Multi objective Capital Structure Modelling: A Goal

Programming Approach

Ms. Yamini Agarwal

Associate Professor, Indian Institute of Finance, Ashok Vihar, Phase-II, Delhi, INDIA
PhD Scholar, Indian Institute of Technology, Department of Management Studies, Delhi, INDIA
Assistant Editor, Finance India, Delhi, INDIA
Tel: +91-11-271725791/27136257
Fax: +91-11-27234473
Email: yagarwal@iif.edu

Prof. K C Iyer
Professor of Finance, Department of Management Studies,
Indian Institute of Technology, Vishwakarma Bhawan,
Shaheed Jeet Singh Marg, New Delhi - 110016, INDIA
Tel: +91-11-9818833452 (Mobile) 26591519 (Res)
Fax: +91-11-26862620
Email: kciyer@dms.iitd.ac.in; kciyer@gmail.com

Prof. Surendra S. Yadav

Professor of Finance & Head of Department, Department of Management Studies,
Indian Institute of Technology, Vishwakarma Bhawan,
Shaheed Jeet Singh Marg, New Delhi - 110016, INDIA
Tel:+ 91-011-26591242/26596309 (Off)
Fax: 91-11-26862620
Email: ssyadav@dms.iitd.ac.in

_______________________
The authors gratefully acknowledge the technical support of Indian Institute of Technology,
Department of Management Studies (IIT Delhi) and Indian Institute of Finance. I (Yamini)
would like to convey my special thanks to my Chairman Prof. J.D. Agarwal, my professors
IIT Delhi and my colleagues at IIF Delhi – Prof. Aman Agarwal, Mr. Deepak Bansal for
their assistance in preparation of this paper.

The views presented in the paper are opinions of the authors, based on our research and
experience and do not depict views of institution or countries to which the authors belong.
All errors and omissions are our own

Electronic copy available at: http://ssrn.com/abstract=1572689

 Abstract

Capital structure decisions have become complex in the changing business paradigm.

The evaluation techniques used for capital structure decisions by the theories and models

developed in the 1950s have lost their relevance due to changes over the years. Capital is still

scarce despite financial liberalization and globalization. Business environment are

exceedingly competitive. Stakeholders are awfully demanding. Survival and growth is

restrained by competition. Decision maker's choice on capital structures is not restricted to

debt and equity alone. Bankruptcy and distress risk go beyond on balance sheet items

including off balance sheet exposures. In the light of this background the premise of a single

objective for evaluating capital structure decision is questioned in this study. The study

explores the multiple considerations followed by decision maker for capital structure

decisions.

The study investigates capital structure practices in the Indian industry through a

sample of top 500 companies classified in 19 industries for a 10 year period (1998-2007) for

67 variables including the leverage variables. The spread of leverage ratio is also examined.

The relationship of leverage ratios with market capitalization and EPS is also explored.

Multi objective criteria for processing capital structure decisions is identified and

justified based on the findings of the past researches and the empirical survey conducted as a

part of this study. In the empirical survey, CFOs as respondents are investigated for their

goals, priorities, motivations, constraints and practices for capital structure decision making.

Goal Programming model was selected from different multi-objective optimization

techniques. The model was found to be capable of providing satisficing solutions to multiple

goals simultaneously by minimizing the deviation from the objective function after assuming

Electronic copy available at: http://ssrn.com/abstract=1572689

that the decision maker is an optimist and does not attempt to satisfy all objectives fully. Goal

Programming Model has been developed and illustrated for capital structure decisions under

multiple objectives.

Electronic copy available at: http://ssrn.com/abstract=1572689

Section I Introduction

Theories and principles on capital structure decisions (CSD) developed in 1950s have lost

their relevance in today’s globalized interlocked dynamic financial world. In 1950s,

Modigliani and Miller (MM) in their path breaking work did not perceive and inculcate the

complexities, risk and uncertainties, which are posed by the emergence of a new financial

architecture. The financial architecture has globally integrated electronic finance,

privatization and liberalization in different economies. Sixty years after the work of MM, the

size, magnitude, complexity in the number of instruments, international capital flows

(inflows/outflows) have increased multifold (Merton 1995). The world has now become a

global village and firms have access to global and domestic financial markets and

instruments. Challenges before a firm motivates or constraints financial and non financial

actions that contribute to costs. Firms are constantly challenged by conflicting goals, agency

problems, financial innovations, globalization, competitive pressures, social responsibility

measures, environmental consciousness, financial costs, value creation and many other

tangible and intangible issues. Adaptability to change cost structures of a firm form an

integral part of capital structure decision making process. Management perceptions and the

economic environment further complicate the capital structure decision process. The

priorities of a firm change with the changing times and over its life.

