintenance) was launched.

9. In 2003 GIL valia is awarded ISO14001 certificate. This certificate is given for

the better environment.

10.Kalzen technology was launched in 1993.

11. TPM (Total Productivity Maintenance) was launched in 2000.

12. The company was awarded best quality circle award of QCFF in oct-2000.

13. In 1996 GIL valia awarded ISO (International Standard Organization) -9002

certificate.

Investment in plant & machinery

Investment in plant & machinery : Rs. 182, 28, 76, 715

Written down value : Rs. 93, 41, 05, 667

Investment in setting up new EOU plant : Gross amount=Rs. 55, 34, 31, 834

Net amount= Rs. 55, 30, 49, 778

Investment in domestic tariff area : Gross amount= Rs. 2, 25, 33, 43, 322

Net amount= Rs. 96, 84, 59, 765

Future expansion plan

The year ahead seems to be very interesting and challenging. The world economy

curve is on upward moving and hence the outlook for the various product categories of

the chemicals division remains positive.

1. The expansions of international markets-coupled with tightness in the supply

position of some of the finished product predict well for the business and also

open up opportunity for growth in position of markets.

2. Retaining competitiveness in sourcing is major challenging in the coming year.

3. Enhancement of production capacities & improve its supply chain management.

EOU being set up at valia would enable enhancement of production capacity.

4. Focus on adding value to some of company’s by-product, in order to get niche

position in the market.

5. Collaborative research along with a customer value addition to develop a new

chemical for the paper industry.

6. Customization of raw material and manufacturing process to suit the needs of a

single high volume customer.

Present man power status

Manpower is divided in to two parts:

1. Management staff

2. Non-management staff

Classification of management staff:

Vice president

Deputy general manager

Assistant manager & executive

Classification of non management staff:

S1= senior assistant/senior operator/senior technician

S2= assistant/plant operator/technician

S3= junior assistant/junior plant operator/junior technician

W1= skilled workman

W2= unskilled workman

W3= trainee operator/chemist/workman

Manpower status as on June 1, 2009

Category Number of employees

Management staff 106

Non management staff 321

Total 427

MAN POWER STATUS

SR.NO. DEPARTMENT MGMT. STAFF NON MGMT.STAFF TOTAL

1 EVP-valia fact. 1 0 1

2 Production 41 125 166

3 Boiler 0 14 14

4 Utility 0 7 7

5 Civil 1 2 3

6 Electrical 5 25 30

7 Instrumentation 7 14 21

8 Mechanical 14 40 54

9 Quality control 12 36 48

10 Purchase 2 3 5

11Logistic. &

excise5 23 28

12 Stores 2 3 5

13 Accounts 4 2 6

14 P & A 3 2 5

15 ISD 1 1 2

16 Security 1 12 13

17 Safety 4 12 16

18 Task force 3 0 3

TOTAL - 106 321 427

ORGANISATIONAL STRUCTURE:

Types of communication channel

Communication is a core of information in GIL following are the major channels of

communication

1. Vertical channel: vertical channel of communication in GIL is used to pass instruction

orders and message from both top to bottom and bottom to top level. Thus both

upward &downward channels are active.

2. Horizontal channel: horizontal channel is used to pass the information at the same

level.

Modes of communication used

Meetings

Internet (mail)

Telephone

Circulars

GIL follows open door policy for communication i.e. employees are free to present their

views suggestions and queries before superior.

Present product mix

Fatty acid

Fatty alcohol

Alpha olefin sulphonate

Stearic acid

Glycerin

Competitive scenario

There are no regional competitors of the company. In India AGIES company is only the

competitor. In global market the companies like HENKEL, PROCTOR & GSMBLE,

SALIM, KAO, and KOGNIS. The global market share of the company is 2% for solid

AOS the market share in the world are 16%.

Overall organizational culture

Organization is a group of individual coming to gather with a view to fulfillment of

common objectives of organization. All employees of godrej group share common

values.

GIL believes that excellence is not produced by machines but by people. Employee

grievance is zero here at GIL. It is an achievement of the company. Organization is

continuously working on improvement of human skills and empowerment of employees.

The organizations framework is designed in such a way that it can train people quickly

and effectively. It helps to empower them to take bold and independent decisions.

Strategies for the future growth, development &

Benchmarking

Strategic planning to develop new product

Value addition in the product

Forward integration i.e. going a step more value for the finished goods

Up gradation of skill of the employees

The benchmarking of the company includes getting a notable place in the world market.

Important statistical information

NET PROFIT

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-080

20

40

60

80

100

120

140

160

Series1

net profit

Series3

54.9

89.6

121.3

144159.24

FY 2007-08 consolidated Net Profit Increaes by 11% from 144 crore to 159.2 crore

PERFOMANCE HIGHLIGHTS

NET SALES

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-080

200

400

600

800

1000

1200

489.6562.7

699.7

953.2

1102.6

FY 2007-08 consolidated Sales Revenue Improve by 16% from 951.5 cr to 1102.6 cr.

