Project Financial Management Capital Structures of Smes
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Transcript of Project Financial Management Capital Structures of Smes
Project
Topic:-Study of Capital Structure of SMEs
Area of research:-Automobile Ancillaries units in NCR
SUBMITTED TO: SUBMITTED BY:
PROF. PRASHANT GUPTA ANKUSH SAXENA
FINANCIAL MANAGEMENT MANOJ KUMAR
PARUL SIROHI
PRABHAT KUMAR
PRASHANT SHARMA
VIKAS CHAUDHARY
MBA 1ST YEAR , SEC.-B
SCHOOL OF MANAGEMENT (2008-10)
GAUTAM BUDDHA UNIVERSITY
GREATER NOIDA
STUDY ON CAPITAL STRUCTURE OF AUTOMOBILES ANCILLERIES SME’s IN (NCR) INDIA
Small and medium enterprises (SME) sector is a vital sector in the Indian context as it contributes a big chunk to national income. This paper examines the sources of funds of SME sector operating in the Gautama Buddha Nagar and Ghaziabad .For this purpose a survey of 20 SME’s was conducted.
INTRODUCTION
Capital structure is a mix of long term debt, specific short term debt, and common equity and prefers equity. The capital structure shows how a firm finances its overall operations and growth by using different sources of funds. This decision has been recognised as the most important decision a firm has to take because the capital structure affects the cost of capital, net profit, earning per share, and dividend power and liquidity position of the firm. These factors along with a number of other factors, determine the value of a firm. If a firm entirely relies on internal funds or equity, than the growth may be restricted due to unavailability of large amount of finance and if firm goes for external finance than chances of risk increases as the liability of firm enhances. Thus a fir has to manage lots of objectives so that liquidity of the firm remains maximum .So, capital structure is considered to be a very vital determinant of the value of the firm.
There are various approaches which have defined various assumptions and thus according to them various ways of forming a capital structure is better .one of them is Modigliani and miller approach which highlights the issues involved in financial structure decisions, viz, the cheaper cost of debt as compared to equity, the increase in risk and the cost of equity as debt increases and the benefit of tax deductibility of debt. They argued that in absence of taxes, cost of capital remained constant as the benefits of using cheaper debt were exactly offset by the increase in cost of equity due to increased risk. They concluded that with taxes and deductibility of interest charges, firms should use as much debt as possible. Myers (1984) stressed that capital structure has proved to be a recurrent puzzle in the field of finance.
Small and medium sized enterprises (SMEs) play an important role in the growth and development
of an economy. Given their potential to generate employment, foster technical innovation and entrepreneurship and raise exports, SMEs need to assume centre-stage in India’s trade policy. Their importance in the Indian economy is underscored by the fact that SMEs account for about 90% of the total industrial units in India and provide employment to more than three crore individuals.
The availability of finance for SME’s is a matter of significant importance to the policy maker all over the world. So to support SME’s various policies like time of credit approval is reduced and tariffs have been lowered for them
LITERATURE REVIEWVarious studies on capital structure related to SME’s were conducted in foreign countries. However, in the Indian context, the number is quite few. Depending on the various issues of capital structure, the review has been discussed in brief as follows.
CAPITAL STRUCTURE AND FIRM’S CHARACTERISTICS
Capital structure of a firm varies with its size, type and some other characteristics such as sales, growth and liquidity. It has been supported by the results of the studies conducted by various researchers from time to time.Sogorb-mira (2005) conducted a study of 6482 non financial Spanish SME’s during the five year period 1994-1998, modelling the leverage ratio as a function of firm-specific attributes hypothesised by capital structure theory. The result suggested that the capital structure of a firm depends to a great extent on the firm’s characteristics. It was found that non-debt tax shields and profitability are both negatively related to SME’s leverage, while size, growth options and asset structure has positive relation.