Empirical behavioural studies indicate that firms pursue multiple considerations while

determining their capital structures. However, no attempt has been made so far to provide for

a deeper understanding of these consideration as goals or constraints, their priorities and the

relevance to the Indian Industry. CEO or a firm’s decision is based on an overall assessment

of the situation which at times apparently appear to lack economic rationale. These

4
considerations and their dimensions are not always quantifiable and readily accessible. A

firm’s ability to choose a specific alternative in its capital structure is a matter of judgment

and may remain a mystery for most researchers, Welch (2004). Such mysteries can be

resolved if the firms goals and constraints can be quantitatively and qualitatively are

developed and used to arrive at optimising or satisficing solutions for any given economic

rationalities and realities.

Multi-objective framework in today’s dynamic corporate environment emerges from the

constraints and goals that pose the need for a sensitive capital structure decision model. There

is a need for a new model framework that accommodates the changing environment and give

results which satisfy all wants. The role of a decision maker is indispensable for the choice

of goals, their priorities and in the selection of an optimal solution. Decision maker however

is constrained by his own perceived and existing external environment. This restricts the

decision maker to choose a solution that is a “satisficing” solution for multi objective criteria

as against a solution that is optimal with respect to one objective of value creation.

The study develops a goal programming model that provides for satisficing solutions to the

multiobjective framework in which a decision maker is forced to exist. This paper illustrates

the use of the developed model on an Indian firm. The economic, industry and company

specific analysis of the capital structure practices is conducted with an Indian backdrop using

a sample of top 500 listed Indian firms ranked by a popular financial daily " The Economic

Times" in the year 2007. Company statistics on leverages over 10 years for the Indian

Industry is assessed through long term debt to equity ratio (LTD) and total debt to equity ratio

(TDE). Behavioral dimension of decision making for capital structures among Indian CFOs is

assessed using a questionnaire approach. Based on 67 variable set and interrelationships of

5
various firm and industry specific goals and constraints are developed and illustrated through

the case study of one company.

Section II Data Compilation

The top 500 companies were divided into 20 industries (see Table A1). Among the 20

industries, finance industry (consisting of 56 Companies) was not considered for evaluation

as it contained banks, NBFCs, financial institutions which are governed by the banking

guidelines identified and issued by Reserve Bank of India. Capital Market Online database

for Indian companies was used to compile the data for 10 years ( from 1998-2007) for 67

variables). There were 10 companies for which the data was either incomplete or not

available or incompatible for use. After removing the 56 finance companies and 10 not

available companies, the sample size contained only 434 firms . A 10 year period from 1998-

2007 is selected for study of 67 variables including leverage variables were used to develop

possible relationships that define goals and constraints for a firm. These relationships also

assess the influence over the capital structure variables (TDE and LTD). The study assesses

whether leverages differ over time and across industries. The study also assesses the

correlation between the leverage variables and other variables. Further, whether these

leverage ratios follow a normal probability distribution or not is assessed on time and

industry classifications.

The questionnaire with 19 questions was sent these 434 companies. The survey results

observed and published (Agarwal, Iyer and Yadav, 2009) are used to develop an empirical

evidence that multiple consideration exist simultaneously that influence capital structure

decision. Among all existing financial models, goal programming technique was identified as

an application tool that can handle multiple objective and constraints simultaneously. A Case

6
study was developed to illustrate the use of goal programming model for capital structure

decisions under multiple objectives.

Section III Literature Review

In the past six decades, the field of capital structure decisions has enlarged the dimensions of

the influencing factors or acceptable variables, which decide the capital structure choices. In

the earliest works we can find Harris (1954) did not initially restrict the definition of capital

structures. He identified capital structure decisions to support long and short-term activities

of business by making good any shrinkage in the asset values and decisions that provide

necessary support for credit availability and banking solvency. Later, Dobrovolsky (1955)

restricted its impact as decision that minimised cost minimizing besides raising funds. Value

of the firm became an synonymous to capital structure choices with the work of Durand

(1959) . Since then the works have contributed how different factors influence the value of a

firm when the firm undertakes a decision for financing its activities, it included the work of

Modigilani and Miller (1958, 1963). Optimal choices of capital structures and value of the

firm a concept of debate for over decades. However, Schwartz (1959), Schwartz and

Aronson (1967), Rao (1989), Singla and Mittal (1993), Rajan and Zingales (1995), Bahng

(2002), Mohnot (2000), Miao (2005), Das and Ray (2007), Iyer and Agarwal (2007)

identified optimal capital structures were constrained by industry dynamics and were studied

with a background with a single objective of increasing the value of the firm. Given the

various level at which optimality of capital structures has been studied under the single

objective framework of value of a firm. Multiple objectives are classified under two heads of

cost and benefits derived from a decision of the financing structure. To investigate the cost

and benefits associated with financing decisions, the investigations have been spread over

7
industries, countries, institutional frameworks, political divides, different ownership firms

and many others.