Mr. Jitendra (Manager)

Mr. R.S.Gavi(Executive-DTA)

Mr. P.R.Shah(Executive-EOU)

Mrs. Sathe (Assistant)

Mr. M.S.Shah (Assistant)

Mr. M.D.Pandya (Assistant)

Departmental structure

Budgetary control system

The budget is prepared for the year. Budget is prepared based on sales and marketing plan. Based on this plan, production plant is prepared with respect to capacity in quantity mutually by the marketing (HO) & Production (Valia). The budged prepared is volume based budged.Taking into account these plans, budget expense are estimated which includes following items.• Administration expenses• Salary• Repair & Maintenance etc.This budget then estimated the cost of production.

Budget manuallyThe capital budget id prepared here at GIL, Valia. It deals with the proposed expenses, Which will be incurred during the year.

Budget periodBudget period is the period for which budget is prepared. Here at Godrej Industries Ltd. budget are prepared for finical year I. e. 1st April to 31st March

Budget centerBudget centers are either department wise here, in GIL is taken as department-wise. The company considers each department as its cost center and accordingly prepares the final budget. Here the finance department has separated the budget centers in to production and services centers.

Accounting method / systemThe financial statement are prepared ones the historical cost convection, on the accrual basis of accounting principles (GAAP) in India and the accounting standards issued by the institute of chartered accounts of India.

Costing of the productThe particular product passes through many sections for getting the final product. The cost of each section-fixed cost and variable cost is calculated and added. The total cost of all section is added then to the cost of raw materials. Cost is valued as under.• Finished product : At lower cost or Market Value• Work in process : At cost.

Responsibility account &responsibility centersThe company has considered responsibility center to the cozen to the plant as a profit center.In GIL the output of the raw material are transferred to one section to another so this is the process industry and the profit are taking in to the market price, such transfer will gave some profit to the responsibility centers.

Long term fund sources:

GIL, Valia uses the long term finance sources like.A) Share capital as the sources of 6, 17, 10,218 equity shares of Rs. 6 each fully paid.B) Reserves and surplus funds securities account, capital investment, subsidy reserve, general reserves.C) Secured loans as the term loans from financial institute’s term loans from banks, overdraft, sales tax department loan from MPSIDC.

• Short term finance sources: GIL, Valia uses the short term finance like,A) Safe deposits account for taking amount more than the deposited.B) Unsecured loans as fixed deposits, inner corporate deposits, short term loans from banks.

• Other information about the sources of finance.1) Choosing the proper types of finance.2) Adjustment of quantum of funds raised.3) Procedure for the raising finance.• All are managed by the H. O. Mumbai branch of GIL

Working capital managementWorking capital management refers to the management of current asset such that the firm has a greater degree of flexibility in managing current assets. Working capital has two main concept that is gross working capital and net working capital the earlier refers to the total investment in current assets and later is the difference current asset and current liabilities.To manage current assets means to have current assets in such a proportion that is lead profitable to the firm.The main objective of working capital is to manage the current assets of the firm for smooth running of firm that is managing day to day requirements.

Operating cyclethe GIL operating cycle fluctuate into the duration of 45 to 55 days.

Estimation of working capital requirementThe estimation of working capital is not done in same systematic procedure. As and when the requirement arises it is conveyed to the head office at Mumbai.

Working capital include three major aspects• Cash management• Receiver management• Inventory managementhere a deep study of working capital management done by the GIL which has been leading to smooth running and increasing profit of the company.

Cash management

Cash is important current asset for the operation of the business. Cash is basic input needed to keep the business running on the continuous basis. it is the ultimate output expected to be release by selling the service or product manufacture by firm. The firm should keep sufficient cash neither more nor less. Cash shortage will disrupt the firms manufacturing operation why excessive cash will simple remains idle, without contributing anything towards the firm profitability.• Cash Planning• Optimum Cash Level• Managing the Cash• Investing Surplus Cash

Cash Planning: A firm needs cash to invest in inventories receivable and fixed assets and to make payment for operating expenses in order to maintain growth and earnings.Cash planning at GIL is required to cash planning as they have enough cash as and when required. They have their slaves on cash term as well as credit terms and no problems of cash shortage.

Cash Budget: GIL to individual prepare cash budget Cash management is done by finance and accounts department and excess is keep with bank.

Budget includes : • Receipts• Payments• Control issues• Advance payment• Salary advance• Tour advance• Salary disbursement• Purchase bill passing• Branch transfer from vikhroli• Brokerage payment• Capital goods payment• Service / job work / related payments

This budget is sent to the head office Mumbai and then the head office approve for the fund to the Valia company. the Valia GIL is also having the safe account which allows them to take the any kind of required amount which let company and check does not bounds inspect of the company have less balance at HDFC.

Cash inflow & cash outflowThe cash inflow are mostly meet by the Mumbai branch providing the fund for meeting all expenses so almost there is no need to manage case inflow.Cash outflow are given as per the requirement occurs.

Remaining cash investmentRemaining Cash investment is no need to control because company does not invest surplus money. They just deposit their money with HDFC Bank.

Taxes

Type of taxesThe company has to pay following types of taxes :• Tax on salary of employees• Tax on payment made by GIL• Tax in received by GIL• Sales Tax• Income Tax

Rate of taxesTDS on salary is deducted at 2% surcharge and the common charges is 2%TDS income received by GIL is deduced at 2% other compliances are done by finance department at Mumbai.

