ABSTRACT

Financial is an important integral part of modern economic life. Financial decision

plays a vital role. It involves raising funds for the company. It is concerned with the designing
of capital structure. Capital structure should be examined from the view points of its impact
on the value of the firm. The firm should select the financing – mix in such a way that it
maximizes the shareholder’s wealth. The combination of debt and equity determines it.

This project deals with an analysis of capital structure for AKET CIDAMBARAM
COTTON MILL PRIVATE LIMTES. The main objective of the project is to analyze the
capital structure of the company and its secondary objectives are to determine the optimal
debt-equity mix for the company, to determine the firms combined effect of the leverages, to
identify the value of the firm {overall cost of capital (KO)} by applying various capital
structure theories, to apply the related ratios in order to analyze the capital structure of the
company and to suggest suitable suggestions for framing effective capital structure to meet
the requirement of the company.

For analyzing the capital structure of secondary data such as balance sheet the
financial statement of the company are collected and the tools such as leverage analysis, ratio
analysis, cost of capital and the theories of the capital structure have been applied.

Finally, from the analysis and interpretation of the study, it has been concluded that
Leverage analysis of the company states that both financial and operating risk associated with
the company is less and they are very efficient in using the operating cost. Cost of capital
analysis of the company states that the company had taken steps to minimize their cost of
capital and they were able to minimize it. It shows how effectively they had used the capital.
The financial performance of the company is also good and they are maintaining it. Capital
structure decisions are dynamic for every year. Overall, the company’s capital structure is
optimum. The study suggests that the company can maintain the same level of capital
structure decision to maximize its earning g for the forth coming years.

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 CHAPTER-I

1.1INTRODUCTION

In our present day economy finance is defined as the provision of money at the time
when it is required. Every enterprise weather. Medium or small needs finance to carry on its
target. In fact finance is so indispensable today. It can be rightly said that it is the lifeblood
of an enterprise. Without adequate finance no enterprise can possible accomplish its
objectives.

In the early years of its evaluation it was treated synonymously with the rising of
funds. In the current literature pertaining to financial management a broader scope so as to
include in addition to procurement of funds efficient use of resources is universally
recognized.

Finance was studied as a part of Economic before the turn of the present century. It
only in was only in early part of the present century when massive consideration movement
took place that finance came to be studied as a corporate discipline. Formation of large size
undertaking by consolidation the smaller one brought before the management is the problem
of financing these giant enterprises. Emphasis was also placed on the study of source and
forms of financing the new industrial giants.

Capital structure is that part of financial structure. Long term sources of Capital
structure is defined to include only long term debt and total stockholders’ investment it is mix
of long term sources of funds. Such as equity shares, reserves and surpluses, debentures.
Long term debt from outside sources and preferences share capital.

13
1.2NEED FOR THE STUDY
 The study is needed to analysis the capital structure of the company in a better
manner.
 Through this study the company can use various capital structure theories to
identify the value of the firm.
 It can also be needed for the management to apply the related rations to analyze its
structure in a better manner.
 It can also be helpful for the management to apply various financial tools such as
financial leverage and cost of capital.
 The study is needed for identifying optimal dept-equity mix.

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1.3OBJECTIVES OF THE STUDY

PRIMARY OBJECTIVES:

The primary objective of the study is to analyze the capital structure of AKCT C
PVT LIMITED

SECOND OBJECTIVES:

 To determine the optimal dept-equity mix for the company.

 To determine the firm’s combined effect the leverages.
 To identify the value of the firm {overall cost of capital (KO)} by applying
various capital structure theories.
 To apply the related ratios in order to analyze the capital structure of the company.
 To suggest suitable suggestions for framing effective capital structure to meet the
requirement of the company.

15
1.4 SCOPE OF THE STUDY

1. The study throws light on the need for analyzing the capital structure of the
company.
2. It also reveals the efficiency and effectiveness of the assessments of the
factors.
3. The study can be help for the management for the further studies in the related
areas.
4. The study can be served as a base for applying the other theories of capital
structure and other financial tools.
5. It can also be useful for other organization to carry the analysis in the similar
areas.

16
 6. This study can serve as a base for expanding the study by other researcher.

1.4 LIMITATION OF THE STUDY

1. The study mainly depends on the secondary data taken from annual report and
internal records of the company.
2. The figures taken from the financial statement for analysis were historical in
nature.
3. The study is confined to a short period of six months. This would not picture
the exact position of the company.

17
 4. The result made using the statistical techniques are expected outcomes and not
the fact.
5. Every company will be having their own factors and situation. The findings of
the study could be t aken only as guidelines and cannot be applied directly to
other companies of the same industry.

CHAPTER - II

2.2 COMPANY PROFILE

HISTORY OF COTTON

The English cotton mill, witch as an entity in 1771, went through many changes
before the last one was constructed in 1929, it had a worldwide influence on the design of
mills, and changed over time.

18
 The architectural development of the cotton mill was linked to financial instrument
used for its construction. In Lancashire, England, the industry was more evenly spread but
more concentrated to the north and west of the county.

In the USA in Pennsylvania, the process was mostly vertically integrated and led to
combined mills where carding, spinning and weaving took place in the same mill, mills ware
also for finishing such as bleaching and printing.

During the second half of the 17th century, cotton goods were imported from india.
Because of the competition with wool and the linen industries, in 1700, the government
placed a ban on imported cotton goods.

Cotton add become popular, however and a home based cotton industry spring up
using the raw material import form the colonies, since much of the imported cotton came
from new England, ports on the west coast of Britain, such as Liverpool, Bristol and
Glasgow, became important in determining the sits of the cotton industry.

Course, the wool and lines manufactures made sure that many restrictions went imposed on
the import of cotton, but as cotton had become fashionable, there was little they could do to
stop the trend.

COMPANY CAPITAL:

The company AKCT Cidambaram cotton mill private limited at Thiruvannamalai has
ISO 9001-2008 Certificated the firms established on December 2006. When the company be
gain investment is 5 lacks additional capital is 30 lacks.

19
 Figure No: 1 Figure No: 2

TECHNICAL AND NON-TECHNICAL EMPLOYEE:

The company has using both employees, technical and non-technical persons, for
effective supervision

Analysis our product contractor labor facilities

Technical Non-technical Labor facilities

Supervisor Line supervisor Regular increments

Electricals Office clerk Bonus

Mechanical Loading-unloading employee performance increments

Diploma Free transport

Mechanism Free hospital facilities

Annul increment

Extra incentive

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INDUSTILAL CHART:

Safety equipments

Their company provides nose masks for every employee

Work environment

Two unit’s plant 10000 cotton produces per day

Promotional tools

 Advertisement
 Overtime double payment

Training

Every employee will get three month basic on the job training.