Costs associated with capital structure of a firm are largely influenced by the proceeds

generated from an issue of a financial instrument. Factors that influence the issue of debt,

equity and other instruments and their influence on the firm and its stake holders have be

investigated in different regions from different viewpoints. Like, the contributions of Jensen

and Meckling (1976), Leland and Pyle (1977), Korajczyk et al (1991), Mathew (1991),

Gertner, Scharfstein and Stern (1994), Neto and Marques (1997), Bolton and Von Thadden

(1998), Subramanyan and Titman (1999), Kumar (2000), Almeida and Wolfenzon (2006),

Verschueren and Deloof (2006), Dittman and Thakor (2007), Helwege, Prinsky, Stulz (2007)

have studied institutional frameworks which identified agency costs, agents self motivated

objectives, ownership objectives, transparency objectives as factors which decide the debt

equity mix.

Further, studies that concentrated on the cost advantage of cheap source of financing or

adjustment cost and increase in profitability included the works of Jalilvand and

Harris(1984), Myer and Majluf (1984), Myers (1984), Titman and Wessels (1988), Fischer,

Heinkel and Zechner (1989), Chatrath, Kamath, Ramchander and Chaudhary (1997), Kakani

(1999), Altinkilic and Hansen (2000), Roberts (2001), Pandey (2002), Fama and French

(2002), Welch (2004), Leary and Roberts (2005). Lately, Strebuleav (2007) also identified

that higher business risk, bankruptcy cost and a lower tax advantage all reduce optimal

leverage.

Among many considerations, the cost of the structure is largely to be influenced by factors

like (a) risk management factors; (b) tax structures; (c) agency cost; (d) flotation/issuance

cost; (e) regulatory frameworks; (f) term structures of interest rate; (g) exchange rate float

8
and regulations; (h) technological advances (in real and money markets); (i) accounting

gimmicks; (j) capital market sentiments/movements; (k) corporate liaison with market

operators and (l) government bodies which have been worked upon by various research

scholar world over. The works of Asquith and Mullin (1986), Baker and Wurgler (2002),

Jung, Kim and Stulz (1996) and Mickelson and Partch (1989) recognized market timing as a

firm's strategy to reduce cost that altered capital structures and increased the value of a firm.

Similar to market timing, firm's accessibility to cheap funds was developed as one among

several other factors ( openness in the economy, developments in the financial markets ,

credit rating, accreditation, investment environment, government support to industry and

many other) that influenced cost. Graham and Harvey (2002) acknowledged that credit

ratings were the second highest concern for CFOs when determining their capital structure. It

was found that 57.1% CFOs found credit ratings as an important variable for the choice of the

amount of debt that they would categorize to use. More commonly, market timing, media

interventions, credit analysis and their effect on capital structure decision is an area of study

in developed capital markets. Despite the range of the studies conducted on capital structure,

no attempts have been made to integrate the efforts of these studies for universal

applicability. The studies have been region specific, descriptive, segmented and do not give a

holistic view of the capital structure decision process. Psychological aspects have also not

been investigated in the decision making. Corporates in developing economies like India are

often restricted to choose equity because of low security of creditors rights, low institutional

penetration, shallow capital markets and in adequate access to international capital markets.

The study evaluated Indian firms for their leverage positions and debt structures before

investigating multiple objectives the firms may pursue for their capital structure decisions.

The next section addresses the concerns of the use of debt by firms in a developing economy

9
like India over a period when second phase of financial reforms have set pace and boom in

the economy provides adequate access to domestic and international markets.

Section IV Capital Structure Practices in India

India and other Asian economies have been dependent on their saving for their financing

needs. In the above context it was essential to understand if leverage was used to by

successful entrepreneurs of the sample firms. Mean LTD was found to 1.064 and TDE was

found to be 1.16. The ascending order in which the industries were levered in the ET 500

sample is as follows; information technology, media & publishing, healthcare, FMCG,

transport equipments, capital goods, miscellaneous, textiles, tourism, diversified, telecom,

agriculture, consumer durables, oil and gas, power, housing related, metal, metal products &

mining, transport services and chemical and petrochemicals. The LTD and TDE is found to

be highest in the chemical and petrochemical industry and lowest in the information

technology industry.

The capital structure positions among industries (inter industry) are found to have significant

differences (see Table A2). However, time (inter temporal) had no influence over the capital

structure decisions in the industries (see Table A3). The capital structure means were not

significantly different for the 10-year period. Inter temporal differences were not observed in

the sample reflecting low or no influence of economic changes on the leverage positions.

