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A STUIDY ON CAPITAL STRUCTURE

ABSTRACT
A project work is a mandatory requirement for the BusinessManagement
Programme. This type of study aims at exposing the young prospective
executive to the actual business world.
This project gives me knowledge about the capital structure and theory analysis.
Financing decisions involve raising funds for the firm. It is concerned with
formulation and designing of capital structure or leverage. The most crucial
decision of any company is involved in the formulation of its appropriate capital
structure.
The best design or structure of the capital of a company helps the management
to achieveits ultimate objectives of minimising overall cost of capital,
maximising profitability and also maximising the value of the firm.
Organization. It is very effective way to judge a companys cash flow prospects,
as cash is like blood life for any company. The report initially begins with the
company profile, followed by
thedetailed analysis of company, like businesses of the company, products
offered by the company, financials of the company, etc.
The report involves a lot of research to understand what exactlycapital structure
of the company should be. that, why companies require appropriate capital
structure.
The purpose is to develop an action plan that creates such a capital structure that
will upgrades and standardize the quality of business analysis
REVIEW OF LITERATURE

The essence of financial management is the creation of shareholder value.


According to Ehrhard and Bringham (2003), the value of business based on the
going concern expectation is the present value of all the expected future cash
flows to be generated by the assets, discounted at the companys weighted
average cost of capital(WACC). From this it can be seen that the WACC has a
direct impact on the value of a business (Johannes and Dhanraj, 2007).

the choice between debt and equity aimsequity to find the right capital structure
that will maximized stockholder wealth. WACCis used to define a firms value
by discounting future cash flows. Minimizing WACC of any firm will
maximize value of the firm (Messbacher, 2004).

policy and equity ownership structure matter and the way in which they matter
differs between firms with many firms with few positive net present value
project. Rosss (1977) model suggests that the values of firms will rise with
leverage, since increasing the markets perception of value. In their second
seminal paper on corporate capital structure, Modigliani and Mill (1963) show
that firm value is an increasing function of leverage due to the tax deductibility
of interest payments at the corporate level. In the 30 years since, enormous

Revista Tinerilor Economiti (The Youn Economists Journal) academic effort


has gone into identifying the relevant costs associated with debt financing that
firms presumably trade off against this substantial corporate tax benefit.
Although direct bankruptcy costs are probably small, other potentially important
factors include personal tax, agency cost, asymmetric and corporate control
considerations. Surveys of this literature include Bradley, Jarrell and Kim
(1984), Harris and Raviv(1991), Masulis (1988) and Miller (1977).Early
empirical evidence on the trade-off theory [e.g., Bradley, Jarrell and
Kim,(1984)] yield mixed results. However, recent studies examining capital
structure response to change in corporate tax exposure. Mayer (1986) argues
that the trade-off theory also fails to predict the wide degree of cross-sectional
and time variation of observed debt ratios. Return on stock increases for
any announcement of issue exchange offers. Overall, 55 percent of the variance
in stock announcement period returns is explained (Masulis, 1998). Under some
conditions capital structure does not affect the value of the firm. Splitting a fund
into some mix of shares relating to debt, dividend and capital directly add value
to the company (Gemmille, 2001). Uddin (1993)has drawn a conclusion in such
a way that there is no relationship between capital structure and return on
investment. Price-earnings ratio and earnings per share i.e., capital structure is
independent of these issues. He

, of course, mentioned that a real world it is absolutely surprising .Sina and


Matubber (1998) observed the adverse position in the industrys

managerial performance, profit earning capacity, liquidity etc that are the result
of operational inefficiency , effective credit policy, improper planning and
controlling of working capital, increased cost of raw materials, labour and
overhead. Choudhury(1993) mentioned that the decreased use of debt tends to
decrease profitability of a company. Because due to lack of adequate finances it
has to give up some of the profitable opportunities and vice-versa. Banu (1990)
stated that the capital structure of a firm has a direct impact on its profitability.
She suggested that the concerned financial executives should put emphasis on
various aspects of capital structure. Otherwise the capital structure of
the enterprise will be unsound producing adverse impact on its profitability.
Rahman (1995) identified the various aspects of problem of the sugar millsin
Bangladesh and particularly of Kushtia Sugar Mills Ltd. Based on the above
literature, we can say that several studies have been done on this area, but a
comprehensive study has not yet been conducted, especially in manufacturing
sector. Hence, this paper is an attempt to evaluate the capital structure and its
impact on profitability of the listed manufacturing companies in Sri Lanka.

CONCEPTUAL FRAME WORK


After the careful study of literature review, the following conceptual model is
formulated to illustrate the relationship between capital structure and
profitability. The conceptualization model from figure 1 shows the relationship
between capital structure and profitability of listed manufacturing companies

BALANCE SHEET

Period Ending: 2016 2015 2014 2013 2012

Current Assets
Cash and Cash 2,641,000 4,010,000 6,364,000 5,173,000 4,585,000
Equivalent
s
Short-Term 0 166,000 1,105,000 300,000 249,200
Investmen
ts
Net Receivables 1,099,000 2,352,000 3,756,000 3,221,000 4,453,000

Inventory 1,173,000 1,359,000 1,205,000 670,000 530,500

Other Current 1,920,000 1,890,000 628,000 516,000 485,000


Assets

Total Current 6,833,000 9,777,000 13,058,000 9,880,000 8,395,000


Assets
Long-Term
Assets
Long-Term 0 0 143,000 3,389,000 4,382,000
Investmen
ts
Fixed Assets 20,297,000 19,721,00 16,164,000 15,214,000 13,395,000
0

Goodwill 6,575,000 6,575,000 6,434,000 359,000 274,000

Intangible 44,542,000 45,880,00 49,838,000 22,345,000 19,385,000


Assets 0

Other Assets 728,000 888,000 458,000 467,000 375,000

Deferred Asset 0 0 0 0 0
Charges
Total Assets 78,975,000 82,841,00 86,095,000 51,654,000 45,295,000
0
Current
Liabilities
Accounts 7,273,000 9,640,000 9,675,000 6,235,000 5,285,000
Payable
Short-Term 4,690,000 1,300,000 994,000 1,656,000 2,493,000
Debt /
Current
Portion of
Long-
Term Debt
Other Current 0 0 0 0 0
Liabilities
Total Current 11,963,000 10,940,00 10,669,000 7,891,000 5,491,000
Liabilities 0
Long-Term 29,268,000 32,342,00 32,017,000 18,535,000 13,528,000
Debt 0
Other Liabilities 4,002,000 3,951,000 3,598,000 3,880,000 3,290,000
Deferred 13,959,000 13,898,00 14,227,000 6,802,000 5,348,000
Liability 0
Charges
Misc. Stocks 0 0 0 0 0
Minority 0 0 0 0 0
Interest
Total 59,192,000 61,131,00 60,511,000 37,108,000 32,538,000
Liabilities 0
Stock Holders
Equity
Common 40,000 40,000 39,000 6,016,000 7,284,00
Stocks
Capital Surplus 27,563,000 27,468,00 27,330,000 46,841,000 50,735,000
0
Retained 7,378,000 5,383,000 1,887,000) 37,582,000 40,375,000
Earnings
Treasury Stock 3,000 7,000 0 227,000 327,000
Other Equity 439,000 08,000 102,000 502,000 604,000
Total Equity 19,783,000 21,710,00 25,584,000 14,546,000 12,593,000
0
Total Liabilities 78,975,000 82,841,00 86,095,000 51,654,000 48,492,000
& Equity 0

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