CAPITAL STRUCTURE

STRUCTURE OF PAPER INDUSTRY:

The industry can be classified in 3 ways (i.e. by sized or the mills, by the raw materials used for production and by the end product produced)

A mill with a capacity to over 33.000 TPA Or 100 pd) is considered large. The large paper mill uses conventional raw materials, which generally is a combination of forest bases raw materials like bamboo, imported wood pulp and waste paper. Over 40% of domestic productions are based on wood based raw materials like hard wood bamboo and pulp, while another 40% are accounted by paper based plants. Many smaller mills used agro-based inputs like bagasee, rice husk, straw, jute etc., While some of then are also equipped to use, waste paper as raw materials for making paper.

On the basis of and product there are some companies the stop at the manufacturing of pulp, some or them makes paper by pulp and the integrated mills that is a combination of both mills are classified on the basis of product mix between cultural and industrial paper. Cultural apper is of two types . I Writing such as bond, cream wove etc., 2) Printing like maphlitho, offset industrial paper comport of wrapping and packaging paper such as kraft, duple bo4ds etc.,

International industrial paper account for 65% of the total paper demands while in India it account, for only 40%.

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CAPITAL STRUCTURE

Structure of paper industry based on end product produced.

Paper and paper board

New Print

Structure of paper industry based on raw materials required for making paper.

Wood paper (Hard Wood & Imported Pulp Bamboo)

Agro based Secondary Raw Materials

Waste

&

(Bagasee, Straive Glasses, Jutewaste, Cotton linters &Industrial Waste)

THE MODERN PAPER MILL

INTRODUCTION

The modern mill is a highly complex industrial facility. Althoug the principles of paper making have ne fundamentally changed for many years, a paper making by imperial China or Per-industrial Europe would be hard pressed recognize his craft among the all the equipment of a
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modern mill. To Explore how a present-day paper mill operates, lets follow the path of an individual wood fiber by its arrival at the mill to its departure.

RAW-MATERIALS USED FOR MAKING- PAPER;

Most of the mills raw-materials arrives by truck or rail in the form of longs. The logs are soaked in water and tumbled in slatted metal drums to remove the bask. The debarked logs are then fed into chipper, a device with a rotating steel blade that cuts the wood into pieces about 1/8 thick and half squre (In some cases, the wood may have been chipped, bark and all, when it was harvested). The wood chips are stored in a pile outside the mill, as new chips ale added to the top of the pile, others are withdrawn by the bottom and carried by conveyor to the digester.

PULPING

Digesting is a the process of removing ligin and other componenets of the wood by the cellulose fibers, which will be used to make paper. Ligin is the gule which hold the wood together, it rapidly decomposes and die colors paper if it is left in the pulp (as in newsprint, which is usually made by ground wood pulp with little or no chemical treatment). Since this is a Kraft mail the ligin is removed by the action of sodium hydroxide (caustic Sode) and sodium sulphide under heat and pressure. The chips are fed into the top of the digester and mixed with the cooking chemicals, which are called while liquor at the point. As the chips and liquor move down through the digester. The ligin and other components
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are dissolved and the cellulose fibers are released as pulp. At the spent chemicals (now known as black liquor) are separated and recycled.

ABOUT SUBJECT DEFINITION FO CAPITAL STRUCTURE; According to Gerstenberg, The capital term Structure refers to the make-up, form or composition of a firms Capitalization, i.e., the types of securities or be issued and the relative proportion of each type of Securities in the total Capitalization. According to Schewartz, The Capital Structure of a business can be measured by the ratios of the various kinds of permanent loan and equity capital to total capital.

DFFEIIENCE

BETWEEN

CAPITAL

STRUCTURE

AND

FINANCIAL STRUCTURE; The term capital structure is different form the term Financial structure capital structure refers to the mix-up or Composition only the long term funds in the Capitalization of a company. But financial

structure refers to the composition of long-term funds as will as short term funds in the Capitalization of a company. That means, capital structure of a company is a part of its financial structure.

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CAPITAL STRUCTURE
SIGNEFICANCER OF CAPIRAL STRUCTURE

Capital Structure has great significance

a) It affects the Cost of Capital or Financing b) It affects also the earning per share for the equity shareholders c) It even affects the control of the promoters and/the existing m Management of the company over the affairs of the company.

BASIC PATTERN OF CAPITAL STRUCTURE There are four fundamental of basic patterns of capita structure refers for a company. These are: a) Only equity shares b) Equity shares and preference shares. c) Equity shares and long term borrowings like debentures and term loan form financial institutions. d) Equity shares, preference shares and long term borrowings like debentures and term loan form financial institutions.

The choice of particular pattern of capital structure depends upon a number of factors.

DETERMINATES OF CAPITAL STRUCTURE OR FACTORS INFLUENCING CAPITAL STRUCTURE OF A COMPANY

There are a number of factors influencing or determining the capital structure of a company, So while determining the capital
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structure of a company the management must keep in mind various factors that influence the capital Structure.

The important factors which influence the capital structure of a company are: 1 Trading on Equity The desire to trade on equity is one of the most important factors influencing the capital structure of a company. When a company desires to trade on equity, its capital structure will be made up of equity shares as well as preference share and /debentures. In this context, it is necessary to have some idea about trading on equity. When a company uses the long-term funds raised through the issue of preference shares and /debentures long-term funds raised through the issue of equity shares in the regular conduct of business with a view to have a rate of earning on its investment (i.e.capital employed in the business) higher than the rate of dividend payable on preference shares and or the rate of interest payable on the debentures, the company is said to be trading on equity.

1. Desire to retain control:

The capital structure of a company is also influenced by the desire of the promoters and /or the existing management of the company to retain control over the affairs of the company. As the preference shareholders and debentures holders do not have much say in the management of the company and only the equity share holders have a say in the management of the company, if the promoters and or the management wants to raise
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funds without diluting(i.e., losing) the control over the affairs of the company, the have to issue preference shares and or debentures and not equity shares. Thus, the desire of the promoters and or the existing management to retrain control over the affairs of the company influences the capital structure of the company.