Rajan and Zingales (1995) who have found that financial development does not seem to

affect everybody equally, contrary to the common belief that country specific development

influence capital structure practices. The study used time differences as proxy for financial

development over a 10 year period of after stable liberalization in India. The results indicates

that time specific factors are found to have not influences mean positions in the Indian

Industry. Among the two macroeconomic variables (economy and industry), industry was

10
found to play an influencing role. This was in agreement with previous studies conducted in

India for capital structure decisions of Rao (1989), Babu (1998), Mohnot (2000), Das and

Ray (2007). They had investigated the inter industry differences in the capital structure of

Indian firms and identified the possible sources of variations that existed in different

industries.

The study also found that LTD and to TDE for over 4000 observations collected for 10 year

period did not follow a normal distribution using Jarque Bera Test (observation more than 50)

and Anderson Darling Test (observations less than 50). The low level of leverages in value

creating firms needed more investigation into their possible causes, this is contrary to the

belief that the firms employ more debt for the want of cheap funds. Further, the distribution

was disturbed by heavy asset based industries like chemical and petrochemical firms and low

tangible asset based firms like information technology.

On the assessment of firms in different industries, some industries were found to have normal

distribution. In the long term debt to equity ratio, the two industries where normal

distribution is observed are the capital goods industry and the tourism industry (see Table

A4). Normal distribution is also observed in the housing related industry, information

technology industry and tourism industry for the TDE (see Table A5). In the tourism

industry both LTD and TDE observed normal distribution. However, TDE , in most

industries is not close to normal distribution, for instance in case of chemical and

petrochemical industry, consumer durables, diversified, FMCG, metal and metal products and

transport services, there is no proximity to normal distribution that could be observed.

Hence, there is need to investigate more into the possible factors affecting the leverage

positions in firms.

11
Market capitalization (proxy for value of firm) was found to have low correlation with paid

up equity. Leverage ratios are found to be negatively correlated with market capitalization.

Earnings Per Share (outcome of leverage ratios) was found to be positively correlated with

leverage for 38 % of the sample which offers contradiction to existing theories.

Section V Multiple Objectives and Constraints for Capital Structure Decision Making

The questionnaire survey conducted on 434 firms with 15.6% response, made it evident, that

in India, firms follow simultaneous considerations, which the study grouped as financial and

non-financial objectives. Among the 68 respondents, there is consensus that there exist

multiple objectives, which differ across firms. However, priorities and goals have been found

to be firm and time specific.

The decision makers preferred equity over debt; target capital structure is not explicitly

placed as a priority. However, they maintained a range for capital structures. The

maintenance of ownership stake and high interest burden motivated the firms to raise equity.

The diluted EPS has acted as a main constraint for raising equity in India. The monitoring

role of financial institutions has played a critical role for raising debt. Damp equity markets

constrained premiums on equity issues. Bonus issues were perceived to have short term

influence on stock prices. Stock splits and buybacks were not much used by the firms.

Discounted cash flow techniques were largely used to evaluate capital structure decision

options.

The decision makers wanted prime lending rates to come down and regulatory bodies to be

more transparent which have restricted their action for using debt. Exposures in international

markets were hedged and were used for business purpose as against speculation. Off balance

sheet exposure were either not recognized as part of the capital structure decisions or were

not used. Other strategies such as bonus shares, stock splits and buy backs did not receive

12
sufficient response. It is also observed that the use of equity was more predominant than debt

in the survey, which complements the finding of the previous investigation in section IV.

Firms believe that there is range of debt to equity mix that should be followed. However,

there may not be a particular target value.

The survey clearly gave the base for multi-objective frameworks for capital structure

decisions. The risk aversion was present among the decision makers. The study further

emphasizes the need to develop models which resolve the present difficulty of providing

satisficing solutions to multiple conflicting objectives for capital structure decisions. The next

section attempts to seek solutions after incorporating multiple goals and objectives for given

priorities in capital structure decisions. Goal Programming technique has been identified and

applied to firms to establish the same.

Section VI Goal Programming Model for Capital Structure Decisions

Mathematical programming techniques such Linear programming, Integer programming and

Goal programming to give a model framework that satisfies multiple objectives

simultaneously. Goal Programming model (GP) was first of all developed by Charnes and

Cooper (1961) as an extension and modification of linear programming model since the

concept of goal programming problems. Later, Ijiri (1965) studied the detailed techniques of

goal programming as developed by Charnes and Cooper. Ijiri reinforced and refined the

concept of goal programming and developed it as a distinct mathematical programming

technique. His study was primarily concerned with the development of the technique and its

possible applications to accounting and management control. In addition, goal programming

has also been applied by Charnes and Cooper (1968) and Lee (1973) to advertising media

planning, man power planning and production etc. has suggested that goal programming may

be applied to an almost unlimited number of managerial and administrative decision areas

13
such as allocation problem, planning and scheduling problems and policy analysis etc.