CAPITAL STRUCTURE AND INDUSTRYWISE DIFFERENCES
Joshua and Nicholas (2007) examined the effect of industry classification on the capital structure of SME’s in Ghana. The result of this study indicated that SME’s in the agriculture sector exhibited the highest capital structure and asset structure or collateral value while the wholesale and retail trade industry have the lowest debt ratio and asset structure. The result clearly indicates that industry effect is important in explaining the capital structure of SME’s and that there are variations in capital structure across the various industries.
NEED AND OBJECTIVES OF THE STUDY
The perusal of the literature reveals that a number of studies have been carried out in the area of capital structure of SME’s in the Indian context; still a wide gap exists in the research field with particular stress on the same aspect. Considering the importance of SME’s in India, the need for current study was felt to analyze the effect of cost of capital affecting the capital structure decision of SME’s. Therefore, the primary objective of this study is to get an idea regarding the capital structure of SME’s. The explicit objective of the study is to:
Study the sources of capital in SME’s. Study the factors that influence the choice of borrowed funds in the capital structure and
To analyze the impact of SME’s on the economy growth.MANAGEMENT DILEMMA
Decrease in profits while companies are performing well and generating good revenue.
MANAGEMENT QUESTION
What should be done to reduce cost and increase profit to maximize the shareholders wealth?
HYPOTHESIS
In order to empirically verify the above objectives the following hypothesis were framed and tested. H1 –small firms tend to rely on the internal sources of finance as compared to the large firms. H2 –there is no significant association between types of fund and degree of competition
faced by SME’s. H3 -there is no significant association between type of funds and level of investments in
SME’s.
DATA BASE AND METHODOLOGY
DATA BASEThis study focuses on identifying the influence of capital structure and their impact on the decision making ability of the SME’s. For accomplishing the objective, a survey was carried out through a non disguised structured questionnaire having open ended questions and the secondary data was also used because we were not able to collect the required information of the firm’s through questionnaire and the database was PROWESS DATABASE.
AREA OF STUDY; AUTOMOBILE ANCILLARY UNITS
We have studied the capital structure of the automobile ancillary smes in NCR region . The focus area is long term financial structure of the smes.We have covered two areas –
1. Cost of capitalA. Capital structureB. Cost of equityC. Cost of debtD. Weighted average cost of capital
2. Financial leveragesA. Degree of financial leverageB. Degree of operating leverageC. Degree of combined leverage
Name of company
%of equity
%debt Cost of equity(Ke)
Cost of debt(Kd)
WACC Remark(As per industry average)
Denso auto parts 11.91 88.08 45.03 0.3438 5.66 Below
Motherson sumi 76.08 23.91 12.75 1.71 10.10 Below
Harigh crankshaft ltd.
73.21 26.89 0 17.26 4.64 Below
ANG auto ltd. 36.55 64.44 72.15 6.92 30.82 Above
Roto pumps ltd. 67.61 32.38 0.33 5.78 2.09 Below
Subros ltd. 32.97 67.02 41.37 30.18 33.86 Above
Amtek auto ltd. 36.59 63.40 .0347 0.6011 0.394 Below
Amtek India ltd. 53.1 46.89 0.4307 0.3803 40.70 Above
Bharat seets ltd. 56.17 43.28 0.0143 14.08 6.1 Below
Clutch auto 7.86 92.14 3.35 39.22 62.46 Above
TOTAL 452.05 548.43 175.45 116.47 196.82
AVERAGE 45.2 54.8 17.5 11.6 19.6
Summary chart of capital structure
Summary chart of leverages
NAME OF COMPANY
DEGREE OF FINANCIAL LEVERAGE(DFL)*
DEGREE OF OPERATING LEVERAGE(DOL)*
DEGREE OF COMBINED LEVERAGE(DOL X DCL)*
REMARK(AS COMPARISION TO INDUSTRY AVERAGE)
DENSO AUTOPARTS
1.004 -0.188 -0.189 BELOW
HARIGH CRANKSHAFT LTD.
3.45 0.761 2.62 ABOVE
Motherson sumi
1.06 0.506 0.5363 BELOW
ANG AUTO LTD.
1.605 0.34 0.545 BELOW
ROTO PUMPS LTD.
