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A PROJECT ON DETERMINANTS OF CAPITAL STRUCTURE A STUDY OF LISTED COMPANIES OF AUTOMOBILE INDUSTRY IN INDIA

PREPARED BY JAYMIT CHAUHAN (10F54)

TOWARDS THE PARTIAL FULLFIILMENT OF REQUIREMENT OF MBA PROGRAMME

SUBMITTED TO DR. P.K PRIYAN G H PATEL POST GRADUATE INSTITUTE OF BUSINESS MANAGEMENT SARDAR PATEL UNIVERSITY, V V NAGAR

PREFACE
As a part of the course curriculum, the third semester MBA students are required to prepare a project report on the topic related to finance. The objective behind preparing this project report is to relate the management subjects taught in the classroom to their practical application and to get insight into practical situation. Finance for a business can't be undervalued and can be said that it's the lifeline of a business and is required for its well being. It can be said to be a lubricant which keeps the business running I have selected one of important topic of finance i.e. Determinants of Capital Structure. For the purpose of analysis, I have carried out the analysis on Automobile Industry of India. The companies which are selected for the purpose of analysis have been listed on Bombay Stock Exchange (BSE). This project is prepared for academic purpose and inspite of my best efforts there may be some errors, which may please be excused.

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ACKNOWLEDGEMENT
An undertaking of this type is a result of contribution received from a number of people. Never can this report be claimed as my individual effort. No amount of words written will be sufficient and adequate to acknowledge all the people who have provided me with the inspiration, guidance and help during the preparation of the project. Therefore I extend my deep sense of gratitude towards them. I express my sincere gratitude to Dr. P K Priyan, Faculty of Finance, GHPIBM for his help and support during the project. I would also like to thank my friends for their valuable inputs and constantly encouraging me in every step towards the completion of the project successfully. Last but not the least; I would like to thank GHPIBM for giving me the platform to gain practical exposure apart from the regular curriculum and to experience life from its near distance.

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ABSTRACT
Determining the optimal capital structure is one of the most fundamental policy decisions faced by financial managers. Since optimal leverage ratio influences firms market value, different firms determine capital structures at different levels to maximize their market value. This issue naturally contributed to the emergence of several competing capital structure theories (MM theory, tradeoff theory, agency theory, pecking order theory) with an aim to help firms decide their optimal capital structure. However, conclusions drawn by these theories in explaining capital structure choice of firms are still controversial. Moreover, the factors those determine the optimal capital structure of firms have been debated for a long time. Numerous researches have been carried out over the years on these issues. But the empirical researches have not been very successful in providing satisfactory answers. Not only that, most of these empirical studies have been conducted on the developed countries perspective. This study attempts to focus on the factors determining the capital structure choice and the conformity of these factors with the predictions drawn by the competing capital structure theories in the context of Indian Automobile Companies. Multiple regression model has been used for the pooled data of listed automobiles companies in India considering Agency cost variables TW, JM, and LP, Effective tax rate, Non-debt tax shield, Firms size, Bankruptcy cost, Profitability, Collateral value to the assets as a independent variables and leverage ratio as dependent variable. The results proved that the regression is a good fit and the determinants explain about 63.3% variation of the capital structure of Indian Automobile companies. Three out of seven independent variables prove to be statistically significant determinants of capital structure. The result shows that Effective tax rate, bankruptcy cost, collateral value to the assets and firms size have no impact in determining the capital structure of the company. Profitability of the firm is positively related with the capital structure whereas agency cost variables TW, JM and LP, and Non-debt tax shield equity show negative relation. This empirical analysis finds that trade-off theory and pecking order theory help describe the capital structure pattern of the automobile companies in India.

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