Hawking and Adams (1974) applied goal programming model to capital budgeting decision

problem taking up Lorie and Savage case and made a comparative analysis of optimal

solutions as given by Weingartner’s linear programming solution. However, Hawkins and

Adams have not taken into account the assignment of priorities to different objectives which

a firm postulates to achieve in order of their importance. While a goal programming model as

developed and applied by Sang M. Lee, Ijiri and others, requires consistent ordering of

priorities between the numbers of multiple sets, it can be applied using its linear

approximations.

Agarwal (1978) developed goal programming and a stochastic goal programming model to

the capital budgeting decisions under risk and uncertainty. In the problem identified by him,

projects were selected based on optimization solution derived after considering the multiple

considerations as constraints. Agarwal (1978, 1987) extended the goal programming model to

working capital management which operated on the premise that no specific theory

undertakes the inter relationship between various current assets and liabilities and in the past

all studies have referred to the management of current assets and liabilities have referred to

the management of current assets as an isolated problem. Moreover, Romero (1991) has

presented a comprehensive overview of the technique, though not in finance but for

engineering problems.

Goal Programming technique is capable of handling decision problems that deal with (a)

Single goals only; (b) Single goals with multiple sub-goals; (c) Multiple goals and (d)

Multiple goals with multiple sub goals.

Goal Programming technique is capable of handling decision problems that deal with (a)

Single goals only; (b) Single goals with multiple sub-goals; (c) Multiple goals and (d)

14
Multiple goals with multiple sub goals. In presence of incompatible multiple goals, the

decision maker is to identify the importance of the individual goals. When all constraints and

goals are completely identified in the model, the decision maker analyzes each goal in terms

of deviations from the goal that are acceptable and state whether over or under achievement

of goal is acceptable or not.

Over achievement is undesirable, positive deviation from the goal is eliminated from the

objective function. If under achievement is undesirable, negative deviation from the goal

eliminated from the objective function. If the exact achievement of the goal is desired, both

negative and positive deviations must be represented in the objective function.

In order to give importance to the goals, negative and or positive deviations about the goal

must be ranked according to the “pre emptive” priority factors. The model considers high

order goal prior to the low order goals. If there are goals in k ranks, the p “pre emptive”

priority factor pj ( j = 1,2, .... k) should be assigned to the negative and or positive

deviational variables. The preemptive priority structure would have a relationship such as pj >

> pj+1, which implies that the multiplication of n, however large, it may be, cannot make pj+1

greater than or equal to pj. Weighting can also be used in the deviational variables at the same

priority level. The criterion to be used in determining the differential weights of deviational

variables is the minimization of the opportunity cost or regret. Hence, coefficient of regret is

always positive and should be assigned to individual deviational variable with the identical pj

factor.

The objective functions of the goal programming problem consist of deviational variables

with pre emptive priority factors. pj’s for ordinal ranking and δ’s for weighting at the same

priority level. Let c be 2m component row vector whose elements are products Pj and δ such

that:

15
 c = (δ1Pj1, δ2Pj2,. . . . . δ2mPj2m) .... eq 6.1

where Pji (i = 1, 2, ....... 2m; j = 1, 2, ..... k) are pre emptive priority factors and highest pre

emptive factor being p1 and δis (i=1,2,. ..... 2m) are real numbers. Let d to be 2m component

column vector whose elements are d-’s and d+’s such that

d = [ d1-, d2-, ........ dm- ; d1+, d2+, ........ dm+ ] .... eq 6.2

Then a goal programming problem is

Minimize cd .... eq 6.3

Subject to ax + Rd = b

x, d ≥ 0

Where A and R are m x m and m x 2m matrices respectively.

The model framework can be used to satisficing solutions to the multiple goals and

constraints faced in the goal programming model. In capital structure problems quantitative

relationships do not exist, which need to be developed using multiple regression analysis.

The 19 industries with respect to the two leverage variables, LTD and TDE, respectively are

studied for their relationship with other variables through correlation and stepwise regression

that develop the constraints which the industry posses on the capital structure decision

making process of a firm. The study has not evaluated the effect of macro economic

parameters like capital markets, economic growth rates, financial intermediation and others

as these factors in India were found to have insignificant effect on the leverages. Inter

industry differences were found to be significant so the use of industry ratios and industry

16
leverage positions is used to develop the relationship between the variables. The relationship

between TDE and other 66 variables for 19 industries is represented in Table A6 that would

act as external constraints for respective industries when using the goal programming model

for the Indian Industry. The relationship between LTD and other 66 variables for 19

industries is represented in Table A7 that would act as external constraints for respective

industries when using the goal programming model for the Indian Industry. The identified

model is applied to firms to test for their validity. The model can be defined in the following

manner for all firms aiming at satisficing solution for their capital structure decisions. The

study illustrates a real life example using a proxy company name α1.