Income tax

Income Rate1 to 150000 10 %150001 to 250000 20 %250001 to 1000000 30 %

Time of paymentThe payment of the salary is paid before 7th of next month.

Financial incentives given by governmentThe company has got tax exemption of rupees 88 core or till the year 2005.

Financial Basically the MIS is prepared for the findings of the difference between monthly budget and actual budget which is generated by the vouchers, purchase order bills, case register prepared on system and it is thus reported to the HOD though computer system.

Computer software used o assist in financial management

The software used for assisting financial management in GIL in manufacturing is developed by QAD Inc. of USA, Basically the MGF_PRO is used as computer software.

RESEARCH OBJECTIVE

Primary objective:

To examine effectiveness of capital structure with help of net income

approach & traditional approach.

To identify the effect of debt & equity on the value of the firm

Secondary objective:

The theory is helpful or not in practical life.

RESEARCH DESIGN:

It is the type of descriptive because the topic & the purpose are decided well in advanced.

SOURCES:

Secondary Data: - The data which have been already collected & comprised for another Purpose.

The secondary data provide a starting point for research and offer advantage of low cost and ready availability.

Annual reports, Charts, management information systems, various books, and internet are sources of secondary data.

DATA COLLECTION METHOD:

Sampling Method has been used for gathering Secondary data.

DATA COLLECTION TOOLS:

To make this research study successful internet Tables & charts are

used as data collection tools.

TYPE OF STUDY

The type study is sample study because I take past five year data from the balance sheet.

SAMPLING

SAMPLING SIZE: There are Last five years balance sheets samples are

used as sample size

SAMPLING UNIT: The research is conducted on the Godrej industry

LTD, valia.

SAMPLING METHOD: In this study Probability sampling method has

been used.

LIMITATIONS

This study is conducted within a short period.

The study is limited 4 years from 2005 to 2009 performance of the company.

The data used in this study have been taken from published annual report

only.

PROJECT PERIOD

Project period of the study is 2 months.

An introduction to capital structure

MEANING:

Capital structure of a firm is a reflection of the overall investment and financing strategy of the firm.

Capital structure can be of various kinds as described below: Horizontal capital structure: the firm has zero debt component in the structure mix.

Expansion of the firm takes through equity or retained earnings only. Vertical capital structure: the base of the structure is formed by a small amount of equity

share capital. This base serves as the Foundation on which the super structure of preference shares Capital and debt is built.

Pyramid shaped capital structure: this has a large proportion Consisting of equity capital; and retained earnings.

Inverted pyramid shaped capital structure: this has a small component of equity capital, reasonable level of retained earnings but an ever-increasing component of debt.

PLANNING AND DESIGNING OF CAPITAL STRUCTURE:- Attributes of a well planned capital structure- Designing a capital structure- Design should be functional- Design should be flexible- Design should be confirming statutory guidelines

DETERMINANTS OF CAPITAL STRUCTURE:- Minimization of risk- Maximization of profit- Nature of the project- Control of the firm

COST OF CAPITAL:Factors determining cost of capital:- General economic conditions: fluctuations in interest rates occur as a resultof changes in the demand supply equilibrium of ingestible funds.- Risk profile of the project: a project considered risky would attract capital ata higher cost than a project in the same industry having lesser risk.

COST OF DEBT:- Concerned essentially with the long-term debt of the firm.- The long-term debt has been used to finance long-term projects.- We denote cost of debt by the symbol k (d). It is calculated in different waysdepending upon whether the debt is a rolling or a term debt redeemable at theexpiry of the term.

Cost of preference share capital :

- The preference dividend is akin to the interest payment and redemption ofPreference capital is equivalent to redemption of debt.- Its inclusion in the share capital component is primarily done to bring downThe borrowings of the firm in the balance sheet.- Cost of preference share capital is arrived at by equating the aggregate ofPresent value of the periodic dividend payments and the redemption amount

Features of An Appropriate Capital Structure capital structure is that capital structure at that level of debt – equity proportion where the market value per share is maximum and the cost of capital is minimum. Appropriate capital structure should have the following features Profitability / Return Solvency / Risk Flexibility Conservation / Capacity Control

Determinants of Capital Structure

Seasonal Variations Tax benefit of Debt Flexibility Control Industry Leverage Ratios Agency Costs Industry Life Cycle Degree of Competition Company Characteristics Requirements of Investors Timing of Public Issue Legal Requirements

Patterns / Forms of Capital Structure

Following are the forms of capital structure: Complete equity share capital; Different proportions of equity and preference share capital; Different proportions of equity and debenture (debt) capital and Different proportions of equity, preference and debenture (debt) capital.

Assumption of Capital Structure Theories

There are only two sources of funds i.e.: debt and equity. The total assets of the company are given and do no change. The total financing remains constant. The firm can change the degree of leverage either by selling the shares and retiring debt or by issuing debt and redeeming equity. Operating profits (EBIT) are not expected to grow. All the investors are assumed to have the same expectation about the future profits. Business risk is constant over time and assumed to be independent of its capital structure and financial risk. Corporate tax does not exit. The company has infinite life. Dividend payout ratio = 100%

Net Income (NI) Approach

The essence of net income approach suggested by Durand is that when

there is a change in capital structure, there takes place a change in overall

cost of capital & total value of the firm.