2. Nature of the enterprise; The nature of the enterprise also influences the capital structure of a Company. For instance, companies like public utilities which enjoy monopoly in the market and have stability in their earnings(i.e. stable earnings)can easily raise capital by the issue of preference shares and or debentures. On the other hand. Companies such as manufacturing

companies, which are subject to trade cycles and competition and which do not have stable earnings, have necessarily to depend on equity shares for raising funds. Similarly. Trading companies which do not have much fixed assets to be charged in favour or debenture holders cannot raise much funds by the issue of debentures. They have to meet their capital requirements by the issue of equity shares and or preference shares.

3. Size of the company The size of a company influenced its capital structure. Generally. Small companies, which do not have better bargaining power, will find it difficult to raise funds by the issue of debentures, So they have to raise funds mainly by the issue of equity shares. On the other hand, large companies, which have stronger financial position and better bargaining power, can raise funds by any source they want.

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CAPITAL STRUCTURE

4. Purpose of finance The capital structure of a company is influenced by the purposed of finance(i.e. the purpose for which finance is required). It funds are required by a company for directly productive purposes. Such as the establishment of a new project. Construction of a new factory, purchase of additional machinery, etc., the company can afford to raise the funds by the issue of debentures, as the interest on debentures can be paid easily out of the earning by the productive assets. On the other hand if funds are required by the company for non productive purposes. Such as the provision of welfare to the employees, it would be advisable for the company to raise the funds by the issue of equity shares.

5. Period of finance

The period of finance also influences the capital structure of a company. For instance, if funds are required more or less permanently (i.e. for a very long period), if would he advisable for the company to raise the funds by the issue of equity shares, which provide more permanent capital. On the other hand if funds are required for a period of 8 to 10 years then, it would be better for the company to raise the funds by the issue of debentures or redeemable preference shares or through term loans by financial institutions.

6. Desire to have flexibility or elasticity in financial plan

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CAPITAL STRUCTURE
The desire of a company to keep its financial plain flexible (which, i.e. the flexible financial plan. Will enable the company to raise funds easily in the case of emergencies) also influences the capital structure of a company Generally, a company which desires to have flexibility in its financial plan raises its capital through the issue of equity shares and preference shares. It resorts to the issue debentures only at a later stage to raise funds for financing the expansion.

7. Need to make provision for the future The need to make provision for the future also influences the capital Structure of a company. While planning the capital structure, the

management of the company must make adequate provision for the future. In the words of company, depending upon the characteristics of the company and the general economic conditions under which the company is operating, the financial manger of a company, who is in charge of determining the capital structure of the company, must exercise considerable skill and judgment. While designing

8. Legal requirements: Legal requirements also affect the capital structure of a company. For instance, under the Banking Regualtion Act of 1949, a banking company cannot issue any security other than equity shares.

9. Requirements or preferences of investors The requirement or preferences of investors also influence the capital structure of a company. As the investors have different preferences, to cater to the preferences of the different types of investors, different types of securities have to be issued. Generally, equity shares are best suited to
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bold and adventurous investors kwho are prepared to risk their capital but require a higher, return. Preference share suit those investors who are not very bold (i.e.

KINDS OF DEBENTURENS Debentures are many kinds of they are, From the point of view of transferabil debentures may be classified into two types.,

a) registered debentures and b) bearer or unregistered debentures.

A) REGISTERED DEBENTURES Registered debentures are those in respect of which the names of the debenture holders are enrered in the register of debenture holder kept by the company. As the debenture holders are recorded in the register of debenture holder maintained by the company, the payment of interest and the repayment of the principal amount are made only to the registered holders, i.e.. those persons whose names are recorded in the register of debenture holders.

B) BEARER DEBENTURE OR UNREGISTERED DEBENTURES

In

the case of bearer debentures. the names of the holder of

debentures are not entered in the register of debentures holder maintained by the company.As such. the payment of interest and the re4payment of these ndebentures are made to the bearers or holders of these debentures these are considered as negotiable incitements.
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CAPITAL STRUCTURE

IRREDEEMABLE PREFERENCE SHARES Irredeemable Preference shares are those preference shares which are mnot redeemable (i.e. re until the company is wound up.) Asa per the Anew section 80A added by the Companies shares Amendment Act 1988, all the existing irredeemable preference shares shall be compulsorily, redeemed by the company within five years from the commencement of this Amendment Act.

DEBENTURE MEANING OF DEBENTURE The term debtnture to owe. is So, derived literally,

from

the

Latin

term a

deberemeaning

debenture

means

documentacknowledgeing a dept. in the words of palmer. Debenture signigies an instrument under seal evidencing a debt, the essence of it being the admission of indebtedness From these definations, it is clear that a debenture is an instrument issued by a company under its common seal, acknowledgeing debt some person, and cointaining an undertaking to repay the debt after a specified date or on a particular date or at the option of the company, and in the meantime, to pay interest at a fixed rate andf at regular intervals. In short a debenture is an instrument of credit, a bond of indebtedness, a certificate of loan or an acknowledgement of debts issued a company.

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CAPITAL STRUCTURE
CONVERTIBLE PREFERENCE SHARES

The holder of convertible preference shares are given the right to convert their shares into equity shares later on (i.e.after a certain period.)

NON-CONVERTIBLE PREFERENCE SHARES Unlike the holder of convertible preference shares the holders of Non-convertible preference shares are not given the right to convert their shares into equity shares later on.

It may be noted that if the articles of association atre silent all preference shares are deemed to be non-convertible preference shares.

REDEEMABLE PREFERENCE SHARE Redeemable preference shares are those preference shares which can he redeemed (i.e.returned of paid back)even during the existence of the company.

These shares can be redeemed as per the terms of issue either at a definite date after the expiry of a stipulated (i.e.fixted)period or at the option of the company, i.e. whenever the company wants, after gives proper notice.

