Saturday, 25 May 2013

Comparative Study of Capital Structure of IT and FMCG Company



Finance Synopsis on Capital Structure

Dissertation Writing Help on Literature Review

The term capital structure refers to the percentage of capital (money) at work in a business by type. Broadly speaking, there are two forms of capital: equity capital and debt capital. Each has its own benefits and drawbacks and a substantial part of wise corporate stewardship and management is attempting to find the perfect capital structure in terms of risk / reward payoff for shareholders.

When you reach the upper echelons of finance, however, that idea is almost anathema. Many of the most successful companies in the world base their capital structure on one simple consideration: the cost of capital. If you can borrow money at 7% for 30 years in a world of 3% inflation and reinvest it in core operations at 15%, you would be wise to consider at least 40% to 50% in debt capital in your overall capital structure.
Of course, how much debt you take on comes down to how secure the revenues your business generates are - if you sell an indispensable product that people simply must have, the debt will be much lower risk than if you operate a theme park in a tourist town at the height of a boom market. Again, this is where managerial talent, experience, and wisdom come into play. The great managers have a knack for consistently lowering their weighted average cost of capital by increasing productivity, seeking out higher return products, and more.

To truly understand the idea of capital structure, you need to take a few moments to read Return on Equity: The DuPont Model to understand how the capital structure represents one of the three components in determining the rate of return a company will earn on the money its owners have invested in it.
Whether you own a doughnut shop or are considering investing in publicly traded stocks, it's knowledge you simply must have. Capital Structure is a part of a much larger, value creating equation. At Sears, as in most companies, creating shareholder value is the main governing objective. There is considerable effort aimed at achieving the lowest long-term cost of capital by managing the capital structure. That leads to a discussion in which we determine our…target capital structure. There are multiple questions for discussion in current scenario related to capital structure of a company.
Rationale of the study 
Optimal Capital Structure A firm wants to choose a capital structure that maximizes firm value or minimizes the cost of capital. I will try to find the factors effects companies value .This targeted debt/equity mix will be: Greater due to corporate taxes Affected by personal taxes (possible lower) Lower due to bankruptcy costs. Lower due to the risk shifting that occurs due to the agency problems between shareholders and debt holders Greater due to debt monitoring, reduction in agency problems between managers and shareholders. My research will explain how these factors works and effects firms value in current market scenario. I also accept this that there is not perfect competition market available in developing countries.

In my paper I will not take the assumptions of Perfect Market. The following analysis assumes no market imperfections. This means No Taxes No Default Risk No Agency Problems Once we understand the perfect market, we will relax each of these assumptions and determine how things changes

 The study is focused on achievement of following objectives:
·        The capital structure of the 2 multinational companies belongs to 2 different industries.
·        Cost of Capital and Capital budgeting issues as per industry.
·        Accounting for Leverage in Valuation Value of the levered firm
·        Corporate Taxes
·        Why do debt ratios differ? From others
·        Agency Problems between Shareholders and Debt holders Shareholders incentives. 
H0: Significantly there is a perfect exists in current economy.
H1L: Significantly there is no perfect exists in current economy.

Research Methodology:

 Data will be collected from both primary and secondary sources. The primary source is field surveys, while the secondary source is the “Reports generated by 2 different companies from IT and FMCG sector”. For analyzing the different trends of market in globalization we will choose data from multinational companies.


Originally the sample for this study will plan to choose from the list of companies listed in National Stock Exchange (NSE). A sample of 2 Companies will selected on the basis of availability of information.  As well as some industry base priority data.

Research Design

This project will be an empirical research where both a quantitative and a qualitative research design will be used. The benefit of a quantitative research design lets the researcher to quantify the respondent’s answers towards certain variables, hypothesis or demographic data to draw statistical conclusions and comparisons. For qualitative results we will use secondary data. This is one of the foremost advantages of the quantitative design and a common design in scientific reports and studies in all areas.

The statistical tools used in this study will be
}     Means,
}     Frequency counts,
}     Percentages,
}     Means and standard deviations.
The analysis of the survey results combined with the statistical applications allowed for the researcher to draw conclusions regarding to the objectives of the study.


This research will be base on 2 different companies’ capital structure to identify their companies’ market value. The value of any company is the sum of the firm’s future operating or free cash flows discounted at the firm’s cost of capital (discount rate). Does capital structure impact operating cash flow? Interest expense is not part of operating cash flow Dividends or distributions to shareholders are not part of operating cash flow Operating cash flow is based on investments in operations. Investment and financing decisions are separate corporate decisions, but both impact value. Does capital structure impact the firm’s cost of capital? The cost of capital is the return investors require on their investment in the company. Do investors require a greater return from more levered companies? How does the firm finance its activities? Through the use of debt or equity?
 Just as an investor views a rate of return, the firm must view its cost of capital. Expectations must be in synch. How does this affect the capital structure?

I will try to answer all these query arises during calculation of any firm’s value.


This project report will have 5 chapters
Chapter 1: Introduction.
Chapter 2: Literature Review.
Chapter 3: Research Design. 
Chapter 4: Data Analysis.
Chapter 5: Conclusions and Generalizations.

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