Vision

AKCT Cidambaram cotton mill private limited future vision is direct export and direct
distribution of the foreign market.

A PROFILE OF INDIA COTTON:

Historical reference indicate that the earliest civilization to spin and weave cotton was
the of India. For over three thousand years (1500 BC to 1700 AD) India was recognized as
the cradle of cotton industry. India has been the producer of cotton and of the finest and
industry beautiful cotton fabrics since time immemorial.

India thus enjoys the distinction of being the earliest country in the world to
domesticate cotton and utilized its fiber for manufacture of fabrics.

This affinity has endured though the centuries and today India ranks first in cotton
cultivated and third in production among all cotton producing countries in the world. i.e next
to CHINA and the USA.

Cotton plays a vital role in the India economy. It sustains the Indian cotton textile
industry. This constitutes the single largest segment of organized industry in the country.

21
 It provides gainful employment to millions people besides contributing substantially
to the country’s foreign trade. The economic significance of cotton industry in India is so
great that Mahatma Gandhi based is freedom movement on cotton economics. It also late
pundit Jawaharlal Nehru, the first prime minister of independent India to observe thus.

The history of cotton and of textile is not history of the growth of modern industry in
India, but in a since it might be considered the history of India during the past one hundred
years.

When I think of textile is not history of the growth of modern industry in India, but in
a since it might be considered the history of the India during the past one hundred years.

India has brought about a qualitative and qualitative transformation in the production
of cotton since her independence.

Production and productivity of cotton in India have improved of 170 kgs each in
1947-48 to 17.8 million bales in 199-97, an increase of 538 percent though there after there
was a consecutive in cotton production next two years. i.e. 1997-98 and 1998-99 to the 15.8
million bales and 16.3 million bales respectively. Cotton production during 1999-2000 is
have also been found. Some scientists say that cotton has been effect ivied for than 7000
years.

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2.3 INDUSTRY PROFILE:

HISTORY OF COTTON INDUSTRY IN INDIA:

In Indian, the cotton industry was started from very ancient time and the industry was
one of the traditional industries of India. In the 19 th century, The modern cotton industry was
the first cotton mill in India and it was established at Calcutta nearby fort glister in 1818. But
the cotton textile industry originally started during 1854. It was established by a parse cotton
merchant and the mill engaged for trade. The majority of the early mills did hand work and
they engaged in yarn and cloth trade in home and marketed the products to China and Africa.

In Ahmedabad, the first cotton mill was established 1861. So the industry was spread
to trading class of Gujarati. In the second half of the 19 th century the cotton industry was
rapidly progressed and 178 cotton mills were started attend of the 19 th century. During 1900,
the cotton industry was in bad state due to the great famine and a number of mills of Bombay
and Ahmedabad were to be closed down for long periods.

The India cotton industry had a great stimulus in the period of second world war and
Swadeshi movement. The first world war gave an impetus to the industry, their prod but the
post war depression hampered the progress of the industry for certain period. The position of
the industry was examined by the tariff board in 1926. Which recommended that the mills
should diversify their production instead of concentrating on the production of course, grey
cloth? In the period of 1922 to 1937, the Bombay mills changed hands. 178 cotton mills were
established in 1901 with 4.05 lakh looms. In 1921, 249 mills were established with 13.35 lake
looms.

COTTON INDUSTRY IN INDIA:

The Indian cotton industry is one of the oldest and emerging industries in the world
and it occupies a unique in the country. The cotton industry is one of the world’s largest
producers of garments in the world after China. The major reason effort these, kasturbhai
lalabhi. In (1954), “the future of the cotton industry”, Kasturbhai Lalbhai. Cotton industry
availability of raw materials such as cotton, silk, wool, jute and it mad the country with
skilled workforce of a sourcing hub. It also plays a most important role in Indian economy
and the industry mainly depends up on the cotton manufacturing and export. It contributes
around 14% to industry production , 4% to the gross domestic product (GDP) and 17% to the

23
country’s export earnings, 18% of employment in the industrial sector and 27% of its total
foreign exchange through cotton exports. The cotton industry is the second largest
employment provider in India. It provides employment opportunities for millions of skilled
and unskilled people. So far 54.85 million people work on its allied industry. In the period of
April to December 2013, the production had increased by about 4%, cotton yarn production
increased by 10%, blended and 100% cotton and non-cotton yarn production increased 85
and 6% in cloth production by mill sector.

India’s share in global cotton has increased by 17.5% in 2013. The government of
india plans to spend US$ 9.1 billion for cotton industry in the 12 th five year plan. The industry
has the potential to increase its share in the world trade from 4.5% to 8% and it will be reach
$ 80 billion by 2020.

COTTON MANUFACTRING PROCESS:

In the industry, the process of cotton manufacturing involves a number of sequential

processes until completion. The Indian cotton industry is one of the ministry of environment
and forests, government of India report-2010, leading industries in the world. This industry
has a unique place in the economic growth of the nation. Cotton sector comprises of few
major processes.

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 Figure No: 3

Figure No: 4

Figure No: 5 Figure No: 6

SPINNING SECTOR:

25
 The spinning process is the final stage of staple yarn manufacturing. It is the final
opportunity for a fiber to interact with the machine. In the spinning process, the goodness of
fiber preparation through the different processes can easily be evaluated. A failure in spinning
is often a result of a default in the preparatory process.

There are different spinning technologies available in today’s technology. Each

technique is unique in its principle and in its requirements of fibre quality. New spinning
techniques involve high drafting where the input fiber strand (the drawn sliver) is separated,
partially or fully, into approximately single fibers, flown

Spinning

Weaving / knitting

Dyeing + printing + finishing

Garments manufacturing

EXPORT SCENARIO OF INDIAN COTTON INDUSTRY:

India’s cotton industry is single of the pillars of the national economic organization. It
is also one of the largest contributing sectors of India’s exports world wine. The report of the
working group established by the planning commission on boosting India’s manufacturing
export during 12th five plans (2012-2017), envisages India’s exports of cotton at USD 64.41
billion by the end of march. 2017.

The cotton industry accounts for 14% of industrial production, which is 4% of GDP
and accounts for almost 11% share of the country’s total export basket. India’s cotton export
registered a robust growth of US$ 22.15 billion in 2007-2008 denoting an increase of 15.7%
but declined by over 5% in 2008 -2009.

Export of cotton grew from USD 21.22 billion in 2008-2009 to USD 22.41 billion in
2009-2010 and has touched USD 27.47 billion in 2010-2011. In the fiscal year 2011-2012
(P), export of cotton and clothing, has risen by 20.05% over the fiscal year 2010-2011 to
touch USD 33.31 billion. Country – wise analysis indicates India’s cotton products, including
handlooms and handicrafts, are exported to more than a hundred countries.