PARTIC PREFERENCE SHARES The holder of these shares, ib addition to a fixted percentage of dividend, are also entitled to participate in the surplus profits of the company (i.e. the profits left after the payment of a specified rate of dividend to preference shareholders and the percentage of dividend
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CAPITAL STRUCTURE
recommended for the equlity shareholders)along with the equity shareholders, In this context, it may be noted that the holdrs of these shares will be entitled to participate in the surplus profiuts only if there is a specific provision in the articles of association of the company giving the holders of these shares the special right to participate in the suplus profits.

NON-PARTICIPATING PREFERENCE SHARES

The holders of non-participating preference shares will get only a fixed of dividend, of course, in the first instance (i.e. before any dividend paid to equity shareholders). But they are non entitled to participate in the surplus profits of the company if any.

It may be noted that under the companies Act, all preference shares are deemed to be non-participating preference Shares unless otherwise stated (i.e. unless the articles of association expressly give them the right to participate in the surplus profits and surplus assets.

Redeemable Preference shares Irredeemable Preference Shares

CUMULATIVE PREFERENCE SHARES

At the yen outset, it amy be noted that unless otherwise st6ated in the articles of association or the terems of issue all preference shares are deemed to be cumulative preference shares.

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CAPITAL STRUCTURE
The holders of cumlutative preference4 shares are no doubt

emntitled to receiver a fixted percentage of dividend bedfore anything is given to other classes of shareholders, Apart from this right, in the case of these shares, if the company has no profits or inadequatge profits in any year to dceclare deividend, the arrears of div idend would accumul;ate and become payable out other future profits before anything is given to other classes of shareholders.

NON-CUMULATIVE PREFERENCE SHARES

Non-cumlative preferencer shares are, nho doubt, entitled to a fixed rate of dividend in the first instance(i.e. before anythingt is given to other types of shareholders). But they are entitled to receive the fixed

percentage of divicdend in the first instance only for the year or years when the company earns sufficient profits and dividend is declared. In case the company has no or inadequate profits in any year to declare dividend, then arrears of dividend do not accumulate and become payable out of future profits in the case these shares.

In the words of company, depending upon the characterstics of the company and the general economic conditiikns undedr which the company is operating, the financial manager of a company, who is in charge of determining the capital structure of the company, must exercise considerable skill and judgement, while designing.

9. Legal requirements

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CAPITAL STRUCTURE
Legal requirements also affect the capital structure of a company. For instance, under the Banking Regulatiopn Act of 1949. A banking company cannot issue any security other than equity shares.

10.Requirements or preference of investors. The requirements of preferences of investors also influence the capital structure of a company. As the investors have different p0references, to cater to the preference of the different types of investors, different types of secutities have to be issued. Genreally, equity shares are best suited to bold and adventurous investors who are prepared to risk their capital but require a higher, return. Preference shares suit those investors who are not very bold(i.e. those investors who look for highere returns combined with safety of capital). Debentures suit those investors who are very cautious(i.e. those investors who are mopre interested in the safety of funds, but are satisfied with reasonable returns.)

11. Market situation or market sentiment The market situatiojn or market sentiments also influence the capital structure of a company for instance, during the boom period, when investors desire to have higher speculative incomes, equity shares may find ready market. On the other hand, during the period of depression, when investors want to have absolute safety, debentures may find ready market.

12. Government policies

The Government policies also influence the capital structure of a company for instance the provision of the capital issues control act of
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CAPITAL STRUCTURE
1947, which are dependent upon the policies of the government, influence the capital structure of a company considerably. Similar to the lending policies of the financial institutions, which are dependent upon the policies of the Governemtn also influence the capital structure of a company. So also the monetary and fiscal policies of the Governemtn influence the capital structure of a company 6.

CONCLUSION Thus there are many actors, which influence the capital structure of a company. So, while designing the capital structure, the management of a company should bear in mind all these factors which influencer the capital.

Again, as some of these actors are conflicting in nature, and as the relative weight age a given to e4ach of the factors varies widely from company to Gerstenberg. manager of corporate financing must always think of rainy days or the emergencies:. To ensure adequate provision for the future it would be always advisable for a company nbot to issue all types of securties at one time. It would be always safe to keep the best security u sonic of the best securities still the last.

OPTIMUM

CAPITAL

STRUCTUIRE

OR

APPROPRIATE

CAPITAL STRUCTURE OF A COMPANY Optimum capital structure referes to that capital is at which there is an ideal relationship between depn and equity securities, resulting in maximizing the value of the companys equity shares in the stock exchanges and minimizing the average cost of capital. In short, optimum
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capital structure is that capital structure at which the value of the equity/shares of the company in the exchange is the maximum, while the average cost of capital is the minimum.

An appropriate capital structure should possess the following features. a) It must be most profitable, that is it must be such as to maitness the earnings per quality share and to minimize the cost of capital. b) It must ensure the solvency of the company. That is it must ensure that the debt content in the capital structure is not so excessive as to threaten the solvency of the company. c) It must be flexible, that is it must ve such that it can be easily changed to meet requirements of the changing conditions. d) It must ensure that the present management does not lose the control of the company.

SOURCESS OF CAPITAL As stated earlier capital structure referes to the from or composition of long-term capital or long term funds. So, in the context of the staudy of sources of capital, let us study the sources of long term capital or long term funds. Long term capital long term finance or long term funds refere to the capital, finance or funds raised for long period of more than 7 years. These funds are needed for investment in fixed assests like land and building, plant and machineary, patents furniture and fixtures, etec., which are used for long period.

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CAPITAL STRUCTURE
VARIOUS SOURCES OF LONG CAPITAL The chief sources of long-term capital or long term founds are 1) equity shares,2) preference shares 3) debentures,4) long term loans and lomg-term deposits now, let us have discussion of the various sources of long-term capital or Rinds. EQUILITY SHARES

INTRODUCTION Joint stock companies raise long-term founds mainly through the issue of equity shares So. Equity shares are the most important sources of long-term finance for joint stock companies.