Case 1: α1 Co. (Alpha One Company) in Agriculture Industry

The selected company is in the agriculture products business, has maintained its equity at

Rs.11.9 crores for the past 10 years. It is particular on not issuing any equity for growth. In

the year 2007, the LTD of the company was 0.03 and TDE of the α1 company is 0.15.

Internal funds have been the prime source of increasing the capital employed. The α1

company has observed the return on equity of 23.73% in past one year which has been the

highest for the past 10 years. The α1 company wishes to retain its ROE and wants to see an

increase in this position for future. The α1 company from its marketing actions intends to

seek the rate of growth of net sales by 8.5%. The company is attempting to look for new

markets so that it can increase its sale to generate more profits. The α1 Co. intends to see that

rate of growth of capital employed remains at 23.25 % after adjusting for the profits as it does

not intend to raise any debt but would like to reduce it, if possible. The α1 Co. believes in

employing less debt and wishes to follow a more conservative approach.

17
The α1 Co. is not adverse to the use of more capital, but wishes to generate the same through

internal funds. The α1 Co. has profit before interest, depreciation and tax margin of 12.26

which it feels would not improve in the future as the raw material costs are rising in the

present state in India. Presently the α1 Co. employs a net working capital of Rs.147.31 crores,

it has a debtor’s velocity of 48 days, pay out maintained by the α1 Co. is 16.79%, cash flow

from investing activities is Rs.42.88 crores. The capital expenses in foreign exchange are

zero. It does not intend to observe changes in these values for next few years. The α1 Co.

presently enjoys a market capitalization of Rs.401.87crores which is the highest market

capitalization observed by the α1 Co. for the past 10 years and wishes to only raise it and not

lose its valuation. The α1 Co. also believes that higher leverage results in low market

capitalizations. The α1 Co. has not attached any priority to the three goals. The firm’s goals

have been identified by the study in the following manner

Goal A1: To retain and increase Rate of return on equity (ROE) at 23.73% can be stated as

ROE ≥ 23.73

Goal A2: To observe a rate of growth of net sales (ROGNS) at 8.5, this is presently 7.9% is

stated as

ROGNS ≥ 8.5

Goal A3: To observe a rate of growth of capital employed at 23.25% is stated as

ROGCE = 23.25

+
The deviations from the goals can be positive (d ) or negative (d-). The positive deviation
+
(d ) in first two goals is desirable however the negative deviations (d-) from the goals are not

desirable. The negative deviations violate the goal requirement and hence should be
+
minimized for the first two goals. In the third goal both positive (d ) and negative deviation

18
 (d-) are not desirable so both positive and negative deviations have to be minimized, for the

exact attainment of the goal.

In each goal when the deviational variables are introduced the inequalities converted into

equalities by introducing on LHS, di(s) and the minimization function shall be established

using the undesirable deviational variable which have to be minimized. The Goal

Programming Model for capital structure decision for α Company is:

+
Objective: Minimize Z = d1- + d2- + d3- + d3

Subject to :
+ 1
Goal Constraint 1 : ROE – d1 + d1- = 23.73

+ 1
Goal Constraint 2 : ROGNS–d2 + d2- = 8.5

+ 1
Goal Constraint 3 : ROGCE–d3 + d3- = 23.25

2
Industry Constraint 1 : TDE = 1.071+ 0.979 LTD - 0.0007 PBIT + 0.003
REFX + 0.002ROGPBIDT + 0.002ROGGB +.
040 CEFX +.001ROGCE + .001 FAR
3
Industry Constraint 2 : LTD = -.812 + 1.085 TDE + .001 NWC -.016DV
+.013PO + .000MC + .001CFFI + .010PBIDTM
-.008CEFX
4
Firm Constraint 1 : ROE = .399ROGCE - .0105ROGPAT
5
Firm Constraint 2 : ROGCE = 74.31ROGRE + 6.71ROGLTD
6
Firm Constraint 3 : ROGPBIT = 5.717 ROGNS
7
Firm Constraint 4 : ROGPAT = 172LTD-145.25TDE -0.21 ROGPBIT
8
Firm Constraint 5 : NWC = 97.84 TDE
9
Firm Constraint 6 : PBIT > 153.88
10
Firm Constraint 7 : ROGGB > 3.8

19
 11
Firm Constraint 8 : NWC > 147.31
12
Firm Constraint 9 : DV = 48
13
Firm Constraint 10 : PBIDTM = 12.26
14
Firm Constraint 11 : CFFI = 42.38
15
Firm Constraint 12 : MC > 401.87
16
Firm Constraint 13 : CEFX = 0
17
Firm Constraint 14 : PBDT > 166.24

Superscripts are explanations given as end notes at the end as Table A9. Description of

variables is given as the notes of the Table 1.1 in Table A8.