26
 Figure No: 7 Figure No: 8

Figure No: 9

CHEPTER-III

REVIEW OF LITERATURE

3.1 INTRODUCTION

Finance is an important integral part of modern economic life. Financing decision

plays a vital role. It involves raising funds for the company. It is concerned with the

27
designing of capital structure. The financial decision should be shaped in such a way it
should support the company’s capital structure. Capital structure should be examined from
the viewpoint of its impact on the value of the firm. The firm should select the financing –
mix in such a way that it maximizes the shareholder’s wealth.

The combination of debt and equity determine it. If the company opts for more debt,
they may trigger off a high Interest burden, devour profits and depress earnings per share and
above all, endanger the very survival of the firm. On the other hand, a conservative policy
may deprive the company of its advantage in terms of magnifying the rage of return to its
equity owners as higher equity component result in low earnings per share. The finance
manger should consider various factors while deciding the choice of debt and equity.

Apart from risk return financial consideration, the financial manager also considers
non-financial factors. When equity shareholders are more in numbers; they have access to
control the company. But when depts owing more than equity, finance manager’s
consideration is more on debt then equity.

Financial crisis may arise in the firm due two main reasons. They are

 Unexpected decline in operating profit.

 Requirement for increased funds. Non-payment of interest or principal amount
to lenders at specified time will have to be recovered through liquidations in the
company. At the same time the non –use of debt prevents the firm from
availing an opportunity to have the advantages on rate of return to its
shareholders.

Meaning

Capital structure refers to the way it corporation finances itself through some
combination of equity, debt, or hybrid securities. A firm’s capital structure is then the
composition or structure of its liabilities. For example, a firm that sells $20bn dollars in
equity and $30bn in debts in said to be 20% equity financed and 80% debt financed. The
firm’s ratio of debt to total financing. 80% in this example is referred to as the firm’s
leverage.

Definition

28
 “The permanent long-term financing of a company, including long-term debt,
common stock and preferred stock, and retained earnings. It differs from financial structures,
which includes short-term debt and accounts payable”

The Modigliani-miller theorem, proposed by Franco Modigliani and Merton Miller,

forms the basis for modern thinking on capital structure, through it is generally viewed as a
purely theoretical result since it assumes away many important factors in the capital structure
decision. The theorem states that, in a perfect market, the value of firm is unaffected by how
that firm is financed. This result provides the base with which to examine real world reasons
why capital structure is relevant, that is, a company’s value is affected by the capital structure
it employs. These other reasons include bankruptcy costs, agency costs and asymmetric
information. This analysis can then be extended to look at whether there is in fact an
‘optimal’ capital structure; the one which maximizes the value of the firm3.2 Features of
capital structure

1. Return

The capital structure of the company should be advantageous subjects to other

considerations; it should generate maximum returns to the shareholders without adding
additional cost to them.

2. Risk

The use of excessive debt threatens the solvency of the company. Debt can be
used the point where there is no significance risk, it should be avoided.

3. Flexibility

The capital structure shared is flexible. It should be possible for the company
to dept its capital structure with a minimum cost and delay if warranted by a changed
situation. It should also possible for the company to provide funds whenever needed to
finance its profitable activities.

4. Capacity

The capital structure should be determined within the debt capacity of the
company, and the capacity should not be exceeded. The capacity depends on the ability to

29
generate future cash flows. They should have enough cash to pay the creditors fixed charges
and principal sum.

5. Control

The capital structure should involve minimum risk of loss control of the
company. The owners of closely held companies are particularly concerned about dilution of
control.

For example, a company may give more importance to flexibility then control while
another company may be more concerned about solvency than any other requirement;
furthermore the relative importance of the requirement may change with shifting conditions.

3.2 DESINGING A CAPITAL STRUCTURE

 The capital structure is said to be optimum when the marginal real cost (explicit
as well as implicit) of each available source of financing is identical.
 With an optimum debt and equity mix, the cost of capital is minimum and the
market price per share (or total value of the firm) is maximum.
 The use of debt and capital structure or financial leverage has both benefits as
well as costs.
 While the attraction of debt is the tax benefit, its cost it financial distress and
reduced commercial profitability.
 The term financial distress includes a broad spectrum of problem ranging from
relatively minx liquidity shortages to bankruptcy.

3.3 CONCEPT INVOLVED IN CAPITAL STRUCTURE

COST OF CAPITAL MEANING

The cost of capital of firm is the minimum rate of return expected by its investors. It
is the weighted average cost of various sources of finance used by a firm. The concept of
cost of capital is very important in the financial management. A decision to invest in a
particular project depends upon the cost of capital of the firm. Generally higher the risk
involved. Higher is the cost of capital.

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3.4 DEFINITION

“A cut –off rate for the allocation of capital to investments of projects. It is the rate of
return on a project that will leave unchanged the market the price of the stock”.

- JAMES C.VANHORNE
“Cost of capital is the minimum required rate of earning on the cut off rate of capital
expenditures”.
-SOLOMON EZRA
Computation of overall cost of a firm involves:

a. Computation of cost of specific source of finance, and

b. Computation of weighted average cost of capital.

3.5 LEVERAGE

Meaning

Leverage refers to “an increased means of accomplishing some purpose”. In financial

management the term leverage is used to increase the return to its owners i.e. Shareholders.

Definition

The employment of an asset of source of funds for which the firm has to pay a fixed
cost or fixed return.

Type of leverage

Basically there are three types of leverages

 Operating Leverage
 Financial Leverage
 Composite Leverage

The leverage associated with the employment of fixed cost assets is referred to as
operating leverage, while the leverage resulting from the use of fixed cost/return source of
funds is known as financial leverages.

31
 In addition to this two kind of leverages, one could always computer ‘composite
leverage’ to determine the combined effect of the leverages.

3.6 CAPITAL STRUCTURE IN A PERFECT MARKET

Main article: Modigliani-Miller theorem

The Modigliani-Miller theorem (of Franco Modigliani, Merton Miller) forms the basis
for modern thinking on capital structure, the basic theorem states that , in the absence of
taxes, bankruptcy costs, and asymmetric information, and in an efficient market, the value of
a firm is unaffected by how that firm is financed.[1] It does not matter if the firm’s capital is
raised by issuing stock or selling debt. It does not matter what the firm’s dividend policy is.
Therefore, the Modigliani-Miller theorem is also called the capital structure irrelevance
principle.

Merton Miller’s analogy to illustrate the principle uses a pizza: cutting a pizza into more
or less pieces does not change the underlying amount of pizza.