MEANING OF EQUITY SHARES

According to the companies Act of 1956,equity shares are those which are not preference shares.In other words,there are shares which do not enjoy any preferential right either in respect of the payment of dividend or in respect of the repayment of the capital at the time of the winding up of the company,It is for this reason that formerly (i.e.,before the passing of the companies Act of 1956),these shares were known as ordinary shares.These shares are known as equity\shares,as they are the ownership shares.Conferring the ownership of the company o n the holders of these shares,i.e.,the holders of these shares are the real owners of the company.

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CAPITAL STRUCTURE
PREFERENCE SHARES

INTRODUCTION

Preference shares are shares which have preferential rights(i.e., first priority or preference over other kinds of shares in respect of payment of divinded during the existence of the company and also in respect of repayment or refound of share capital in the event of the winding up of the company-It is because of their preferential rights in respect of the payment of dividend and repayment of capital that these shares are known as preference shares.

TYPES OF PREFERENCE SHARES

Preference shares are of many types.they are

a)cumulative preference shares b)Non-cumlative preference shares c)participating preference shares d)Non- participating preference shares e)convertible preference shares f)Non convertible preference shares g) Redeemable preference shares h) Irredeemable preference shares

From the point of view of security, debentures can be classified in to two kinds, viz., (a) simple, or unsecured debentures and (b) mortgage or secured debenture.
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(a) Simple, Naked or Unsecured Debentures: Simple debentures are those debentures Which are issued with a more promise to pay the interest and to repay the principal without any charges on the assets of the company. (b) Mortgage or Secured Debentures Secured debentures are those debentures which are secured by a charge on the assets of the company. If the charge is on some fixes or specific immovable property of the company, it is called a fixed charge.

From the point of view of redemption, debentures may be divided into two classes, viz,. (a) Redeemable Debentures and (b)

Irredeemable Debentures.

a) Redeemable Debentures Redeemable Debentures are those debentures which are repayable on a certain date or after a specified period. b) The term Irredeemable Debentures does not mean that these debentures are not be repaid at all. It only means that there is no time specified or fixed for the repayment of these debentures. As no time is specified for the repayment of these debentures. The holder of these debentures cannot demand the repayment.

By the point of view of their convertibility /. Debentures may be classified into two kinds, viz, a) Convertible Debentures and b) Nov convertible Debentures.
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a) Convertible Debentures: Convertible Debentures are debentures in which an option is given to the holders to convert them into preference or equity shares after a specified period, say after 10 years or 15 years. The option must he exercised within a fixed period, say, 6months. After expiry of the 10years or 15years.

b) Non-convertible Debentures. Non- convertible Debentures are debentures which are not

convertible into preference shares or equity \ shares at the option of the debenture holders. It may be noted that unless the debentures are especially issued as convertible, a it debentures are non-convertible.

LONG-TERM CORPORATIONS

LOANS

BY

INDUSTRIAL

FINANCE

Long-term Loans by specialized Industrial Finance Corporation are one of the important sources of long-term finance for industrial companies. In India, industrial companies raise long-terms loans for period over 7 years by several specialized industrial finance corporations, such as the industrial Finance Corporation of India, the Industrial Development Bank of India, the industrial Credit and investment corporation of India, etc.

LONG-TERM PUBLIC DEPOSITS Long term public deposits also have become an important source of long-term finance. It may be noted that, as per the buidelines issues by
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the reserve Bank of India, public deposits cannot be accepted for a period exceeding 36 months. A company can accept publice deposits up to a maximum of 25% of its paid-up capital and free reserves. Generally, long-term public deposits are uinsecured. An interest of 15% to 18% is allowed on these deposits.

INSTALMENT CREDIT Instalment credit refers to the purchase of machinery. Equipments. Etc. by a concern either on hire-purchase system or on instalment system. It is one of the sources of long-ter finance. In the sense that the acquisition of a fixed asset is financed by this sources. Of course the amout of financed through this source is not much. Again this sources of finance is popular only with small concerns.

LEASING Leasing is an arrangement under which a concern acquires some machinery, equipments, etc. on lease by a leasing company fori the consideration of rent. The machinery, equipment, etc obtained on lease remain the property of the leasing company. The company which has acquired the machinery, equipments, etc., can only use them during the lease period by paying the agreed rent.

RATIO ANALYSIS Ratio analysis is a widely used and powerful tool of finance analysis. Ratio analysis makes related information in the statement

comparable. A single figure by itself has no meaning but when expressed in terms of related figures, it yields significant inferences, with the use or ratio analysis one can measure the financial condition u a firm and can
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point out whether the condition is strong, good, questionable or poor and also conclusions can be drawn as to whether the performance is

improving or deteriorating . Thus ratios have wide applications and immense us today.

RATIO ANALYSIS HELPS IN ASSESSING THE PERFOMANCE OF THE FIR IN RESPECT OF FOLLOWING FOUR ASPECTS

LIOUDITY POSTION Radio analysis helps in deciding whether the liquidity position of the 1 is satisfactory or not and whether the firm can meet its current obligations and as when become due or not. LONG-TERM SOLVENCY Ratio analysis is useful for assessing the long-term financial viability of a firm. Long-term creditors, security analysis and the present and potential investors are interested in respect of the long-term solvency of a firm.

OPERATING EFFICIENCY Ratio analysis also throw light on the degree of efficiency in the management and utilization of assets of a firm. The operating efficiency of the firm is analyzed with respect of its sales or cost of sales.

