CAPITAL STRUCTURE

PRESENTED BY:
DHIREN PATEL (191137)
ISHAN JAIN(191141)
MANAN KOHLI (191145)
PAYAL SAMANTA (191156)
RAHUL JAIN(191159)
RANGOLI JAIN (191162)
 PROJECT OBJECTIVE
• Analyze and compare the capital structure of
firms :
 Inter- Industry
 Intra- Industry ( Each industry with different
nature)
Therefore, to obtain a broader perspective of
the market.
 PARAMETERS
CAPITAL STRUCTURE: Combination of debt and equity that a firm uses to fund its long
term financing. Debt to equity ratio= total debt/shareholder’s equity.

FINANCIAL LEVERAGE : Degree of financial leverage can be given by :

DFL = % Change in EPS
% Change in EBIT
The financial leverage ratio is also referred to as the debt to equity ratio. This ratio
indicates the extent to which the business relies on debt financing

•PROFITABILITY:
Return on assets (ROA) & Return on investments (ROI)
INDUSTRIES INTO CONSIDERATION
 HYPOTHESIS

1. Top firms have low D/E ratio irrespective of industry they are in
2. Firms of same industry follow similar capital structure
3. Firms during expansion mode have high D/E ratio
4. There is a positive correlation between capital structure and return on
investment (ROI)
5. There is a positive correlation between profitability (ROA ) and DFL
 FMCG
Growth drivers:
• Robust GDP growth
• Increased income
• Increased urbanization
• Evolving consumer lifestyle and
buying behavior

Challenges:
• Prolonged food inflation
• Price wars due to increased
competition
• Requirement of constant product
innovation & advertising
 IT

Growth drivers :
• Highly skilled human resource
• Initiatives taken by Government
(implementation of e-governance projects);
• Many global players have set-up operations in
India like Microsoft, Oracle, etc

Challenges :
• Concentration of IT development in few cities
 TELECOM
Growth Drivers:
• 3G spectrum
• Tax incentives by the Govt.
• Increasing access to internet

Challenges:
• Decreasing ARPU (average revenue per
user )
• Slowing revenue growth and a huge
pressure on profit margins
• Rural tele-density is still less than 25%,
while there is saturated urban tele-
density.
 POWER
Growth Drivers
• Tax benefits
• Encouraged private investment in
transmission sector through competitive
bidding
Challenges
• Delay in technology procurements
• Delay in environmental clearances, land
acquisition and financial closures
• Law and order problems
• Shortage of trained manpower and
equipments
• Need of huge finance
• Fuel unavailability
 D / E RATIO

0.25

0.2

0.15 HUL
P& G
0.1 NESTLE
DABUR
0.05

0
2006-07 2007-08 2008-09 2009-10
Testing Hypotheses
 Hypothesis 1: Top firms have low D/E ratio
irrespective of industry they are in

Assumption: Top firms according to market capitalization

Test statistic: t-test
Result: All top firms don’t have lower D/E Ratio
Analysis:
• It seems that the type of industry influences the variation in
financial leverage ratio of firms across industries.
• This may be due to the fact that both FMCG and IT industry
are relatively less capital intensive as compared to Telecom
and Power industry
• Hence top firms in FMCG and IT industry have very low D/E
Ratio as compared to top firms in Power and Telecom
industry
Hypothesis 2: Firms of same industry follow similar
capital structure
Test statistic: ANOVA

SECTOR RESULT ANALYSIS

FMCG Firms follow similar capital •Relatively low capital intensive

structure •Expenditure mainly for advertising

IT Firms don’t follow similar capital •Higher risks, avoid taking debts
structure •Wipro has taken debts unlike
Infosys and TCS

TELECOM Firms don’t follow similar capital •Relatively capital intensive

structure •However, MTNL has zero debt

POWER Firms don’t follow similar capital Capital intensive , still a lot
structure variation in capital structure
 Hypothesis 3: Firms during expansion mode have
high D/E ratio
Test statistic: t-test for paired sample with equal means
Assumption: Firms are in expansion whenever there is increase
in asset by above 25 % over the previous year
Result: There is no correlation between expansion mode and D/E
ratio
Analysis:
• A firm may use its equity, or reserves & surplus or debt to
invest in expansion.
• Adani power had high D/E ratio while going in for expansion
since power industry is a capital intensive one, however
Infosys had zero debt, though it was in expansion phase from
2006-07 to 2007-08.
• Some firms follow Pecking order theory
 Hypothesis 4: There is a positive correlation
between ROI and the debt equity ratio of a firm

Test statistic: t-Test

Result: There is no correlation between ROI and
the debt equity ratio of a firm
Analysis:
• Though higher ROI refers to easy availability of debt at low
interest, still a firm having higher ROI may not consider taking
debt in order to avoid financial distress. It may be using its
share capital and reserves and surplus to increase its ROI.
• e.g. Though HUL and NESTLE have higher ROI, they have very
low D/E ratio, while Idea cellular has a very high D/ E ratio its
ROI being quite less than that of HUL.
 Hypothesis 5: There is a positive
correlation between ROA and DFL

Test statistics: t-Test

Result: There is a positive correlation between
ROA and DFL

Analysis:

• Tax benefits in debt leads to increase in EPS and EAT which

leads to increase in ROA.
CAPITAL STRUCTURE DEPENDS
ON:
• Firm size
• Type of industry
• Govt. Policies
• Objective of the firm
 LIMITATIONS

• Only few firms of a sector have

been considered
• We have assumed top firms
based on market capitalization
• Hypotheses have been tested
on few samples
 Literature Review

• Modigliani & Miller Theory

• Pecking Order Theory