Modigliani won the 1985 Nobel Prize in Economics for this and other contributions.
Miller won the 1990 Nobel Prize in Economics, along with Harry Markowitz and William
Sharpe, for their “work in the theory of financial economics,” with Miller specifically cited
for “fundamental contributions to the theory of corporate finance

Propositions

The theorem was originally proved under the assumption of no taxes. It is made up of
two propositions which can also be extended to a situation with taxes.

Consider two firms which can are identical except for their financial structures. The first
(Firm U) is unlevered: that is, it is financed by equity only. The other (Firm L) is levered: it is
financed partly by equity and partly by debt. The Modigliani-Miller theorem states that the
value of the two firms is the same.

Without taxes

32
Proposition L:

Vu- VI where VU is the value of an unlevered firm-price of buying a firm composed

only of equity, and VL is the value of a levered firm-price of buying a firm that composed of
some mix of debt and equity.

To see why this should be true, suppose an investor is considering buying one of the
two firms U or L instead of purchasing the shares of the levered firm L, he could purchase
the shares of firm U and borrow the same amount of money B that firm L does. Te eventual
returns to either of these investments would be the same. Therefore the price of L must be
the same as the price of U minus the money borrowed B,which is the value of L’s debt.

This discussion also clarifiers the role of some of the theorem’s assumptions. We have
implicitly assumed that the investor’s cost of borrowing money is the same as that of the
firm, which need not be true in the presence of asymmetric information or in the absence of
efficient.

Proposition II with risky debt. As leverage (D/E) increases, the WACC stays constant.

1. Y is the required rate of return on equity, or cost of equity.

2. C0 is the cost of capital for an all equity firm.
3. B is the required rate of return on borrowings, or cost of debt.
4. D/E is the debt-to-equity ratio.

The proposition states that the cost of equity is a linear function of the firm’s debt to
equity ratio. A higher debt-to-equity ratio leads to a higher required return on equity, because
of the higher risk involved for equity-holders in a company with debt. The formula is derived
from the theory of weighted average cost of capital.

These propositions are true assuming the following assumptions:

1. No taxes exist
2. No transaction costs exist, and
3. Individual and corporations borrow at the same rates.
4. These results might seem irrelevant (after all, none of the conditions are met in
the real world), but the theorem is still taught and studied because if tells us
something very important. That is, if capital structure matters, it is precisely
because one or more of the assumptions is violated. It tells us where to look for
determinates of optimal capital structure and how those factors might affect
optimal capital structure.

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Proposition I:

Where VL=VU+TCD

 VL is the value of a levered firm.

 VU is the value of an unlevered firm.
 TCD is the tax rate (TC)x the value of debt(D)

This means that there are advantages for firms to be levered, since corporation can
deduct interest payments. Therefore leverage lowers tax payments. Divided payments are
non-deductible.

3.7 CAPITAL STRUCTURE IN A REAL WORLD

If capital structure is irrelevant in a perfect market, then imperfections which exist in
the real world must be the cause of its relevance. The theories below try to address some of
these imperfections, by relaxing assumptions made in the M&M model.

Trade- off theory

Trade-off theory allows bankruptcy costs to exist. It states that there is an advantage
to financial with debt. The tax of debt and there is a firm cost of financing with debt decline
as debt increases, with the marginal cost increases, so that a firm that is optimizing its overall
value will focus on this trade-off when choosing how much debt and equity to use for
financing. Empirically, this theory may explain differences in D/E ratios between industries,
however it doesn’t explain differences within the same industry.

Agency costs

Types of agency costs which can help explain the relevance of capital structure.

 Asset substitution effect:

 Underinvestment problem
 Free cash flow

TYPES OF ARBITRAGE

 Merger arbitrage
 Municipal bond arbitrage
 Convertible bond arbitrage
 Depository receipts
 Regulatory arbitrage telecom arbitrage
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 CHAPTER – IV

RESEARCH METHODOLOGY

4.1 RESEARCH METHODOLOGY

Research methodology is a way through which systematically we solve the research

problem. It is understood as a science of studying how research is dined scientifically. Is
necessary for the research to know not only the research methods and techniques but also
methodology.

4.2 RESEARCH DESIGN

Research design is the conceptual structure within which research is conducted. It

constitutes the blue print for collection, measurement and analysis of data.

The study aims at narration of existing facts and figures regarding financial position of
the company. So the research design adopted in the study has been analytical in nature.

4.3 AREA OF STUDY

The study was carried out in the finance department of AKCT CIDAMBARAM
COTTON MILL PRIVATE LIMITED at THIRUVANNAMALAI.

4.4 PERIOD TAKEN FOR STUDY

The time taken for the study is for ONE month

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4.5 DATA COLLECTION

The study involves only secondary data.

4.6 SECONDAERY DATA

Secondary data were collected through annual report and balance sheets and manuals of
the company.

4.7 TOOLS OF ANALYSIS

In order to analyze the capital structure and dividend policy of the company the
following statistical tools are used.

 Leverage analysis
 Cost of capital analysis
 Ratio analysis
 Theories of capital structure

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 CHAPTER – V

DATA ANALYSIS AND INTERPRETATION

5.1 FINANCIAL LEVERAG

Each and every company has a legal binding to pay the interest. The rate of interest
differs on each of financing. The use of fixed charges sources of funds. Such as debt and
preference capital along with owner’s capital in the capital structure is known as financial
leverage. Here the owner’s equity is used as the base to raise debt and the supplier has limited
participation in company’s profits.

Earnings before interest and tax

Degree of financial leverage = -------------------------------------------------------------------

Profit before tax

TABLE NO. 5.1

FINANCIAL LEVERAGE

Earning before interest and Profit before tax Financial leverage

YEAR tax ( Rs. In. million ) (times)
(Rs. In .million)

2011- 2012 492 349 1.41

37
2012-2013 471 358 1.32

2013-2014 425 309 1.38

2014-2015 529 455 1.16

2015-2016 445 402 1.11

SOURCE OF SECONDERY DATA

CHART NO. 5.1

FINANCIAL LEVERAGE

2.45

2.4

2.35

2.3

2.25

2.2
2.41 Column2
2.38
2.15
2.32
2.1

2.05 2.16
2.11
2

1.95
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

38
INTERPRETATION

It shows that the financial leverage was high in the year 2011-2012 with 2.41 times
and low in the years 2015-2016 with 2.11 times. Thus it can be concluded that a low rate of
financial leverage indicates a low interest outflow and consequently lower borrowings.

5.2 OPERATING LEVERAGE

Operating leverage refers to the relationship between firm’s sales revenue and its
Earning before interest and tax. Operating leverage results from the operating cost of a firm’s
income. The operating cost may be fixed cost, variable cost, semi-variable or semi-fixed and
cost. The firm will employ assets in such a way their revenues are sufficient to cover all fixed
and variable cost.