To be more precise, if financial leverage is increased by raising the ratio of

debt to equity, there will be a decrease in weighted average cost of capital

and increase in the market value of its shares.

Conversely, if financial leverage is reduced by lowering the ratio of debt to

equity there will be an increase in weighted average cost of capital and

decrease in the market value of its shares.

ASSUMPTIONS OF NET INCOME APPROACH

There are no taxes on companies.

The cost of debt is less than the cost of equity.

A change in the ratio of debts to equity does not affect the degree of risk

that the investors bear

LIMITATION OF NET INCOME APPROACH

The assumption that rate of interest on debentures will remain constant is also not realistic.

Their basic assumptions are not realistic. With the increase of leverage in its capital structure, its risk increases & equity shareholders expect higher return that is, cost of its equity capital (Ke) increase.

TRADITIONAL APPROACH

In traditional approach, if we change in capital structure of the firm are affect to overall value of the firm and equity capitalization rate.

If we decrease debt(D) in capital structure of the firm at that time market value of the firm is decrease and also decrease in capitalization rate of equity(ke).

If we increase debt (D) in capital structure of the firm at that time market value of the firm decrease and also increase equity capitalization rate(Ke)

ASSUMPTION OF TRADITIONAL APPROCH

An optimum capital structure exists.

Market value of the firm can be reduce through a prudent manipulation of

leverage.

The cost of debt capital increases if debt (or degree of leverage) is

increased beyond a definite limit. This is because the greater the risk of

business, the higher the rate of interest the creditors would ask for the rate

of equity capitalization will also increase with it, thus there remains no

benefit of leverage when debts are increased beyond a certain limit the

cost of capital also goes up.

Thus ,at a definite level of mixture of debts to equity capital , average cost

of capital also increased the capital structure is optimum at this level of the

mix of debt to equity capital

The effect of change in capital structure on the overall cost of capital can be

divided in to three stages as followes :

First stage :

In the first stage the overall cost of capital falls and the value of the firm

increased with the increase in leverage. Thus, the leverage has beneficial

effect as debts are less expensive. The cost of equity remains constant or

increase negligibility. The proprietors of the risk are less in such a firm.

Second stage:

A stage is reached when increase in leverage has no effect on the value,

or the cost of capital of the firm. Neither the cost of capital falls nor the

value of the firm rises, this is because the increase in the cost of equity

due to the added financial risk offthe advantage of low cost of debt. This is

the stage where in the value of the firm is maximum and cost of capital is

minimum.

Third stage :

Beyond a definite limit of leverage, the cost of capital increasewith

leverage and the value od the firm decrease with leverage, this is

because, with the increase In debt, investors begin to realize the degree of

financial risk hence they desire to earn a higher rate of return on equity

shares. The resultant increase in equity capitalization rate will more than

offset the advantage of low cost debt.

0 Degree of leverage

X-Axis= degree of leverage.

Y-axis = cost of capital.

Ke= cost of equity.

Kd =cost of debt.

$

Net Income (NI) Approach

Particulars 2005 2006 2007 2008 2009PBDIT 113.99 133.07 143.79 173.79 101.74LESS: Interest 17.45 24.31 39.02 38.28 88.5PBDT 96.54 108.76 104.77 135.59 43.23LESS: Depreciation 21.48 22.59 24.26 25.47 26.46PBT 75.06 86.17 80.51 110.04 16.17LESS: TAX -0.69 14.99 2.23 2.22 -2.83PAT (NI) 75.77 71.12 72.33 106.49 18.68Ke (cots of equity) 22.18% 27.73 34.14 46.76 46.77S = NI/Ke 341.61 256.47 226.51 227.74 39.94Debt (D) 256.33 327.14 467.69 435.67 600.96V 597.94 583.61 694.2 663.41 640.9Ko= EBIT/V 0.1906 0.228 0.2071 0.262 0.1587

2005 2006 2007 2008 2009

0.00%

10000.00%

20000.00%

30000.00%

40000.00%

50000.00%

60000.00%

70000.00%

0.2218 27.73 34.14 46.7646.77

341.61

256.47226.51 227.74

39.94

256.33327.14

467.69435.67

600.96597.94

583.61

694.2663.41

640.9

Ke (cots of equity)S = NI/KeDebt (D)Ko= EBIT/VV

InterpretationCapital structure or leverage affects the overall value of the firm

Change in the leverage is affected the change in overall cost of capital and Change in value of the firm, which change in price of equity and vice-versa.

2005If we raise funds through debt in Rs 256.33 crore at that time the value of the firm is Rs. in crore 597.94 and equity capitalization rate is 22.18%.2006If we raise funds through debt in Rs 327.14 crore at that time the value of the firm is Rs .in crore 583.61 and equity capitalization rate is 27.73%.2007If we raise funds through debt in Rs 467.69 crore at that time the value of the firm is Rs. in crore 694.2 and equity capitalization rate is 34.14%.2008

If we raise funds through debt in Rs 435.67 crore at that time the value of the firm is Rs. in crore 663.41 and equity capitalization rate is 46.76%.2009If we raise funds through debt in Rs600.96 crore at that time the value of the firm is Rs. in crore 640.9 and equity capitalization rate is 46.77%.