1.15 2.03 2.34 ABOVE
SUBROS LTD. 1.28 4.52 5.78 ABOVE
AMTEK AUTO 1.08 0.614 0.668 BELOWAMTEK INDIA 1.08 2.39 2.55 ABOVEBHARAT SHEETS
1.14 1.39 1.58 BELOW
CLUTCH AUTO 1.71 3.2 5.49 ABOVETOTAL 14.55 15.563 21.92AVERAGE 1.455 1.5563 2.192
*- DFL=EBIT/EBIT-I
*-DOL=% CHANGE EBIT/% CHANGE Q
Q-SALES EBIT-EARNING BEFORE INTEREST AND TAX
Note :-details of calculations are given below
Conclusion :-
The greater the DOL, the higher is the operating leverage.
The average DOL of our industry is 1.55 which is greater than 1, this implies that operating leverage exists. Operating leverage exists when there are fixed operating costs. High operating leverage is good when revenues are high. Our industry’s DOL is 1.55 which is moderate and to cover risk they has to increase their sales.
DOL is 1.55 means 1% change in sales results in 1.55 % change in EBIT level.
Average DFL of industry is 1.455 which is moderate that means the EPS is not that much volatile.
DCL is 21.92 which means 1% change in sales will bring about 21.92 % changes in EPS.Therefore industry is good in terms of investment.
The cost of equity is 17.5 that means industry is paying higher interest to their share equity holders.That indicates the industry is attractive in terms of investment.
The cost of debt is 11.6 which implies that industry is getting loan on a moderate rate.
Calculations
DENSO AUTOPARTS
3rd Floor, Left WingThe Capital CourtOlof Palme Marg, MunirkaNew DelhiDelhi-110 067
Capital Structure-
Equity- 11.91%
Debt- 88.08%
COST OF CAPITAL-
Cost of equity-
= 6.53/43+.2985
= 45.03
Cost of Debt-
= intrest/Total borrow*100
= .02/3.77*100
= .0053*100(1-.35)
= .3438
Weighted average cost of capital-
Source cost capital
Equity 45.03 .1191
Debt .3438 .8808
k e=D1
Po
Weighted cost of capital
=.1191(45.03)+.8808(.3438)
=5.36+.3028
=5.66%
LEVERAGE
DFL=EBIT/EBIT-I
=42.87/42.87-.2
=1.004
DOL=%EBIT/%Q
=-0.02/.106
=-0.188
DCL=DOL X DFL
=1.004 X -0.188
=-0.189
HARIGH CRANKSHAFT LTD.
ADDRESS-
C-49, Phase IIGautam Budh NagarNoidaUttar Pradesh-201 305
Capital Structure-
Equity- 73.21%
Debt- 26.89%
COST OF CAPITAL-
Cost of equity-
= 0/.84+0 (since no dividend paid to shareholders from 1993)
= 00
Cost of Debt-
= intrest/Total borrow*100
= 2.48/12.37*100
= .2004*100(1-.138)
= 17.26
Weighte average caot of capital-
Source cost capital
Equity 0000 73.21%
Debt 17.26 26.89%
Weighted cost of capital
=.7321(0000)+.2689(17.26)
=0000+4.64
=4.64%
Motherson sumi2nd Floor, F-7, Block B-1Mohan Cooperative Industrial EstateMathura RoadNew DelhiDelhi-110 044
k e=D1
Po
Capital Structure-
Equity- 76.08%
Debt- 23.91%
COST OF CAPITAL-
Cost of equity-
= 1.35/77.15+.11
= 12.75
Cost of Debt-
= intrest/Total borrow*100
= 9.99/457.9*100
= .0053*100(1-.21)
= 1.71
Weighte average caot of capital-
Source cost capital
Equity 12.75 .7608
Debt 1.71 .2391
Weighted cost of capital
=12.75(.7608)+1.71(.2391)
k e=D1
Po
=9.70+.4064
=10.10
ANG AUTO LTD.