Where, contribution = sales – variable cost

Contribution

Degree of operating leverage = --------------------------------------------------------

Earning before interest and tax

TABLE NO. 5.2

39
 OPERATING LEVERAGE

Contribution Earning before interest Operating leverage

YEAR (Rs. In. million) And tax (Rs. In million) ( time )

2011-2012 1376.40 492 2.79

2012-2013 1934.20 471 4.11

2013-2014 1600.00 425 3.77

2014-2015 1480.28 529 2.79

2015-2016 1663.50 445 3.74

SOURCE OF SECONDERY DATA

CHART NO. 5.2

OPERTING LEVERAGE

40
 3.5

2.5

2
3.11 Series 3
1.5 2.77 2.74

1 1.79 1.79

0.5

0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

INTEPRETATION

It reveals that operating leverage it was high in the year 2012-2013 with 3.11 times
and lower in the year 2011-2012 and 2014-2015 with 1.79 times. On an average operating
leverage 2.44 times.

41
5.3 COMBINED LEVERAGE

The operating leverage and financial leverage constitutes combined leverage. The
combined leverage represents the effects of a given in the sales revenue on EPS. It affects the
total risk of the firm. To keep a risk with in manageable limit. The firm, which has high
degree of operating leverage, should have low financial leverage and vice versa.

Combined leverage = operating leverage * financial

leverage

TABLE NO. 5.3

COMBINED LEVERAGE

Year Operating leverage Financial leverage Combined leverage

2011-2012 2.79 1.41 3.93

2012-2013 4.11 1.32 5.43

2013-2014 3.77 1.38 5.20

2014-2015 2.79 1.16 3.24

2015-2016 3.74 1.11 4.15

SOURCE OF SECONDERY DATA

42
 CHART NO.5.3

COMBINED LEVERAGE

3 Series 3
5.43 5.2

3.93 4.15
2
3.24

0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

INTERPRETATION

It shows that the combined leverage is high in 2o12-2013 with 5.43 times and low in
the year 3014-2015 with 3.24 times. Since the total risk is high in 2011-2012 the company
can increase its equity to reduce the risk.

43
5.4 COST OF EQUITY

Equity is the permanent capital for a firm. The company may raise equity capital both
internally and externally. It can rise internally by retained earnings and externally by issuing
new shares. When a company wants to raise funds by way of equity shares. Their
expectations have to be evaluated and for that cost of equity is calculated.

Dividend per share

Cost of equity = ----------------------------------------------------------------- + 100

Market price per share

TABLE NO. 5.4

COST OF EQUITY

Year Dividend per share Market per share Cost of equity capital
(%) (%) (%)

2011-2012 6.0 106 5.66

2012-2013 7.0 90 7.78

2013-2014 7.5 77 9.74

44
 2014-2015 10.0 105 9.52

2015-2016 12.5 172 7.27

SOURCE: SECONDERY DATA

CHART NO. 5.4

COST OF EQUITY

10

5 9.74 9.5 Series 3

4 7.78
7.27
3 5.66

0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

INTERPRETATION
45
 It reveals that the cost of equity capital was high in the year in the year 2013-014 with
9.74% and low in the year 2011-2012 with 5.66%. The market price was fluctuating for all
the years. In 2014-2015 the market price had been drastically falling and hence the cost of
equity was high. The decline in the market price was due to the recession in the Indian
economy.

5.5 COST OF DEBT

A Company may raise debt in various ways. It may be in the form of debenture or
lone borrowed from financial or public institutions for a citrine period of time at a specific
rate of interest. The debenture or bond may be issued at par, discount or premium. It forms
the basis for calculating cost of debt.

Interest

Cost of debt = ----------------------------------------- * 100

Total debt

TABLE NO. 5.5

COST OF DEBT
46
 Year Interest Debt Cost of debt
(Rs. In. million) (Rs. In. million) (%)

2011-2012 143 780.44 18.32

2012-2013 113 964.66 11.71

2013-2014 116 1012.10 11.46

2014-2015 74 650.69 11.37

2015-2016 43 395.78 10.86

Source: SECONDERY DATA

CHART NO. 5.5

COST OF DEBT

47
 20

18

16

14

12

10 18.32 Series 3

6 11.71 11.46 11.37 10.56

4

0
2011-2013 2012-2013 2013-2014 2014-2015 2016-2017

INTERPRETATION

The above table it is clear that the cost of debt has shown a decreasing trend in the
five years. The cost of debt was high in the year 2011-2012 with 18.32% and low in 2015-
2016 with 10.86%. Due to the high interest rate in 2011-2012 the cost of debt was maximum.

48
5.6 DEBT- EQUITY RATIO

The relationship between borrowed funds and owner’s capital is a popular measure of
the long-term financial solvency of a firm. This relationship is shown by debt-equity ratio.
This ratio was calculated to measure the relative claims of outsiders and the owners against
the firm’s assets. It indicates the relationship between the external equities (or) outsider’s
funds and the internal equities (or) the shareholders funds.

Long term debt

Debt equity ratio = -------------------------------------------------------

Share holder’s fund

TABLE NO. 5.6

DEBT- EQUITY RATIO

Year Long term debt Share holder’s fund Debt equity

(Rs. In. million) (Rs. In million ) ratio

2011-2012 471.43 1556.36 0.30

2012-2013 471.82 1397.34 0.34

2013-2014 522.00 1367.85 0.38

2014-2015 499.06 1530.39 0.33

2015-2016 395.78 1715.10 0.23

SOURCE: SECONDERY DATA AVERAGE 0.32

49
 TABLE NO. 5.6

DEBT – EQUITY RATIO

0.4
0.38
0.35
0.34
0.33 0.33
0.3

0.25
0.23
0.2
Series 3

0.15

0.1

0.05

0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

INTERPRETATION

It refers that the debt-equity ratio was high in 2013-2014 with 0.38 and low in 2015-
2015 with 0.23. The ratio shows a decreasing trend. The standard norm for debt equity ratio is
2:1. According to the above table the company maintains debt-equity ratio as 0.32 0n an
average. It implies that for every one rupee of outside liability the firm has two rupees of
owner’s capital. Since debt is less than equity in all the year the ratio is satisfaction to the
company.

50
5.7 COMPOSITE COST OF CAPITAL

By using composite cost of capital to determine the optimal debt-equity mix for the
company.

