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Shantnu

tyagi

Richa singh

Analysis of the CapitalStructure of a company.

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Capital structureCapital structure of a firm is themixture of different securitiesissued by the firm to finance itsoperation. The capital structuredecision of the firm can becharacterized as a choice ofthat combination of debt andequity, which maximizes the

market value of the firm.

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Contd..With unplanned capital structure

these companies may also fail

to economies the use of theirfund. Consequently it is been

increasingly realized that

company should plan its capitalstructure to maximize the use of

the funds and to be able to

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SRS STEELS PVT. LTD

The SRS Steel Pvt. Ltd is a newly

incorporated company and wants to

plan an appropriate capital

structure. It can issue 15% debt and

11% preference share and has 35%

tax rate. The firm initial requirement

for funds is Rs4 crores. Equity

share can be sold for a net price of

Rs25/share.

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The capital structure

Alternative Equity Preference Debentures

1 75% NIL 25%

2 75% 25% NIL

3 50% 20% 30%

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Analysis of Earning Per Shares

Particulars Option A Option B Option CAmount in INR

Earnings Before Interest

& Tax 9720000 9720000 9720000Interest : (1500000) Nil ( 1800000)Profit Before Tax 8220000 9720000 7920000Tax @ 30% (2877000) (3402000) (2772000)Profit After Tax 5343000 6678000 5148000Preference ShareDividend Nil (1100000) (880000)Earnings Available for

Equity Share Holders(A) 5343000 5578000 4268000Number of Equity

Shares(B) 1200000 1200000 800000

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ADDITIONAL INFORMATIONS

Expected sales: - Rs 1,80,00,000

Variable cost: - 36%

Fixed cost: - Rs 18,00,00,000Expected market price of shares is

assumed of Rs 100 per share

Expected dividend to declared is 25% ofthe expected market price.

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Analysis of Weighted Average Cost of Capital

In order to determine the cost of capital from the threeoptions the company has done the following analysis:

Cost of capital of for Debentures

=

( )

100

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Cost of capital for Preference Shares

=

100

Cost of capital for Equity Shares

=

100

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Analysis of Weighted Average Cost of Capital

W CC of OptionParticulars Option A

AmountWeighta

ge Cost (%)Weighted

Cost (%)Equity Shares 30000000 0.75 25 18.7511%Preference

Shares Nil Nil Nil15%Debentures 10000000 0.25 9.75 10Total 40000000 1 28.75

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W CC of Option BParticulars Option B

AmountWeighta

ge Cost (%)Weighted

Cost (%)Equity Shares 3000000 0.75 25 18.7511%Preference Shares

1000000

0.25

13.41

3.35

15% Debentures Nil Nil Nil NilTotal 4000000 1 22.1

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WACC of Option C

Particulars Option C

AmountWeighta

ge Cost (%)Weighted

Cost (%)Equity Shares 20000000 0.5 25 12.511%PreferenceShares 8000000 0.2 14.19 2.83815% Debentures 12000000 0.3 9.75 2.925Total 40000000 1 18.263

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Analysis of Leverage

=

=

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=

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Analysis of Leverage Option A

Particulars OptionEBIT Contribution PBT

mount 9720000 11520000 8220000Financial Leverage 1.18OperationalLeverage 1.185Combined Leverage 2.183

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Option B

Particulars Option BEBIT Contribution PBT

mount 9720000 11520000 9720000Financial Leverage 1

Operational Leverage 1.185Combined Leverage 1.185

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Option C

Particulars Option C

EBIT Contribution PBT

mount 9720000 11520000 7920000Financial Leverage 1.23

Operational Leverage 1.185Combined Leverage 1.45

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CONCLUSION:-

After evaluating EPS, Leverage and

WACC for all the financing options

we hereby conclude that Option B ismost suitable financing option for the

required capital structure fulfilling

most of the criteria.

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Thank You