OVERALL PROFITABILITY The profitability of a firm influences the ability of the firm to meet its short-term as will as long-term obligations to tis creditors, to ensure reasonable return to its investor etc., the profitability can be measured easily by ratio analysis.
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CAPITAL STRUCTURE

CAPITAL STRUCTURE RATIOS OR LONG-TERM SOLVENCY RATIOS These ratios indicate a firms ability to meet the fixed interest and costs and repayment schedules associated with its long-term borrowings and security of loans. These ratios measure ability to meet the longterm obligations of a firm. The capital structure ratios are as belows: a) DEBT EQUITY RATIO It is calculated to measure the relative claims of outsiders and the owners against firms assets. The ratio is

b) DEBT ASSET RATIO It measures the extent to which borrowed funds support the firms assets. The ratio denotes the extent of assets is financed by debt. The ratio is

c) PROPRIETARY RATIO It is the relationship between shareholders hinds to total assets of the firm. It indicates the extent to which the assets of the firm are financed by using the proprietary-funds. The ratio is

d) CAPITAL GEARING RATIO It is to be equity shareholders funds and preference shareholders funds and fixed interest bearing debt. Gearing should be kept in such a way that the company/is able to members a steady rate of dividend. The ratio is

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CAPITAL STRUCTURE
e) OVERALL COVERAGE RATIO This ratio is also known as fixed charges coverage ratio. It

measures the ability of a company to serve all fixed obligations out of the earnings. The fixed obligation includes interest on loans and d4ebentures. Dividend on preference shares. Lease payment and loan payment. This ratio reflects the overall ability of a company to serve outside liabilities. This ratio is computed as follows.

PROFITABILITY RATIOS These ratios measure the profitability of a concern. They reveal the total effect of business transactions on the profit position of an enterprise and indicate how far the enterprise has successful in the aim of making profits. These rations measure the ability of the firm to earn an adequate return on sales, total assets and invested capital. The important ratios are as follows:

a) CROSS PROFIT RATIO It shows the margin left after meeting. Manufacturing costs. It

measures the efficiency of production as well as pricing. The Ratio is

b) NET PROFIT RATIO It measures the overall efficiency of production, administration, selling and financing pricing as well as tax manangement. It

indicates what portion of sales is left to the owners, after all expenses have been met. The ratio is

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CAPITAL STRUCTURE
c) OPERATING RATIO It measures the cost of operations per rupee of sales. It indicates the percentage of net sales that is consumed by operating cost. Ratio is

d) RETURN OF EQUITY It measures the profitability of equity funds invested in the firm. It is the relationship between profit of a company and is equity capital. The ratio is.

e) RETURN ON TOTOAL ASSETS It is a measure of how efficiently capital is employed, it is the relationship between profit and average total assets. The ratio is

f) DIVIDENT PAYOUT RATIO It is calculated to find the extent to which earning per share have been retained in business and the extent divided declared. The ratio is

g) DIVIDEND YIELD RATIO It is calculated to evaluate the relationship between dividend per share and market value of the share. The ratio is

h) PRICE EARNING RATIOS It is ratio between market price per equity share and earnings per share. It is calculated to make an estimate of appreciation in the value of a share of company. The ratio is

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CAPITAL STRUCTURE
RESEARCH DESIGN TITILE OF THE STUDY A STUDY ON CAPITAL SPICIAL REFERENCE TO MYSORE PAPER MILL LIMITED (MPM ltd) BHADRAVATHI, KARNATAKA.
STATEMENT OF THE PROBLEM

The capital structure of the company shows that long term solvency position of the company and its ability to raise debts by outsiders and whether a company has a benefit of the leverages the capital structure of the company has an impact on the long term profitability of the company and also shows that the company is able to finance its future its insure projects. The optimum capital structure increases the net worth of the share holders.

OBJECTIVE OF THE STUDY 1. To know the capital structure of the company 2. To assess the long term solvency position of the company 3. To know the main source if founds through which the company has been financed 4. To study the working capital position of the company 5. To increase the Net worth of the share holders.

SCOPE OF THE STUDY The study of capital structure covers the study of different types of shares issued by the company to raise the required share capital and also
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study of the different sources of borrowed capital, it also deals with the study of composition of optimum capital structure in order to undertake new project.

It is also concerned with the study of utilization of capital both for field capital and working capital purpose.

LIMITATIONS OF THE STUDY 1. The study is limited to information provided by the MPM ltd Bhadravathi.

2. Lime constraints limited the wide coverage of the study. 3. The study is concentrated on only one financial aspect i.e., capital structure. 4. The Analysis does not include current year financial statement. 5. The study & analysis of the capital structure restricted only 4 years financial statements. 6. The accuracy of the information depends on degree of correctness in a/cs of the company.

MTHODOLOBY OF STUDY

The data required for the study is collected in the following: a) Primary data: The primary data recollected h) finance departmental heads by asking them question and it is preplanned, droughts are clear there itself.

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b) Secondary data: Secondary data are gathered by the published documental data (or)information that are present in organizations internal records, it includes. Published annual reports Text books, Other reference material.

RESEARCH INSTRUMENTS: The technique used for the study is ratio analysis as it is, most widely used and powerful tool for analysis. The ratio such as Debt equity ratio, Proprietary ratio, Solvency ratio, Fixed asset to net worth ratio. Current assets to net worth ratio, current liabilities to net worth ratio. Fixed asset ratio, debt to total capital ratio. Reserves ratio, fixed assets to long term Rind ratio are used and also some statistical tools are used.

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CAPITAL STRUCTURE

TABLE -1 Long term Debt Debt equity Ratio = --------------------------Share holders funds

TABLE SHOWING DEBT EQUITY RATIO FOR 4 YEARS, 2003. 2004,2005 & 2006 (Rs. In Lakhs) Years Long term Debt Share funds 2002-03 2003-04 2004-05 2005-06 20,229.62 20,739.46 20,805.29 19,447.64 12,851.60 12,812.95 12,775.41 12,739.34 holders Debt Ratio 1.57 1.62 1.63 1.53 equity

ANALYSIS The long term debt of the company were 20,229.62 lakhs, 20,739.46 lakhs, 20,805.29 lakhs. 19,447.64 lakhs in the 2002-03, 200304, 21004-05, 2005-06 respectively. The share holders funds of the

company were 12,851.60 lakshs, 12,812.95 laksh. 12,775.41 laksh % in the 12,739.34 laksh in the year 2002-03, 2003-04, 2005-06 respectively. The debt equity ratios of the company 1.57, 1.62, 1.63, &1.53 in the year 2002 2003, 2003-04, 2004-05m 2005-06 respectively.