TABLE NO. 5.7

COMPUTATION OF COMPOSITE COST OF CAPITAL

Year Debt - equity Cost of debt Cost of equity Composite cost

mix (%) (%) % of capital

2011-2012 23.77 18.32 5.66 8.57

2012-2013 25:75 11.71 7.78 8.76

2013-2014 28:72 11.46 9.74 10.22

2014-2015 25:75 11.37 9.52 9.98

2015-2016 19:81 10.86 7.72 7.95

SOURCE: SECONDERY DATA

51
 CHART NO. 5.7

COMPUTATION OF COMPOSITE COST OF CAPITAL

35
8.57
10.22 9.98
30
8.76

25 7.79
5.66
9.74 9.52
20 7.78
18.32 COMPOSITE COST OF CAPITAL
7.27
COST OF EQUITY
15 COST OF DEBT
11.71 11.46 11.37
10 10.58

0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

52
INTERPRETATION

From the above, it is clear that the composite cost of capital is the lowest at 19% debt
and 81% equity. Hence optimal debt-equity mix is 19% debt and 81% equity

5.8 CAPITAL GEARING RATIO

The term capital gearing is used to describe the relationship between equity share
capital including reserves and surplus to preference share capital and other fixed interest
fixed interest al and loans. If preference shares capital share capital including reserves, the
firm is side to be highly geared and vice versa.

Equity share capital (+) reserves and surplus

Capital gearing ratio = ----------------------------------------------------------------------

Long term debt

53
 TABLE NO. 5.8

CAPITAL GEARING RATIO

Equity share capital +

year reserves & surplus Long term debt Ratio
(Rs. In. million) (Rs. In. million) (%)

2011-2012 1556.30 471.43 3.30

2012-2013 1397.20 471.82 2.96

2013-2014 1368.40 522.00 2.62

2014-2015 1530.40 499.06 3.07

2015-2016 1715.40 395.78 4.33

SOURCE: SECONDERY DATA

TABLE NO. 5.8

CAPITAL GEARING RATIO

54
 5

4.5
4.33
4

3.5
3.3
3 2.96 3.07
2.62
2.5
Series 3
2

1.5

0.5

0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

INTERPRETATION

It indicates that the capital-gearing ratio shows an increasing trend in the five year
except in 2011-2012. Since equity share capital (+) reserves and surplus exceed the long term
debt in the year the company is said to be in a low gear.

55
5.9 INTEREST COVERAGE RATIO

It is also known as “time-interest-earned ratio”. This ratio measures the debt servicing
capacity of a firm in so far as fixed interest on long-term loan is concerned. It is determined
by dividing the operating profits or earnings before interest and taxes (EBIT) plus
depreciation by the fixed interest charges on loans.

EBIT + depreciation

Interest coverage ratio = ------------------------------------------------------------

Fixed interest charges

TABLE NO. 5.9

INTEREST COVERAGE RATIO

Year EBIT (+) depreciation Fixed interest charges Ratio

(Rs. In. million) (Rs. In. million) (time)

2011-2012 614.10 143 4.29

2012-2013 584.70 113 5.17

2013-2014 541.50 116 4.67

2014-2015 648.50 74 8.76

2015-2016 560.90 43 13.04

SOURCE: SECONDERY DATA

56
 CHART NO. 5.9

INTEREST COVERAGE RATIO

2015-2016 13.04

2014-2015 8.76

2013-2014 4.67
Series 2

2012-2013 5.17

2011-2012 4.29

0 2 4 6 8 10 12 14

INTERPRETATION

It reveals that the ratio is high during 2015-2016 with 13.04 times and low during
2011-2012 with 4.29 times the ratio has shows an increasing trend in the five years. This
indicates the better position of creditors the company’s risk is lesser.

57
5.10 RATIO OF FIXED ASSETS TO FUNDED DEBT

This ratio measures the relationship between the fixed assets and the funded debt and
is very useful to the long-term creditors.

Fixed assets

Ratio of fixed assets to funded debt = ------------------------------------------

Funded debt

TABLE NO. 5.10

RATIO OF FIXED ASSETS TO FUNDED DEBT

year Fixed assets Funded debt Ratio

(Rs. In. million) (Rs. In. million) (Time)

2011-2012 1013 93.40 10.85

2012-2013 972 116.40 8.35

2013-2014 989 173.00 5.72

2014-2015 911 231.06 3.94

2015-2016 865 205.78 4.20

58
SOURCE: SECONDERY DATA AVERAGE 6.60

CHART NO. 5.10

RATIO OF FIXED ASSETS TO FUNDED DEBT

12

10

6
10.85 Series 3

4 8.35

5.72
2 3.94 4.2

0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

INTERPRETATION

59
 It shows that on an average 6.6 times of debt is in fixed assets. The ratio is high in the
year 2011-2012 with 10.85 times and low in the year 2014-2015 with 3.94 times. The ratio
shows a decreasing trend in the five year. This indicates that the company had used less debt
in the earlier stage and more debt in the later stages.

5.11 RATIO OF CURRENT LIABILITY TO PROPRIETOR’S FUND

The ratio of current liabilities to proprietors fund establishes the relationship between
current liabilities and the proprietor’s fund and indicates the amount of long term funds raised
by the proprietors as against short-term borrowings.

Current liabilities

Ratio of current liabilities to proprietor’s fund = -------------------------------------

Shareholder’s fund

TABLE NO. 5.11

RATIO OF CURRENT LIABILITY TO PROPRIETOR’S FUND

60
 year Current liabilities Shareholder’s fund Ratio
(Rs. In. million) (Rs. In. million) (Time)

2011-2012 314.70 1556.36 0.20

2012-2013 317.22 1397.34 0.23

2013-2014 285.60 1367.85 0.21

2014-2015 275.43 1530.39 0.18

2015-2016 315.69 1715.10 0.18

SOURCE: SECONDARY DATA

CHART NO. 5.11

RATIO OF CURRENT LIABILITY TO PROPRIETOR’S FUND

61
 0.25

0.23

0.21
0.2 0.2

0.18 0.18

0.15

Series 3
0.1

0.05

0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

INTERPRETATION

It reveals that the ratio was high ratio was high in the year 2012-2013 with 0.23
and low in the year 2014-2015 with 0.18. The table shows that the company had less
liabilities in proprietor’s fund.

62
5.12 PROPRIETORY RATIO

Proprietary ratio is a variant to the debt-equity ratio. This ratio establishes the
relationship between shareholder’s funds to total assets of the firm. It is an important ratio for
long term solvency of a firm.