TRADITIONAL APPROACH

In traditional approach, if we change in capital structure of the firm are affect to overall value of the firm and equity capitalization rate.

If we decrease debt (D) in capital structure of the firm at that time market value of the firm is decrease and also decreases in capitalization rate of equity (ke).

If we increase debt (D) in capital structure of the firm at that time market value of the firm decrease and also increase equity capitalization rate(Ke)

Note:I assume debt(D),capitalization rate of equity(ke),and interest rate of debt approximately For prove the traditional approach in 2005 to 2009 respectively, in which middle column of the calculation table of the 2005 to 2009 respectively is in real term happened.

2005Particulars 0% Debt 6.8% Debt 12% DebtPBDIT 113.99 113.99 113.99LESS: Interest 0 17.45 37.2PBDT 113.99 96.54 76.79LESS:Depreciation 21.48 21.48 21.48PBT 92.51 75.06 55.31LESS: TAX -0.69 -0.69 -0.69PAT (NI) 93.2 75.77 56Ke 20% 22.18% 25%S = NI/Ke 466 341.61 224Debt (D) 0 256.33 310V 466 597.94 534Ko= EBIT/V 24.46% 19.06% 21.35%

PB-DIT

LESS: In-ter-est

PBDT LESS:De-pre-cia-tion

PBT LESS: TAX

PAT (NI)

Ke S = NI/Ke

Debt (D)

V Ko= EBIT/

V

0% Debt

113.99

0 113.99

21.48

92.51

-0.69000000000000

1

93.2 0.2 466 0 466 0.2446

6.8% Debt

113.99

17.45

96.54

21.48

75.06

-0.69000000000000

1

75.77

0.2218

341.61

256.33

597.94

0.1906

12% Debt

113.99

37.2 76.79

21.48

55.31

-0.69000000000000

1

56 0.25 224 310 534 0.2135

-50

150

350

550

2005

Interpretation

If I create unleveraged firm through eliminating the debt by the firm at that time overall value of the firm is decrease from 597.94 (In Rs.crore) to 466(In Rs.crore).and equity capitalization rate is also decrease from 22.18% to 20% while increase in debt from256.33(In Rs.crore).to 310(In Rs.crore).at that time decrease in total market value of the firm(v) from 597.94(In Rs.crore) to 534(In Rs.crore) and also increase capitalization rate of equity(ke) from 22.18% to 25%.

2006Particulars 0% Debt 7.4% Debt 12% DebtPBDIT 133.07 133.07 133.07LESS: Interest 0 24.31 44.4PBDT 133.07 108.76 88.67LESS: Depreciation 22.59 22.59 22.59PBT 110.48 86.17 66.08LESS: TAX 14.99 14.99 14.99PAT (NI) 95.49 71.18 51.09Ke 20% 27.73% 33%S = NI/Ke 477.45 256.68 154.82Debt (D) 0 327.14 370V 477.45 583.82 524.82Ko= EBIT/V 27.87% 22.79% 25.36%

PB-DIT

LESS: In-ter-est

PBDT

LESS:De-pre-cia-tion

PBT LESS: TAX

PAT (NI)

Ke S = NI/Ke

Debt (D)

V Ko= EBIT/V

0% Debt

133.07

0 133.07

22.59

110.48

14.99

95.49

0.2 477.45

0 477.45

0.2787

7.4% Debt

133.07

24.31

108.76

22.59

86.17

14.99

71.18

0.2773

256.68

327.14

583.82

0.2279

12% Debt

133.07

44.4 88.67

22.59

66.08

14.99

51.09

0.33000000000000

1

154.820000000001

370 524.82

0.2536

50

250

450

2006

Interpretation

If I create unleveraged firm through eliminating the debt by the firm at that time overall value of the firm is decrease from 583.82 (In Rs.crore) to 477.45 (In Rs.crore).and equity capitalization rate is also decrease from 27.73% to 20% while increase in debt from327.14(In Rs.crore).to 370 (In Rs.crore).at that time decrease in total market value of the firm(v) from 583.8(In Rs.crore) to 477.4 (In Rs.crore) and also increase capitalization rate of equity(ke) from 22.73 % to 33 %.

2007Particulars 0% Debt 8.3% Debt 12 %debtPBDIT 143.79 143.79 143.79LESS: Interest 0 39.02 60PBDT 143.79 104.77 83.79LESS:Depreciation 24.26 24.26 24.26PBT 119.53 80.51 59.53LESS: TAX 2.23 2.23 2.23PAT (NI) 117.3 72.33 57.3Ke 30% 34.14% 38%S = NI/Ke 391 226.51 150.79Debt (D) 0 467.69 500V 391 694.2 650.79Ko= EBIT/V 36.77% 20.71% 22.09%

PB-DIT

LESS: In-

terest

PBDT LESS:De-pre-cia-tion

PBT LESS: TAX

PAT (NI)

Ke S = NI/Ke

Debt (D)

V Ko= EBIT/

V

0% Debt

143.79

0 143.79

24.26

119.53

2.23 117.3

0.3 391 0 391 0.3677

8.3% Debt

143.79

39.02

104.77

24.26

80.51

2.23 72.33

0.3414

226.51

467.69

694.2

0.2071

12 %debt

143.79

60 83.79

24.26

59.53

2.23 57.3 0.38000000000000

1

150.79

500 650.790000000001

0.2209

50

250

450

650

2007

Interpretation

If I create unleveraged firm through eliminating the debt by the firm at that time overall value of the firm is decrease from 694.2 (In Rs.crore) to 391 (In Rs.crore).and equity capitalization rate is also decrease from 34.14% to 30% while increase in debt from 467.6(In Rs.crore).to 500 (In Rs.crore).at that time decrease in total market value of the firm(v) from 694.2(In Rs.crore) to 650.7 (In Rs.crore) and also increase capitalization

rate of equity(ke) from 34.14 % to 38 %.

