SYNOPSIS

OF
FINANCIAL
MANAGEMENT

SUBMITTED TO:- SUBMITTED BY:-

Ms. MANPREET KAUR SURYAKANT

MALHOTRA

ROLL :- RK27B1A07

3470070064

BTECH MBA(IT)
 ACKNOWLEDGEMENT

A successful project is a combined effort of the teacher for

guidance and inspiration and the project report developer.

I wish to extend our sincere gratitude to Ms. Manpreet kaur,

lecturer of financial Management, for imparting in depth knowledge
of the subject and providing me an opportunity to do a project
work on ‘Impact of capital structure on the risk and return
aspect of shareholders for the last five years of Hero Honda
Motors Ltd’. The support thus, helped me to develop a meaningful
report.

Also, I would like to convey our thanks to all the people who have
been an integral part during the entire course of project
completion and have extended a helping hand for the same.
 CAPITAL STRUCTURE

Capital structure is a mix of a company's long-term debt,

specific short-term debt, common equity and preferred equity.
The capital structure is how a firm finances its overall
operations and growth by using different sources of funds.
Debt comes in the form of bond issues or long-term notes
payable, while equity is classified as common stock, preferred
stock or retained earnings. Short-term debt such as working
capital requirements is also considered to be part of the capital
structure.

Factors determining capital structure

• Minimization of Risk: Firms Capital structure must be

developed with an eye towards risk because it has a direct
link with the value. Risk may be factored for two
considerations. The capital structure must be consistent with
the business risk and the capital structure result in a certain
level of financial risk.

• Control: The decision of the firm lies in the hands of the

shareholders of the company. If the company issues more shares than
the control will be diluted. Capital structure of the firm should be
such that it reflects management’s philosophy over the control of
the firm.
• Flexibility: The flexibility of the firm shows that how much
company is capable to raise any further capital or not. The capital
structure should be one that enables the companyto raise or acquire
any further capital for further requirements.

• Profitability: The capital structure should be such that it

increases the profitability of the company. The main aim of the
company is to increase the shareholders value so the capital of the
company should be such that it increases the profitability of the
company.

HERO HONDA MOTORS Ltd.

Analysis
Hero Honda being the leader in two wheeler segment has been
doing well as far as the returns to shareholder are considered.
Company by far has remained a low debt company. Majority of
the funding of the company is done from accumulated
reserves and surplus out of the past profits. From the figure
in the balance sheet it can be seen that the reserves has
increased by more than 10 times in last 10 years.

Because of its increasing sales continuously company has

remained least dependent on the external financing in past.
It has also not raised any equity capital from the market by
issue of shares.

With a current position of low debt and equity company has

backed itself with good credibility.

It has maintained a strong liquidity position with high interest

coverage ratio which in the last year was moving in the range
of 700+. This shows that company has good image of itself
to raise any debt if required from the market. Hero Honda has
maintained its high ROCE despite its large and growing
investment portfolio. There was a fall in EPS in year 2007
because of increased capital expenditure and declining
operating income.

Dividend Policy
To start with the topic firstly we will brief about dividends.
Dividends are the payments made by an organization to its
shareholders or members. It is basically a portion of corporate
profit that is paid out to the shareholders. When any
organization earns profit, the money that the organization gets
can be used in two ways to fulfill the expectations of the
shareholders i.e. to meet the cost of equity.

• Either it can be reinvested in the business or

• It can be paid to the shareholders as dividends.

Many companies just retain a part of the earnings and pay

the remainder as a dividend. Dividend is allocated as a fixed
amount of a share and hence shareholders get the dividend in
proportion to their shareholding. Dividend can be of two types,
• Cash dividend, in which organization gives cash to its
shareholders in proportion to their shareholding,

• Stock dividend, in which each shareholder is given extra

shares depending on the number of shares it has currently.
In this cash is not given but extra share is given instead
of that.

Now Dividend policy refers to the policy that the management

formulates in regard to earnings for distribution as dividends
among shareholders. It determines the division of earnings
between payments to shareholders and retained earnings.

Importance of Dividend Policy

• To balance the growth of the company and the distribution to

the shareholders.

• A critical influence on the value of the firm

• To strike a balance between the long term financing

decision (company distributing dividend in the absence of any
investment opportunity) and the wealth maximization

• The market price gets affected if dividend paid are less

• Retained earnings helps the firm to concentrate on the

growth, expansion and modernization of the firm

• To sum up, it to a large extent affects the financial

structure, flow of the funds, corporate liquidity, stock price
and growth of the company and investor’s satisfaction.

Factors Affecting Dividend Policy

• Liquidity of Funds

• Extent of share Distribution

• Trade Cycles

• Government Policies

• Taxation Policy

• Legal Requirements

• Past dividend Rates Ability to Borrow

• Policy of Control

• Repayments of Loan

• Time for Payment of Dividend

• Regularity and stability in Dividend Payment

Broadly these are the factors that affect dividend payout ratio
and hence the dividend policy for a company. But we have in our
study taken limited factors and not all of these. The factors
that we have taken are,

 Net sales

 Profit after tax i.e. PAT

 Market capitalization

 Capital expenditure

 Cash and cash equivalents at the end of year