Share holder’s fund

Proprietary ratio = --------------------------------------------

Total assets

TABLE NO. 5.12

PROPRIETORY RATIO

Year Share holder’s fund Total assets Ratio

(Rs. In. million) (Rs. In. million) (Time)

2011-2012 1556.36 2274 0.68

2012-2013 1397.34 2237 0.62

2013-2014 1367.85 2465 0.55

2014-2015 1530.39 2314 0.66

2015-2016 1715.10 2225 0.77

SOURCE: SECONDARY DATA AVERAGE 0.66

63
 CHART NO. 5.12

PROPRIETORY RATIO

SHARE HOLDER'S FUNDS (RS. IN. MILLION)

2011-2012
2012-2013
2013-2014
2014-2015
2015-2016

INTERPRETATION

The above table reveals that the ratio was high in the year 2015-2016 with 0.77 times
and low in 2013-2014 with 0.55. The ratio indicates that nearly 66% of the total assets are
financed through shareholder’s funds and remaining 44% were financial through outsider’s
fund.

64
5.13 FIXED ASSETS TURNOVER RATIO

The fixed assets turnover ratio indicates the velocity with which assets are turned over
in relation to sales. This ratio is supposed to measure the efficiency with which fixed assets
are employed.

Net sales

Fixed assets turnover ratio = -------------------------------

Fixed assets

TABLE NO. 5.13

FIXED ASSETS TURNOVER RATIO

Net sales Fixed assets Ratio

year (Rs. In. million) (Rs in million) (Time)

2011-2012 2161.90 1013 2.13

2012-2013 2488.90 972 2.56

2013-2014 2483.40 989 2.51

2014-2015 2475.68 911 2.71

65
 2015-2016 2748.38 865 3.18
SOURCE: SECONDARY DATA AVERAGE 2.62

CHART NO.5.13

FIXED ASSETS TURNOVER RATIO

2015-2016 865
2748.38

2014-2015 911
2475.68

2013-2014 989 NET SALES

2483.4 FIXED ASSETS
Series 3

2012-2013 972
2488.9

2011-2012 1013
2161.9

0 500 1000 1500 2000 2500 3000

66
INTERPRETATION

It shows that ratio is high in the year 2015-2016 with 3.18 times low in the year 2011-
2012 with 2.13 times. The table shows that on an average 2.09 times of investment are in
fixed assets.

5.14 RATIO OF RESERVES TO EQUITY CAPITAL

This ratio establishes a relationship between reserves and equity capital. The ratio
indicates that how much profit does the firm for the future growth generally retains.

Reserves

Ratio of reserves to equity capital = ------------------------------------------

Equity share capital

TABLE NO. 5.14

RATIO OF RESERVES TO EQUITY CAPITAL

67
 Reserves & surplus Equity share capital Ratio
year (Rs. In. million) (Rs. In. million) (Time)

2011-2012 1435.30 121.00 11.86

2012-2013 1303.90 93.30 13.97

2013-2014 1275.00 93.40 13.65

2014-2015 1437.00 93.40 15.39

2015-2016 1622.00 93.40 17.37

SOURCE: SECONDARE DATA AVERAGE 14.45

TABLE NO. 5.14

RATIO OF RESERVES TO EQUITY CAPITAL

68
 2015-2016

2014-2015

2013-2014 RESERVES & SURPLUS

Series 3

2012-2013

2011-2012

0 200 400 600 800 1000 1200 1400 1600 1800

INTERPRETATION

It reveals that an average ratio of 14.45 of equity share capital represented by

reserves. The ratio was highest in the year 2015-2016 with 17.37 low in the year 2011-2012
with 11.86. The table also indicates that good amount o earnings were retained as reserve for
future growth and expansion of business.

69
5.15CAPITAL STRUCTURE OF AKCTC

(PROPORTION OF EQUITY AND DEBT CAPITAL)

The capital structure is the combination or the proportion of different source of

financing (debt and equity) to the total capitalization. It is the permanent financing of a firm
represented by long-term debt plus preferred stock plus net worth. the main problem in
training the capital structure is choosing the best mix of debt and equity.

TABLE NO. 5.15

CAPITAL STRUCTURE OF AKCTC

Proportion of
Year Equity capital Debt capital debt &
(Rs. In. million) (Rs. In. million) equity

2011-2012 1556.30 471.43 77.23

2012-2013 1397.20 471.82 75.25

2013-2014 1368.40 522.00 72.28

2014-2015 1530.40 499.06 75.25

2015-2016 1715.40 395.78 81.19

SOURCE: SECONDERY DATA

70
 TABLE NO. 5.15

CAPITAL STRUCTURE OF AKCTC

395.78
2015-2016
1715.4

499.06
2014-2015
1530.4

522
2013-2014 EQUITY CAPITAL
1368.4
Series 3

471.82
2012-2013
1397.2

471.43
2011-2012
1556.3

0 200 400 600 800 1000 1200 1400 1600 1800 2000

INTERPRETATION

The above table shows the proportion of equity & debt in the capital structure of
ESAP. During five years the company uses more equity capital than debt capital. In the year

71
2015-2016 the equity capital is maximum. Since the company has repaid the loans the debt
capital is showing a decreasing trend.

5.16PRICE OF EARNING RATIO

The price earnings ratio is closely related to the earnings price yield/earnings price
ratio. It is actually the reciprocal if the latter. This ratio is a summery measure, which
primarily reflects the factors such as growth prospects, risk characteristics, shareholders
orientation, corporate image and degree of liquidity.

TABLE NO. 5.16

PRICE EARNING RATIO

Market price per Earning price per Ratio

Year share share (Time)
Rs Rs

2011-2012 106 21.45 4.94

2012-2013 90 21.03 4.28

2013-2014 77 23.05 3.34

2014-2015 105 39.15 2.68

72
 2015-2016 172 38.92 5.06

SOURCE: SECONDARY DATA

CHART NO. 5.16

PRICE EARNING RATIO

73
 6

3 Series 3
4.94 5.06
4.28
2 3.34
2.68

0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

INTERPRETATION

It indicates that the ratio is highest in the year 2015-2016 with 5.06 times and lowest
in the year 2013-2014 with 2.68 times. Hence it can be concluded that an increase in earnings
per share decreases the price earnings ratio, which is preferred by the investors.

74
5.17 RETURN ON SHARE HOLDER’S INVESTMENT OR NET
WORTH

This ratio is one of the most important ratios used for measuring the overall efficiency
of a firm. It shows the relationship between net profits (after interest and tax) and the
proprietor’s funds. This ratio is of great importance to the present and prospective
shareholders as well as the management of the company.

