Project Report on COMPARATIVE STUDY OF CAPITAL STRUCTURE OF IT AND FMCG COMPANY
Finance Synopsis on Capital Structure
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.
OBJECTIVES OF THE STUDY:
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.
Hypothesis
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.
Sampling:
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.
Tools
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.
THE EXPECTED CONTRIBUTION FROM 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.
If you want Dissertations, Thesis, Case Studies, Project Report on Capital Structure, Research Proposals, Term Papers, Research Projects, Assignments, Coursework, PowerPoint Presentations and Synopsis, than contact Mahasagar Publications, Mumbai, India by calling +91 9819650213 or +91 8081344446 or visit website www.projectspapers.com
If you want Dissertations, Thesis, Case Studies, Project Report on Capital Structure, Research Proposals, Term Papers, Research Projects, Assignments, Coursework, PowerPoint Presentations and Synopsis, than contact Mahasagar Publications, Mumbai, India by calling +91 9819650213 or +91 8081344446 or visit website www.projectspapers.com
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