2008Particulars 0% Debt 8.8% Debt 12% DebtPBDIT 173.79 173.79 173.79LESS: Interest 0 38.28 60PBDT 173.79 135.59 113.79LESS:Depreciation 25.47 25.47 25.47PBT 148.32 110.04 88.32LESS: TAX 2.22 2.22 2.22PAT (NI) 146.1 106.49 86.1Ke 38% 46.76% 55%S = NI/Ke 384.47 227.74 156.55Debt (D) 0 435.67 500V 384.47 663.41 656.55Ko= EBIT/V 45.20% 26.20% 26.47%

PB-DIT

LESS: In-ter-est

PBDT LESS:De-pre-cia-tion

PBT LESS: TAX

PAT (NI)

Ke S = NI/Ke

Debt (D)

V Ko= EBIT/

V

0% Debt

173.79

0 173.79

25.47

148.320000000001

2.22 146.1

0.38000000000000

1

384.47

0 384.47

0.452

8.8% Debt

173.79

38.28

135.59

25.47

110.04

2.22 106.49

0.4676

227.74

435.67

663.41

0.262

12% Debt

173.79

60 113.79

25.47

88.32

2.22 86.1 0.55 156.55

500 656.55

0.2647

50

250

450

650

2008

Interpretation

If I create unleveraged firm through eliminating the debt by the firm at that time overall value of the firm is decrease from 663.4 (In Rs.crore) to 384.4 (In Rs.crore).and equity capitalization rate is also decrease from 46,76% to 38% while increase in debt from 435.6(In Rs.crore).to 500 (In Rs.crore).at that time decrease in total market value of the firm(v) from 663.4(In Rs.crore) to 656.5 (In Rs.crore) and also increase capitalization rate of equity(ke) from 46.76 % to 55 %.

2009Particulars 0% Debt 9.7% Debt 12% DebtPBDIT 101.74 101.74 101.74LESS: Interest 0 88.5 78PBDT 101.74 43.23 23.74LESS:Depreciation 26.46 26.46 26.46PBT 75.28 16.17 -2.72LESS: TAX -2.83 -2.83 -2.83PAT (NI) 78.11 18.68 0.11Ke 38% 46.77% 55%S = NI/Ke 205.55 39.94 0.2Debt (D) 0 600.96 650V 205.55 640.9 650.2Ko= EBIT/V 49.50% 15.87% 15.65%

PBDIT LESS: Interest

PBDT LESS:Deprecia-

tion

PBT LESS: TAX

PAT (NI)

Ke S = NI/Ke

Debt (D)

V Ko= EBIT/V

0% Debt

101.74 0 101.74 26.46 75.28 -2.83 78.11 0.38000000000000

1

205.55 0 205.55 0.495

9.7% Debt

101.74 88.5 43.23 26.46 16.17 -2.83 18.68 0.4677 39.94 600.96 640.9 0.15870000000000

1

12% Debt

101.74 78 23.74 26.46 -2.72 -2.83 0.11 0.55 0.2 650 650.2 0.1565

-5050

150250350450550650

2009

Interpretation

If I create unleveraged firm through eliminating the debt by the firm at that time overall value of the firm is decrease from 640.9 (In Rs.crore) to 205.5 (In Rs.crore).and equity capitalization rate is also decrease from 46,77% to 38% while increase in debt from 600.9(In Rs.crore).to 650 (In Rs.crore).at that time increase in total market value of the firm(v) from 640.9(In Rs.crore) to 650.2 (In Rs.crore) and also increase capitalization rate of equity(ke) from 46.76 % to 55 %.

Websites

WWW.Money control.com

WWW.Godrejind ltd.com

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Books

I.M.Pandey

B.S.Shah

Rs in croreSources Of Funds Mar '05 Mar '06 Mar '07 Mar '08 Mar '09Total Share Capital 29.19 29.19 29.19 31.98 31.98cost of equity capital (Ke) 22.18 27.73 34.14 46.76 46.77Equity Share Capital 29.19 29.19 29.19 31.98 31.98Share Application Money 0 0 0 0 0Preference Share Capital 0 0 0 0 0Reserves 275.86 319.25 363.17 1,009.73 981.05Revaluation Reserves 30.32 22.91 18.26 16.71 14.1Networth 335.37 371.35 410.62 1,058.42 1,027.13Secured Loans 220.76 249.11 330.92 249.48 232.82Unsecured Loans 35.57 78.03 136.77 186.19 368.14cost of debt (Kd) 6.8 7.4 8.3 8.8 9.1Total Debt 256.33 327.14 467.69 435.67 600.96