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INFERENCE The debt equity Ratio of the company was by 0.05 in the year 2003-04 as compared to 2002-03. In the following year 2004-05 there is no significiant changes in the Ratio. But in the year 2005-06 the ratio has been decreased by 0.1 as compared to 2004-05.

GRAPH 01

GRAPH SHOWING THE DEBT EQUITY RATIO OF MPM BY 2002-03 TO 2005-06

12,851.61 18,000.00 16,000.00 14,000.00 12,000.00 10,000.00 8,000.00 6,000.00 4,000.00 2,000.00 0.00

12,775.41 12,739.34 Fixed Assets Networth Fixed Assets to long term fund ratio

12,812.95

2002-03 2003-04 2004-05 2005.06

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TABLE 2

Proprietors fund Proprietary Ratio = ------------------------------------------ X Total assets 100

TABLE SHOWING PROPRITORY RATIO FOR 4 YEARS, 2003, 2004, 2005 & 2006.

Years 2002-03 2003-04 2004-05 2005-06

Proprietors fund 12,851.60 12,812.95 12,775.41 12,739.34

Total assets 30,286.30 28,706.62 27,917.54 26,782.48

Proprietary Ratio 42.43 44.63 45.76 47.57

ANALYSIS

In proprietors fund of the company were 12,851.60 lakhs, 12,812.95 lakhs, 12,775.41 lakhs & 12,739.34 lakhs in the years 2002-03, 2003-04, 2004-05, 2005-06, respectively. The total assets of the company were 30,286.03 lakhs, 28,706.62 lakhs, 27,917.54 lakhs & 26,782.48 lakhs in the year 2002-2003, 2003-04, 2004-05 respect. The proprietary Ratio of the company were 42, 43, 44, 45, 76, & 47, 57 in the year of 2002-03, 2003-04, 2004-05, 2005-05 respectively.

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INFERENCE The Proprietary Ratio of the company was increased by 2.2 in the year 2003-04 as compared to 2002-03, in the following year 2004-05 there is a increase of 1.13 in the ratio as per compare to 2003-04. But in the year 2005-06 the ratio has been increased by 1.81 as compared to 2004-05. GRAPH 02

GRAPH SHOWING THE PROPRIETARY RATIO OF MPM BY 2002-03 TO 2005-06.

18,000.00 16,000.00 14,000.00 12,000.00 10,000.00 8,000.00 6,000.00 4,000.00 2,000.00 0.00 2002-03 2003-04 2004-05 2005.06 Fixed Assets to long term fund ratio 12,851.61 12,812.95 12,775.41 12,739.34 Fixed Assets Networth

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TABLE 3

Total Assets Solvency Ratio = ------------------------- X 100 Total Liabilities TABLE SHOWING SOLVENCY RATIOS FRO 4 YEARS 2003, 2004, 2005 & 2006

Years 2002-03 2003-04 2004-05 2005-06

Fixed Assets 30,286.62 28,706.62 27,917.54 26,782.48

Total Liabilities 33,081.22 33,552.41 33,580.70 32,186.98

Solvency ratio 91.56 85.56 83.14 83.21

ANALYSIS The total assets of the company were 30,286.03 lakhs. 28,706.62 lakhs, 27,917.54 lakhs & 26,782.48 lakhs and the total liabilities of the company were 33,186.98 lakhs and the solverncy Ratio of the company were 91,56,85,56,83,14 & 83,21 respectively in the year of 2002-03, 2003-04, 2004-05 & 2005-06.

INFERENCE

The solvency Ratio of the company was decrease by 6.0 in the year of 2003-04, as compared to 2003-03, In the following year 2004-05

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there is decrease of 2.42 in the ratio as per compare to 2003-04 but in the year 2005-06 there is no significant changes in the ratio.

GRAPH 03

GRAPH SHOWING SOLVANCY RATIO OF MPM FROM2002-03 TO 2005-06

18,000.00 16,000.00 14,000.00 12,000.00 10,000.00 8,000.00 6,000.00 4,000.00 2,000.00 0.00

17,104.66 16,268.63 15,994.17 15,409.83

Fixed Assets Fixed Assets to long term fund ratio

2002-03 2003-04 2004-05 2005.06

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TABLE - 4

Net fixed assets Fixed Assets to Net worth ratio = ------------------------------------- X Net worth 100

TABLE SHOWING FIXED ASSETS TO NET WORTH RATIO FOR 4 YEARS 2003, 2004, 2005 & 2006

Years

Fixed Assets

Networth

Fixed Assets to long term fund ratio

2002-03 2003-04 2004-05 2005.06

15,994.17 17,104.66 16,268.63 15,409.83

12,851.61 12,812.95 12,775.41 12,739.34

124.46 133.50 127.34 120.96

ANALYSIS

The Net fixed Assets of the Company were 15,994.17 lakhs, 17,104.66 lakhs. 16,268.63 lakhs & 15,409.83 lakhs and The Net worth of the company were 12,739.34 lakhs & F.A. to Net worth ratio of company were 124.46, 133.50, 127.34 & 120.96 respectively in the year of 2002-03, 2003-04, 2004-05 & 2005-06.

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INFERENCE

The F.A. to Net worth ratio of the Company was increased 9.04 in the year of 2003-04 as compared to 2002-03. In the following year 200405 there is decrease of 6.16 in the ratio as per compare to 2003-04, but in the year 2005-06 the ratio has been decreased by 6.38 as compared to 2004-05.