1C/13, New Rohtak RoadKarol BaghNew DelhiDelhi-110 005
Capital Structure-
Equity- 36.55%
Debt- 64.44%
COST OF CAPITAL-
Cost of equity-
= 20/32.5+66.6
= 72.15
Cost of Debt-
= intrest/Total borrow*100
= 12.18/148.87*100
= .081*100(1-.15)
= 6.92
k e=D1
Po
Weighte average caot of capital-
Source cost capital
Equity 72.15 36.55%
Debt 6.92 64.44%
Weighted cost of capital
=72.15(.3655) +06.92(.6444)
=26.37+4.45
=30.82%
ROTO PUMPS LTD
Capital Structure-
Equity- 67.61%
Debt- 32.38%
COST OF CAPITAL-
Cost of equity-
= 2/34.1+.28
= .33
Cost of Debt-
= intrest/Total borrow*100
= .72/7.96*100
= 9.04*100(1-.36)
= 5.78
Weighte average caot of capital-
Source cost capital
Equity .33 .6761
k e=D1
Po
Debt 5.78 .3238
Weighted cost of capital
=.33(.6761)+5.78(.3238)
=.22+1.87
=2.09%
SUBROS LTD.
ADDRESS-
LGF, World Trade CentreBarakhamba LaneNew DelhiDelhi -110 001
Capital Structure-
Equity- 32.97%
Debt- 67.02%
COST OF CAPITAL-
Cost of equity-
= .80/21.5+.3766
= 41.37
Cost of Debt-
= intrest/Total borrow*100
= 11.56/24.39*100
=.4339*100(1-.30)
k e=D1
Po
= 30.18
Weighte average caot of capital-
Source cost capital
Equity 41.37 .3297
Debt 30.18 .6702
Weighted cost of capital
=41.37(.3297)+30.18(.6702)
=13.64+20.22
=33.86%
AMTEK AUTO LTD.
Plot No 16, Industrial Estate
Rozka-Meo (Sohna)
Gurgaon
Haryana-122 103
Cost of equity
Ke=D/P+G
= .5/106.25+.03
= .0347
Cost of debt-
Kd=i/avg.borrow*100
= 1939/2394.47*100
= .8097(1-.2576)
= .6011
Weighted avg. cost of capital-
Source cost capital(%)
Equity .0347 36.59%
Debt .6011 63.40
WACC-
=0.0347(.3659)+.6011(.6347)
=0.394
AMTEK INDIA LTD.
Village Narsinghpur
Old Manesar Road
Gurgaon
Haryana-122 001
Cost of equity
Ke=D/P+G
= .2/35+.42
= .4307
Cost of debt-
Kd=i/avg.borrow*100
= 2.61/569.51*100
= .4582(1-.17)
= .3803
Weighted avg. cost of capital-
Source cost capital(%)
Equity .4307 53.10
Debt .3803 46.89
WACC-
=43.07(.5310)+38.03(.4689)
=40.70
BHARAT SEATS LTD.
D-188
Okhla Industrial Area
Phase-I
New Delhi
Delhi-110 020
Cost of equity
Ke=D/P+G
= .5/9.2+(-.04)
= .0143
Cost of debt-
Kd=i/avg.borrow*100
= .67/3.28*100
= 20.42(1-.31)
= 14.08
Weighted avg. cost of capital-
Source cost capital(%)
Equity .0143 56.17
Debt 14.08 43.28
WACC
=0.0143(0.5617)+14.08(.4328)
=6.1
CLUTCH AUTO LTD
2E/14, 1st Floor
Jhandewalan Extension
New Delhi
Delhi-110 055
Cost of equity
Ke=D/P+G
= 1/19.25+3.3
= 3.35
Cost of debt
Kd=i/avg.borrow*100
= 11.49/24.6*100
= 46.7(1-.16)
= 39.22
Weighted avg. cost of capital
Source cost capital(%)
Equity 3.35 7.86
Debt 39.22 92.14
WACC
=3.35(7.86)+39.22(.9214)
=62.46