591.7 698.49 878.31 1,494.09 1,628.09

Total Liabilities

Application Of Funds Mar '05 Mar '06 Mar '07 Mar '08 Mar '09Gross Block 497.29 536.4 542.58 558.22 578.55Less: Accum. Depreciation 261.92 255.68 273.03 291.74 314.68Net Block 235.37 280.72 269.55 266.48 263.87Capital Work in Progress 15.63 5.22 17.49 4.94 24.84Investments 335.77 371.35 485.67 775.48 1,148.08Inventories 107.52 118.92 155.15 197.71 93.56Sundry Debtors 86.04 58.07 92.53 156.4 161Cash and Bank Balance 6.41 4.06 5.29 3.11 2.42Total Current Assets 199.97 181.05 252.97 357.22 256.98Loans and Advances 54.73 84.79 111.23 167.35 167.6Fixed Deposits 7.37 8.54 20.08 291.18 26.1Total CA, Loans & Advances 262.07 274.38 384.28 815.75 450.68Deffered Credit 0 0 0 0 0Current Liabilities 208.93 203.34 228.26 293.72 185.28Provisions 49.48 52.02 66.44 85.53 77.95Total CL & Provisions 258.41 255.36 294.7 379.25 263.23Net Current Assets 3.66 19.02 89.58 436.5 187.45Miscellaneous Expenses 1.26 22.19 16.02 10.68 3.86

Total Assets 591.69 698.5 878.31 1,494.08 1,628.10Contingent Liabilities 143.35 91.25 111.03 124.54 106.28Book Value (Rs) 62.71 71.63 13.44 32.58 31.68

Profit & Loss account of Godrej Industries

Mar '05(Rs.in crore)

Mar '06Rs. in crore)

Mar '07Rs. in crore)

Mar '08Rs. in crore)

Mar '09Rs. in crore)

Income         

Sales Turnover 821.99 800.54 714.26 796.02 873.47

Excise Duty 58.13 57.91 58.87 71.37 61.53

Net Sales 763.86 742.63 655.39 724.65 811.94

Other Income 37.98 82.38 120.85 91.76 131.25

Stock Adjustments 8.82 11.96 28.78 -5.4 -22.54

Total Income 810.66 836.97 805.02 811.01 920.65

Expenditure          

Raw Materials 516.09 508.61 472.03 403.95 555.22

Power & Fuel Cost 35.7 41.65 49.63 58.69 68.2

Employee Cost 68.72 67.35 62.66 79.58 82.93

Balance Sheet of Godrej Industries ltd.

Other Manufacturing Expenses 16.57 9.63 7.43 7.58 9.95

Selling and Admin Expenses 48.81 60.25 54.2 69.88 82.94

Miscellaneous Expenses 16.56 21.79 22.01 25.03 25.93

Preoperative Exp Capitalized -5.78 -5.38 -6.73 -7.49 -6.26

Total Expenses 696.67 703.9 661.23 637.22 818.91

 Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

Operating Profit76.01 50.69 22.94 82.03 -29.51

PBDIT 113.99 133.07 143.79 173.79 101.74

Interest 17.45 24.31 39.02 38.28 58.51

PBDT 96.54 108.76 104.77 135.51 43.23

Depreciation 21.48 22.59 24.26 25.47 26.46

Other Written Off 0 0 0 0 0

Profit Before Tax 75.06 86.17 80.51 110.04 16.77

Extra-ordinary items 0.02 -0.08 -0.22 1 -1.51

PBT (Post Extra-ord Items) 75.08 86.09 80.29 111.04 15.26

Tax -0.69 14.99 2.23 2.22 -2.83

Reported Net Profit 75.77 71.12 77.33 106.49 18.68

Total Value Addition 180.58 195.28 189.2 233.28 263.71

Preference Dividend 0 0 0 0 0

Equity Dividend 19.46 24.32 29.19 39.97 39.97

Corporate Dividend Tax 2.73 3.41 4.96 6.79 6.79

Per share data (annualized)          

Shares in issue (laths) 486.42 486.42 2,918.52 3,197.59 3,197.59

Earnings Per Share (Rs) 15.58 14.62 2.65 3.33 0.58

Equity Dividend (%) 66.66 83.33 100 125 125

Book Value (Rs) 62.71 71.63 13.44 32.58 31.68

Cash Flow of Godrej Industries

Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

 Particular 12 Months

12 Months

12 Months

12 Months

12 Months

Net Profit Before Tax 75.06 55.13 79.56 107.72 16.5Net Cash From Operating Activities