GRAPH-04

GRAPH SHOWING FIXED ASSETS TO NET WORTH RATIO OF MPM BY 2002-03 TO 2005-06

50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 1 2 120.96 3 15,409.83 12,739.34 2005.06 2004-05 2002-03 Years

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TABLE -5

Current Assets Current Assets to Net worth ratio = ------------------------ X 100 Net Worth

TABLE SHOWING CURRENT ASSETS TO NET WORTH RATIO FOR 4 YEARS 2003, 2004, 2005 & 2006

Years

Current Assets

Networth

Current to ratio Net

Assets worth

2002-03 2003-04 2004-05 2005.06

21,000.08 23,650.80 19,149.05 19,474.31

12,851.61 12,812.95 12,775.41 12,739.34

163.40 184.59 149.89 152.87

ANALYSIS

The Current Asset of the Company were 21,000.08 lakhs, 23,650.80 lakhs, 19,149.05 lakhs & 19,474.31 lakhs and the Net worth of the Company were 12,851.61 lakhs. 12,812.95 lakhs, 12,775.41 lakhs &
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12,739.34 lakhs & Current Assets to Net worth ratio of company were 163.40, 184.59, 149.89 &152.87 respectively in the year of 2002-03, 2003-04, 2004-05 & 2005-06

INFERENCE The current Assets to Net worth ratio of the company was increased by 21019 in the yer of 2003-04 as compared to 2002-03. In the following year 2004-05 there ise decrease of 34.7 in the ration as per compare to 2003-04. But in the year 2005-06 the ratio has been increased by 2.98 as compared to 2004-05.

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GRAPH 5

GRAPH SHOWING CURRENT ASSETS TO NEW WORTH RATIO OF MPM BY 2002-03 TO 2005-06

100% 100% 100% 99% 99% 99% 99% 99% 98% 1 2 3 12,812.95 12,775.41 12,739.34 133.5 127.34 120.96 Series2 Series1

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TABLE 6

Current Liabilities Current Assets to Net worth Ratio = --------------------------X Net worth TABLE SHOWING CURRENT LIABILITIES TO NEW WROTH RATIO FOR 4 YEARS 2003, 2004, 2005 & 2006. 100

Years

Fixed Assets

Net worth

Fixed assets to long term fund ratio

2002-03 2003-04 2004-05 2005-06

15,489.02 16,093.63 12,287.50 13,032.59

12,851.61 12,812.95 12,775.41 12,739.34

120.52 125.60 96.18 102.30

ANALYSIS The currents liabilities of the company were 15,489.02 lakhs, 16,093.63 lakhs. 12.287.50 lakhs & 13,032.59 lakhs and the net worth of the company were 12,851.61 lakhs. As,812.95 lakhs. As,775.41 lakhs & 12,739.34 lakhs & current liabilities to net worth ratio of company were 120.52, 125.60, 96.18 & 102.30 respectively in the year of 2002 03, 2003-04, 2004-05 & 2005-06.

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INFERENCE

The current liabilities to net worth ratio of company was increased by 5.08 in the year 2003-04 as compared to 2002-03. In the following year 2004-05 there is decrease of 29.42 in the ratio as per compare to 2003-04. But in the year 2005-06 the ratio has been increased by 6.12 as compared to 2004-05.

GRAPH 06

GRAPH SHOWING CURRENT LIABILITIES TO NET WORTH RATION OF MPM BY 2009-10 TO 2011-12

18,000.00 16,000.00 14,000.00 12,000.00 10,000.00 8,000.00 6,000.00 4,000.00 2,000.00 0.00 2002-03 2003-04 2004-05 2005-06 Fixed assets to long term fund ratio 12,851.6112,812.9512,775.4112,739.34 Fixed Assets Net worth

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TABLE No. -7

Long term Debt Debt to Total Capital Ratio = -------------------- X Total Capital 100

TABLE SHOLWING DEBT TO TOTAL CAPITAL RATIO FOR 4 YEARS, 2003, 2004, & 2006 Years Fixed Assets Net worth Fixed assets to long term fund ratio 2002-03 2003-04 2004-05 2005-06 20,229.62 20,739.46 20,805.29 19,447.64 33,081.22 33,552.41 33,580.70 32,186.98 61.15 61.81 61.96 60.42

ANALYSIS The long term debt of the company were 20,229.62

lakhs20,739.46lakhs & 19,447.64lakhs in the year 2007-08, 2009-10 2011- 2012rspective. The Total capital of the company were

33,081,22, 33,552,41, and 32,186,98 in the year 2002-2003, 200304, 2004-05, 2005-06 respectively. The Debt to total capital Ratios

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of the company 61.15, 61.81, 61.96 and 60.42 in the year of 20022003, 2003-04, 2004-05, 2005-06 respectively.

INFERENCE The Debt to total capital ratio of the company was increased 0.66 in the year 2003-04 as compared to 2002-03. In the following year 2004-05 there is a increase of 0.15 in the ratio as per compare to 2003-04. But in the year 200-06 the ratio has been decreased by 1.54 as compared to 2004-05. GRAPH 07

GRAPH SHOWING THE DEBT TO TOTAL CAPITAL RATIO OF MPM BY 2002-03 TO 2005-06

35,000.00 30,000.00 25,000.00 20,000.00 15,000.00 10,000.00 5,000.00 0.00

33,081.2233,552.4133,580.7032,186.98

Fixed assets 17,104.6616,268.63 15,994.17 15,409.83 Net worth Fixed Assets to long term fund ratio

2002-03 2003-04 2004-05 2005-06

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TABLE 8

Reserve & Surplus Reserves Ratio = ---------------------------------- X Share holders fund 100

TABLE SHOWING RESERVES RATIO FOR 4 YEARS, 203, 2004, 2005 & 2006 Years Fixed assets Net worth Fixed assets to long term

fund ratio 2002-03 2003-04 2004-05 2005-06 811.37 772.72 735.08 669.11 12,851.60 12,812.95 12,775.41 12,739.34 6.31 6.03 5.75 5.49

ANALYSIS The Reserves and Surplus of the company were 811.37 lakhs, 772.72 lakhs. 735.18 lakhs and 699.11 lakhs and the share holders fund of the company were 12,851.60 lakhs, 12,812.95 lakhs, 12,775.41 lakhs 12,739.34 lakhs and Reserves Ratio 6.3, 6.03, 5.75, and 5.49 in the year of 2002-2003, 2003-04, 2004-05, 2005-06 respectively.