There are in all 3 goals with no priorities, two (2) industry constraints and fourteen (14) firm

constraints of the α Co. There are a total of 19 constraint equations. There are 27 variables

including the deviational variables. POM software has been used to seek the goal

programming solution in its linear formulations. The results are presented in Table 6.5. On

the 26th iteration, the software achieved the solution which would minimize the value of z to

zero such that ROE is 23.73 %, ROGNS 8.5% and ROGCE is 23.25 % which were the goals.

The ROGRE would be 0.313%, ROGPBIT has reduced to 48.595 % , TDE is reduced to

0.119, PBDT is the constraint met at Rs.166.240 crores, PBIT has increased at Rs.257.310

crores, ROGGB is maintained at the constraint level of 3.870 % MC was found to be Rs.

401.87, PO was also found to be maintained at 16.790 %, ROGPAT was same as the previous

year of Rs.115.440 crores, CFFI is also maintained at Rs. 42.380 crores, REFX was also

maintained at Rs.163.920crore , NWC was also maintained at Rs.147.330 crores, PBIDTM

is also maintained at 12.260%, CEFX which was a constraint was also zero. However the

fixed asset ratio has increased to FAR 6.550. DV was to be at the constraint level of 48.000

days.

20
The α1 Co. would have a rate of growth of sales at 8.5% which increases its ROCE by

23.25%, the total debt to equity would reduce from the present level of 0.15 to 0.11 and it is

proposed that the long term debt which was 0.03 may be paid back to keep a zero level of

long term debt. The REFX is also maintained as a non basic variable whereby the value for

the given solution it would be zero.

21
 Table 1.1 Goal Programming Solution for α1 Company
Objective Function: Min Z= d1- + d2+ + d3+ + d3-
Objective Function Z = 0;
DECISION VARIABLES : LTD = 0; ROGLT = 0;
Non Basic Variables d1- = 1; d1+ = 0; d2- = 1; d2+ = 0; d3- = 1; d3+ = 1
Variables (27) ROGNS, ROGRE; ROGCE; ROE; ROGPB; TDE; PBDT; PBIT; ROGGB; MC; PO; ROGPAT; CFFI; REFX;
NWC; PBDTM; CEFX; FAR; DV; LTD; ROGLT :d1-; d1+ ; d2- ; d2+ ; d3- ; d3+
S. Constraints Solution Deviations Sensitivity
No. Target Value Analysis RHS Range
Goals
1. ROE – d1++ d1- = 23.7301 ROE = 23.730 d1+ = 1 7.9251 — 39.8025
d1- = 0
2. ROGNS –d2+ +d2- = 8.5001 ROGNS = 8.500 d2+ = 0 0.0000 — + ∝
d2- = 1
3. ROGCE – d3++d3- = 23.2501 ROGCE = 23.250 d3+ = 1 0.0000 — 63.4660
d3- = 1
Industry
4. TDE2 -0.979 LTD + 0.0007 PBIT = 1.071 TDE = 0.119 — 0.3400 — + ∝
- 0.003 REFX- 0.002PBDTM LTD = 0.000
- 0.002ROGGB - 0.040 CEFX PBIT = Rs. 257.310 cr
- 0.001ROGCE + 0.001 FAR REFX = Rs. 163.920 cr
PBDTM = Rs. 166.240 cr
ROGGB = Rs. 3.870 %
CEFX = 0.000cr
ROGCE = 23.250 %
FAR = 6.550 %
5. 1.085 TDE + LTD + 0.001 NWC ≥ 0.081 TDE = 0.119 — -0.0476 — 0.8741
-0.016DV +0.013PO + 0.001CFFI LTD = 0.000
+ 0.010PBTM+0.008ROE NWC = 147.330cr
DV = 48.000days
PO = 16.790%
CFFI = 42.380cr
PBTM = 12.260cr
ROE = 23.730 %