46 15.29 -8.99 50.3 44.5

Net Cash (used in)/from Investing Activities

-40.61 -33.06 -51.52 -262.61 -367.59

Net Cash (used in)/from Financing Activities

2.8 18.99 73.28 481.24 57.32

Net (decrease)/increase In Cash and Cash Equivalents

8.2 1.21 12.77 268.93 -265.78

Opening Cash & Cash Equivalents

5.58 11.38 12.6 25.36 294.29

Closing Cash & Cash Equivalents

13.78 12.6 25.36 294.29 28.51

Key Financial Ratios of Godrej IndustriesMar '05

Mar '06

Mar '07

Mar '08 Mar '09

Investment Valuation Ratios          Face Value 6 6 1 1 1Dividend Per Share 4 5 1 1.25 1.25Operating Profit Per Share (Rs) 15.63 10.42 0.79 2.57 -0.92Net Operating Profit Per Share (Rs) 157.04 152.67 22.46 22.66 25.39Free Reserves Per Share (Rs) 49.98 54.59 10.82 30.26 29.58Bonus in Equity Capital 32.79 32.79 32.79 29.93 29.93Profitability Ratios          Operating Profit Margin(%) 9.95 6.82 3.49 11.31 -3.63Profit Before Interest And Tax Margin(%) 6.9 3.62 -0.18 7.43 -6.29Gross Profit Margin(%) 11.13 3.78 -0.2 7.8 -6.89Cash Profit Margin(%) 12.31 5.73 6.9 10.12 -0.8Adjusted Cash Margin(%) 10.81 5.73 6.9 10.12 -0.8Net Profit Margin(%) 9.59 9.16 10.68 14 2.09

Adjusted Net Profit Margin(%) 8.09 9.16 10.68 14 2.09Return On Capital Employed(%) 14.37 9.05 7.78 6.22 1.36Return On Net Worth(%) 24.84 21.8 20.54 10.32 1.85Adjusted Return on Net Worth(%) 21.04 6.71 6.82 4.99 -3.33Return on Assets Excluding Revaluations 8.91 7.46 6.59 5.68 0.99Return on Assets Including Revaluations 9.24 7.64 6.7 5.74 1Return on Long Term Funds(%) 15.79 10.15 9.88 7.43 1.75Liquidity And Solvency Ratios          Current Ratio 0.81 0.8 0.72 1.18 0.67Quick Ratio 0.55 0.58 0.75 1.6 1.31Debt Equity Ratio 0.84 0.94 1.19 0.42 0.59Long Term Debt Equity Ratio 0.68 0.73 0.73 0.19 0.24Debt Coverage Ratios          Interest Cover 5.67 3 1.95 2.73 0.44Total Debt to Owners Fund 0.84 0.94 1.19 0.42 0.59Financial Charges Coverage Ratio 5.86 3.45 2.34 3.07 0.83Financial Charges Coverage Ratio Post Tax 6.57 4.86 3.6 4.45 1.77Management Efficiency Ratios          Inventory Turnover Ratio 7.35 7.46 5.05 4.39 10.89Debtors Turnover Ratio 9.73 10.31 8.7 5.82 5.12Investments Turnover Ratio 8.04 7.46 5.05 4.39 10.89Fixed Assets Turnover Ratio 3.56 1.4 1.24 1.33 1.44Total Assets Turnover Ratio 1.38 1.11 0.77 0.5 0.51Asset Turnover Ratio 1.56 1.4 1.24 1.33 1.44Average Raw Material Holding 46.76 52.05 56.38 106.56 17.99Average Finished Goods Held 20.24 17.89 18.8 18.9 11.7Number of Days In Working Capital 1.72 9.22 49.2 216.85 83.11Profit & Loss Account Ratios          Material Cost Composition 67.56 68.48 72.02 55.74 68.38Imported Composition of Raw Materials Consumed 63.13 64.89 47.85 72.21 62.91Selling Distribution Cost Composition 4.21 5.6 6.08 6.77 7.02Expenses as Composition of Total Sales 20.12 20.39 34.02 41.71 39.89Cash Flow Indicator Ratios          Dividend Payout Ratio Net Profit 29.27 38.99 44.15 43.91 250.36Dividend Payout Ratio Cash Profit 22.81 29.59 33.6 35.43 103.59

Earning Retention Ratio 65.31 -26.63-

32.91 9.25 238.89Cash Earning Retention Ratio 74.03 37.68 31.65 39.27 -2.11

AdjustedCash Flow Times 3 7.35 9.36 5.66 13.12

 Mar '05

Mar '06

Mar '07

Mar '08 Mar '09

Earnings Per Share 15.58 14.62 2.65 3.33 0.58Book Value 62.71 71.63 13.44 32.58 31.68

CAPITAL STRUCTURE OF GODREJ INDUSTRY LTD.

Year 2005 2006 2007 2008DPS(Rs) 1.25 1.25 1.25 1.25Book Value(Rs.) 62.71 71.63 13.44 32.58Payout(%) 29.27 38.99 44.15 43.91Retention Ratio 70.73 61.01 55.85 56.09PBT 75.01 86.09 80.29 111.04Tax -0.69 14.99 2.23 2.22PAT 75.77 71.12 77.33 106.49Preference Dividend 0 0 0 0Equity 29.19 28.19 31.98 31.98

Reserves 275.86 319.25 363.17 1,009.73P & L Account(Dr Balance) 0 0 0 0Equity Shareholder Fund 61671 73667 91811 153028ROE 0.12 0.097 0.084 0.07Growth Rate(%) 8.5 5.9 4.7 3.9Cost of Equity(%) 22.18 27.73 34.14 46.76Interest 17.45 24.31 39.02 38.28Total Debt 256.33 327.14 467.69 435.67Cost of Debt(%) 6.8 7.4 8.3 8.8PBIT 113.99 133.07 143.79 173.79Capital Employed 561 675 860 1477ROI(%) 20 17 20 20