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INFERENCE The Reserves Ratio of the company was decreased by 0.28 in the year 2003-047 as compared to 2002-03. In the following year 2004-05 there is a decrease of 0.28 in the Ratio as per compare to 2003-04. But in the year 2005-06 the ratio has been decreased by 0.26 as compared to 2004-05.

GRAPH NO. 08

GRAPH SHOWING RESERVES RATIO OF MPM BY 2002-03 TO 2005-06

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2002-03 2003-04 2004-05 2005-06 33,081.22 33,552.41 33,580.70 32,186.98 Fixed Assets to long term fund ratio Net worth Fixed assets

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TABLE No. 9

FA X Fixed Assets to long Term fund ratio =

100

--------------------Long term fund

TABLE SHOWING FIXED ASSETS TO LONG TERM FUND RATIO FOR 4 YEARS 2003, 2004, 2005 & 2006 Years Fixed assets Net worth Fixed Assets

to long term fund ratio 2002-03 2003-04 2004-05 2005-06 15,994.17 17,104.66 16,268.63 15,409.83 33,081.22 33,552.41 33,580.70 32,186.98 48.35 50.98 48.45 47.87

ANALYSIS The fixed Assests of the Company were 15,994.17 lakhs, 17,104.66 lakhs, 16,268.63 lakhs and 15,409.83 lakhs and tone term fund of the Company were 33,081.22 lakhs, 33,552.41 lakhs, 33,580.70 lakhs and 32,186.98 lakhs and Fixed Assets to long term fund ratio if company were 48.35, 50.98, 48.45 and 47.87 respectively in the year of 2002-03,s 2003-04, 2004 and 2005.
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INFERENCE: The fixed Assets to long term fund ratio of the company was increased by 2.63 in the year of 2003-04 as compared to 2002-03. In the following year 2004-05 there is decrease of 2.53 in the ratio as per compare to 2003-04, but in the year 2005-06 the ratio has been decreased by 0.58 as compared to 2004-05

GRAPH NO. 09

GRAPH SHOWING FIXED ASSETS TO LONG TERM FUND RATIO OF MPM BY 2002-03 TO 2005-06

35,000.00 30,000.00 25,000.00 20,000.00 15,000.00 10,000.00 5,000.00 0.00

33,081.2233,552.4133,580.7032,186.98

Fixed assets Net worth Fixed Assets to long term fund ratio

2002-03 2003-04 2004-05 2005-06

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SUMMARY OF FINDINGS: The study on capital structure of MYSORE PAPER MILL LTD, BHADRAVATHI has been carried with the objective of study the capital structure of the company, To assess the long term solvency position of the company, to increase the net worth of the share holders, to calculate the various ratios to understand the current position of the concern.

The study reveals the following findings: 1) To creditors of the company are having more stakes in the capital, in the year 200-03 the long term debt of the company was 1.57 times of the share holders funds but in the current year 2005-06 the company has long term debt to the company was 1.53 times of the share holders funds.

2) The long term debt of the company have constituted has major component in the capital structure. In the year 2005-06 the long term debt of the company has been reduced to 60.42% of the totoal capitalization as compare to 2002-03 where in it was 61.15%.

3) In the year 2002-03 the total assets of the company as financed by Proprietors fund to the extent of 42.43%. But in the

current year 205-06 the contribution of proprietors fund has been come to 47.57%

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4) The Reserves and Surplus of the company has constituted 63% in the total share holders fund in the year 2002-03. But in the current yuear 2005-06 in has come to 5.49% it shows that the Reserve and Surplus of the company has been decreased. It is due to consecutive losses incurred by the company.

5) In the year 2002-03, the company financed its Fixed Assets by long term funds to the extent of 48.35%. In the current year long term funds has been used to the extent of 47.87% for financing fixed assets.

6) The Solvency position of the company has been decrease in the year 2002-03 the solvency ratio was 91.56% . But in the current year 2005-06 it has reduced to 83.21%.

7) Generally fixed Assets are financed by share holders fund. But in the company the share holder fund are not sufficient to finance its fixed assets in the year 2002-03. The value of fixed assets were lesser than the Net worth or share holders fund. The same condition has been prevailed in the current year two.

8) The current Assets of the company was 163.40% of the share holders fund in the year 2002-03. In the later year 2003-04 the current assets of the company was 84.59% more than share holders fund. In the current year 2005-06 it has come to 153% the financial position of the company was good.
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9) The current Liabilities of the company was more than share holders fund in all the years except in the year 2004-05. The current liabilities base of the company will not provide an adequate cover for long term funds.

CONCLUSION The basic objective of any organization is to maximize the wealth fo share holders. In order to achieve this objective, the

company must earn sufficient point. The amount of such profit largely depends on magnitude of sales. Therefore, the radio analysis helps to analyze where the company exactly going on.

To conclude the short-term financial standing of the company is concerned it may be state that it is unsatisfactory. The long-term financial position is also poor. This is due to the ratios of debitequity and proprietary ratio.

The operation of the company was adversely affected due to companys inability to meet the adverse market conditions during the year and there as sharp decline in the prices of the paper. The company with old machinery varying by 30 to 65 years without any investment on its modernization has the risk of its potential utilization. With the usage of this old machinery, without

investments, there is gradual increase in the input costs.

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Finally, it may not be out place, here to note that, that ratio analysis under taken in this project give only birds eye-view of the overall financial and operative performance of the organization indicated by the financial statements of the company for the past 4 years. We do hope that our effort would benefit to company in assessing the future prospectus and impact on the financial status in the near future.

Recommendations 1. The company should avoid financing its financial needs by short-term funds. The company should try to finance its financial needs from long-term funds. The company should try to finance its financial needs by the long term rinds, because the cost of the long-term funds is comparatively cheaper than short-term funds.

2. The profitability of the company is decreased this is mainly due to decrease in sales so: the company has to take measure to increase the sales and perform well in decrease of costs.

3. By providing facilities such as fringed benefits, medical benefits etc., to the employees in motivates them to work, more efficient and effectively which increases productivity.

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