Capital Structure

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| PROJECT ON CAPITAL STRUCTURE|
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FORE SCHOOL OF MANAGEMENT|

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ACKNOWLEDGEMENT

We are very thankful to everyone who all supported us to complete our project effectively. We are grateful to Prof.Himanshu Joshi for providing us proper guidelines and moral support regarding completion of the report.

TABLE OF CONTENTS

S.NO.| CONTENT| PAGE NO.|
| ACKNOWLEDGEMENT| 2|
| EXECUTIVE SUMMARY| 4|
| ABSTRACT| 5|
1. | INTRODUCTION| 6|
2. | RESEARCH METHODOLOGY| 8|
3. | HYPOTHESIS| 9|
4. | FMCG SECTOR| 10|
5. | IT SECTOR| 11|
6. | TELECOM SECTOR| 12|
7. | POWER SECTOR| 13|
8. | TESTING & ANALYSIS OF HYPOTHESES| 14|
9. | CONCLUSION| 18|
10. | REFERENCES| 19|
11. | ANNEXURES| 20|

EXECUTIVE SUMMARY:

The objective of the project is to understand the capital structure decisions taken in different industries. For this, 4 industries have been taken into consideration which is as follows: FMCG: HUL , P& G, Dabur and Nestle

IT: Infosys, HCL and Wipro
Power: Adani Power, Reliance Power and Birla Power Solutions Telecom: Bharti Airtel, Idea Cellular and Reliance Communications Major findings:
* In IT and FMCG sector, investment is predominantly handled through equity * Capital structure in these sectors
* Profitability of companies in each sector
* FMCG sector have shown quite a stable profit margin over the last 4 years Limitations: Only few companies per sector has been taken into consideration on the assumption that some are the market leader and have been following the best possible financial practices in the sector. Their capital structure is compared to other firms in that industry and various hypotheses were tested.

ABSTRACT
Corporate governance theory predicts that leverage affects agency costs and thereby influences firm performance. We plan an approach to test this theory using profit efficiency, or how close a firm’s profits are to the benchmark of a best-practice firm facing the same exogenous conditions. We also look for effect of industry structure on the capital structure. We also took into account the relation between capital structure and ROCE. Adding to that we also found if a company in expansion phase has high debt irrespective of the industry they are in.

The purpose of this project is to investigate empirically existence of inter-industry differences in the capital structure of Indian firms and identify the possible sources of such variations in capital structure. The technique used for this cross-sectional analysis is one way ANOVA analysis of variance and co-relation between capital structure and ROCE.

Though differences is firm size contributes to the existing variation in financial leverage ratio across industry-classes to some extent, it is the nature of the industry itself or more precisely the differences in the fund requirement of industry groups based on the technology used, which is a potential source of the existing variation.

KEYWORDS :

Capital Structure
Financial Leverage
ROCE
DFL

1. INTRODUCTION
The relationship between capital structure and firm value has been the subject of considerable debate, both theoretically and in empirical research. Throughout the literature, debate has centred on whether there is an optimal capital structure for an individual firm or whether the proportion of debt usage is irrelevant to the individual firm's value.

a. LITERATURE REVIEW

In their seminal article, Modigliani and Miller (1958 and 1963) demonstrate that, in a frictionless world, financial leverage is unrelated to firm value, but in a world with tax-deductible interest payments, firm value and capital structure are positively related. Miller (1977) added personal taxes to the analysis and demonstrated that optimal debt usage occurs on a macro-level, but it does not exist at the firm level. Interest deductibility at firm...
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