Net profit (after interest and tax)

Return on shareholders’ investments = -------------------------------------------------- * 100

Shareholder’s funds

TABLE NO. 5.17

RETURN ON SHARE HOLDER’S INVESTMENT OR NET WORTH

Year Net profit after tax Share holders fund Ratio (%)
(Rs. In. million) (Rs. In. million)

2011-2012 259.50 1556.36 16.48

2012-2013 232.00 1397.34 16.60

2013-2014 215.20 1367.85 15.73

2014-2015 365.50 1530.39 3.88

2015-2016 317.17 1715.10 18.49

SOURCE: SECONDARY DATA

75
 TABLE NO.5.17

RETURN ON SHARE HOLDER’S INVESTMENT OR NET WORTH

1800 1715.1
1656.36
1530.39
1600
1397.34 1367.85
1400

1200

1000
NET PROFIT AFTER TAX
800 Series 3

600
365.5
400 317.17
259.5 232 215.2
200

0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

INTERPRETATION

It reveals that the ratio i.e return is high in 2014-2015 with 23.88 and low in the year
2013-2014 with 15.73. Since the company has repaid the in 2013-2014 the ratio is lower. It
all the other years the ratio shows an increasing trend, which is satisfactory to shareholders as
well as to the management of the company.

76
5.18 CAPITAL STRUCTURE CALCULATION UNDER NET INCOME
APPROACH FOR THE YEAR (2014-2015)

FORMULA

Net income available to share holders - earning before interest and tax – interest

Total market value of firm V = S=D

Where

S = market value of equity shares.

Net income

= -----------------------------

Equity capitalization rate

D = market value of debt

And

Earnings before interest and tax

Ko – overall cost of capital = -------------------------------------------------

Year 2011-012

Debt capital = 1012.1

Cost of debt = 11.46%

77
Cost of equity = 8.24%

Earning before interest and tax =425 million

Interest (less) =115.99 million

Net income available to shareholders =309 million

Market value of equity =309/.0824

=3750 million

Market value of debt (ADD) =1012.1

V =4762.1

Ko = 425/4762.1

= 8.92%

INTERPRETATION

The about shows the capital structure calculation of AKCT CIDAMBARAM

COTTON MILL PRIVATE LIMITED under the net operating income approach in the year
2013-2014. The EBIT is 425 millions. The value of the debt capital is 1012.1 millions. The
value of the firm is 4764.57 millions. The weighted average cost of capital is 8.92%. if the
debt is increased by 100 chores (1000 million) that is 2012.1 millions, the value of the firm
remains the same as 4764.57 millions. But the equity capitalization rate is decreased to
7.06%. The weighted average cost of capital will remain constant as 8.92%. Thus it is clear
that according to NOI approach, change in capital structure does not affect the value of firm
and weighted average cost of capital.

78
 CHAPTER – VI

6.1 FINDINGS OF THE STUDY

In this chapter the researcher has made an attempt an attempt to present the findings
and suggesting of the study.

 Financial leverage shows a decreasing trend except in 2012-2013. This

indicates that a low rate of financial leverage was due to low interest out
flow and consequently lowers borrowings.

 The operating leverage has been increased from 2.79 to 3.74 in the five
years. This indicates that the company had effectively used is variable
operating cost.

79
 The combined leverage shows a decreasing trend except in 2011-2012. This
indicates that the total risk is decreasing year by year.

 The cost of equity was lower in 2012-2011 and was higher in 2012-2013.
The market price was very low, so the cost of equity was very high in that
particular year.

 The cost of debt has shown a decreasing trend in the five years. Due to high
rate of interest, cost of debt was higher in 2010-2011 with 18.33.

 Debt equity ratio was in the decreasing trend, due to the repayment of debt.
Debt is more than equity in all the years and so the ratio is satisfactory to the
company.

 Capital gearing ratio shows an increasing trend in the 5 years except in 2012-
2013. This ratio indicates that the company is said to be in a low gear.

 Interest coverage ratio has shown an increasing trend in the five years. This
indicates the better position of creditors and less risk of the company.

 Ratio of fixed assets to funded debt shows an decreasing trend in the five
years. This indicates that the company had used less debt in the earlier state
and more debts in the later stage.

 Ratio of current liability to proprietor’s funds shows an increasing trend.

This ratio reveals that the company has used more long tern funds.

 Proprietor’s ratio shows a fluctuating trend in the years. This ratio indicates
that nearly 60% of assets are financed through shareholder’s funds and
remaining through outsiders.

 Fixed assets turnover ratio shows a fluctuating trend in the five years. The
higher turnover ratio indicates the more efficient management and better
utilization of available fixed assets.

 Ratio of reserves to equity shows a fluctuating trend in the five years. The
ratio indicates that a fair amount of earnings were retained for future
expansion.

80
  The capital structure of AKCT reveals that debt capital proportion is
decreasing year by year due to repayment of debt.

 The price-earning ratio was high in 2014-15 with 5.06 times and low in
2013-2014 with 2.68 times. The ratio reveals that an increase in Earnings per
share decreases the price earning ratio , which is preferred by investors.

 Return on shareholders investment shows that return is low in 2010-2011 as

the company had repaid the loans. In the other years the ratio shows an
increasing trend, which is satisfactory to shareholders as well as management
of the company.

 Capital structure calculation of AKCT under net income approach shows that
an increase in debt capital increases the value of the firm and reduces the
overall cost of capital.

 Capital structure calculation of AKCT under no l approach shows that an

increase in the proportion of debt capital structure does not affect value of
firm and overall cost capital.

6.2 SUGGESTIONS

 The company has to maintain the same proportion of debt-equity ratio

 Fixed assets turnover ratio shows a floating trend in the five years. So the
company should maintain a higher turnover ratio for more efficient management
and buffer utilization of available fixed assets.

81
 The company has effectively used its variable operating cost. So it should
maintain the same level of usage in future which in turn will help the company
in increasing its operating efficiency and better growth.
 Ratio of reserves to equity capital shows a fluctuating trend. So, the company
could maintain the higher ratio which will help the company to maintain a fair
amount of earning for future expansion.
 In future the company can use equity capital for long-term obligations and-debt
capital for the short-term obligations as equity is best suited for long run and
debt capital is best suited for day-today activities.

82
6.3 CONSLUSION

Leverage analysis of the company states that both financial and operating risk
associated with the company is less and they are very efficient in using the operating cost.
Cost of capital analysis of the company stats that the company had taken steps to minimize
their cost of capital and they were able to minimize it. It shows how effectively they had
used the capital. The financial performance of the company is also good and they are
maintaining it. Capital structure decisions are dynamic for every year. Overall, the
company’s capital structure is optimum. The study suggests that the company can maintain
the same level of capital structure decisions to maximize its earnings for the forth coming
years.

83
 CHAPTER VII

BIBLIOGRAPHY

 John D Danieal, international financial business, Pearson

 Alan M.Ragman, international financial business, oxford
 Roger bennet, international financial system
 Apte P.G international financial system
 www.esabindia.com
 www.financial.com
 www.google.com
 www.capitalstructure.com

84