Capital Structure

Topics: Corporate finance, Finance, Stock Pages: 41 (12228 words) Published: April 29, 2013
CORPORATE FINANCE PROJECTPRACTICAL CONSIDERATIONS OF CAPITAL STRUCTURE OF A COMPANY IN INDIASubmitted to:Submitted by:Mr. Rajesh JhambAtul Pabbi 09104013Priyanka Bhola 09104043Rahul Mahajan 09104045Shreya Adya 09104052ACKNOWLEDGEMENTAn acknowledgement is not just a mere formality but a true opportunity to express my sincere gratitude towards all the people who have been of great help and have played an important role in making the training a great learning experience providing us with the right exposure in the industry. I would like to express my profound gratitude to Mr. Rajesh Jhamb, who made the project well structured so that i could learn a lot during this survey. His motivation and encouragement were the key to success of this program. He has been a constant source of inspiration to me throughout the period of my Industrial Training.I would also like to express my sincere thanks to Mr. Saurav Chopra (Tata Motors) for constantly guiding me in my entire training period. It was his competent guidance, constant encouragement and critical evaluation that helped me develop a new insight into my work.My report will not be complete without expressing my sincere thanks and appreciation to all those who have contributed directly or indirectly towards completion of my training.Atul Pabbi 09104013Priyanka Bhola 09104043Rahul Mahajan 09104045Shreya Adya 09104052CONTENTS * Introduction * CAPITAL STRUCTURE: Definition * Features of An APPROPRIATE CAPITAL STRUCTURE * Forms of CAPITAL STRUCTURE * CAPITAL STRUCTURE: Major Considerations * Factors Determining CAPITAL STRUCTURE * FINANCIAL LEVERAGE: * Definition * Financial Leverage and the Shareholders’ Return * Effect of Leverage on ROE and EPS * CAPITAL STRUCTURE THEORIES * CAPITAL STRUCTURE OF TATA MOTORS LTD.INTRODUCTIONWhat is CAPITAL?Capital refers to the funds a company has available to fuel growth and expansion. A corporation can obtain capital from equity sources such as venture capital firms or from lenders such as commercial banks. Some companies elect to do an initial public offering, or IPO, which allows them to sell stock shares to the public, including small investors. In every business organization, capital is the main element to establish and run its business activities smoothly. CAPITAL STRUCTURE- Definition * Capital structure refers to the types of capital sources a company uses and the percentage of its total capital obtained from each. a. Optimal Debt/Equity Mix * The relative percentages of debt and equity capital usually change as the company grows. In the long run, debt capital is less expensive than equity. Equity capital is normally the source used by very early-stage companies that do not have the cash flow to make debt payments. Investors who provide equity expect to receive a higher rate of return than lenders would. This higher return is their reward for taking the risk that the company will not succeed. As a company grows and becomes profitable, it can obtain more of its capital from debt sources. This allows the company's owners to hold onto their equity shares rather than having their ownership diluted by additional investors coming in. b. Reasonable Debt Payments * Sources of debt capital, such as commercial banks, require that funds be repaid at a fixed schedule along with interest. Debt payments that are too high for the company's cash flow to support can cause a strain on the company's finances. In extreme cases, the company many not be able to fund important business functions that will help it grow, such as expenditures on new equipment to improve operating efficiency or marketing programs to increase revenues. Companies should have relatively stable cash flows before taking on debt and be able to make the required payments while still having a healthy cash balance in place. c. Sufficient Capital * All companies require capital to fund operations and expansion plans. Early stage...

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