22
S. Constraints Solution Deviations Sensitivity
No. Target Value Analysis RHS Range
Firm
6. ROGCE5 -6.71 ROGLT- 74.31ROGRE ≥ 0.000 ROGCE = 23.250% — -∝ — 23.2500
ROGLT = 0.000%
ROGRE = 0.313%
7. -0.393ROGCE5+ROE+0.0105ROGPA≥ 0.000 ROGCE = 23.250% S1 = 15.805 - ∝ — 15.8049
ROE = 23.730%
ROGPA = 115.440%
8. ROGPB6 - - 5.717 ROGNS ≥ 0.000 ROGPB = 48.595 % — -48.5945 — + ∝
ROGNS = 8.500%
9. 145.25TDE -172 LTD +ROPGPA + ≥ 0.000 TDE = 0.119 S2 = 142.828 - ∝ — 142.8283
0.21 ROGPB LTD = 0.000
ROGPA = 115.440%
ROGPB = 48.595%
10. PBDT17 ≥ 166.240 PBDT = 166.240cr — 0.0000 — + ∝
11. PBIT9 ≥ 152.880 PBIT = 257.310cr S3 = 104.430 - ∝ — 257.3104
12. ROGGB10 ≥ 3.870 ROGGB = 3.870% — 0.0000 —+∝
13. MC15 = 401.000 MC = 401.000cr — 0.0000 —+∝
14. DV12 = 48.000 DV = 48.000days — 39.9638 — 97.5718
15. PO = 16.790 PO = 16.790% — 0.0000 — 26.6808
16. ROGPA ≥ 115.440 ROGPA = 115.440% — 0.0000 —+∝
17. CFFI14 = 42.380 CFFI = 42.380cr — 0.0000 — 170.9600
18. REFX = 163.920 REFX = 163.920cr — 0.0000 —+∝
19. -11.91 TDE+NWC8 ≥ 0.000 TDE = 0.119 S4 = 145.919 -∝ — 145.9186
NWC = 147.330cr — 0.0000 — 25.1180
20. PBTM13 = 12.260 PBTM = 12.260cr
21. CEFX16 = 0.000 CEFX = 0.000cr — 0.0000 — + ∝
22. FAR = 6.550 FAR = 6.550 — 0.0000 — 737.5631
23. NWC11 ≥ 147.330 NWC = 147.330cr — 2.9958 — 275.9100
* Solution is obtained using POM Software

23
Section VII Concluding Remarks

Goal Programming model is identified as multi-criteria technique providing satisficing

solutions that overcomes the deficiency of the single objective framework. The steps

involved in the development of a firm specific capital structure decision making technique is:

(a) management participation; (b) analysis of objectives, goals and policies; (c) formulation

of a goal programming model; (d) testing the model and solution and (e) final implementation

of the solution. The model allows simultaneous solutions to a system of complex multiple

objectives. It utilizes an ordinal hierarchy among conflicting multiple goals where low order

goals are considered after higher order goals are satisfied or have reached the desired limit.

There is an inbuilt flexibility in the model.

Goal Programming Model is illustrated using an Indian firm example as a model which

supports the fulfillment of multiple objectives and constraints simultaneously. The model

may prove to be highly beneficial for firms in achieving an optimum or satisficing practical

solution to capital structure decisions incorporating multiple goals in a systematic and

scientific way in today's complex and dynamic business world.

24
 Table A1 Industry Composition of ET 500 Companies

Number of Percentage of the

companies in industries in the
S No. Industry Composition each industry sample survey
1 Agriculture 26 5.20
2 Capital Goods 46 9.20
3 Chemical & Petrochemical 35 7.00
4 Consumer Durables 18 3.60
5 Diversified 12 2.40
6 Finance 56 11.20
7 FMCG 25 5.00
8 Healthcare 27 5.40
9 Housing Related 41 8.20
10 Information Technology 33 6.60
11 Media & Publishing 6 1.20
12 Metal, Metal Products & Mining 32 6.40
13 Miscellaneous 30 6.00
14 Oil & Gas 15 3.00
15 Power 9 18.00
16 Telecom 12 2.40
17 Textile 21 4.20
18 Tourism 3 0.60
19 Transport Equipments 40 8.00
20 Transport Services 13 2.60
Total 500 100.00

25
 Table A2 Summary of 10 Years LTD for 19 Industries
S.No. Industry 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 Min Max Range Average
1 Agriculture 0.73 0.69 0.85 0.97 1.13 1.27 1.35 1.58 1.6 0.81 0.7 1.6 0.91 1.1
2 Chemical & Petrochemicals 0.58 0.94 7.4 7.45 2.11 1.49 1.07 1.2 1 0.94 0.6 7.5 6.87 2.42
3 Power 0.59 0.51 0.49 1.66 1.08 1.57 1.7 1.55 1.36 1.36 0.5 1.7 1.2 1.19
4 Transport Services 1.17 0.96 1.78 6.74 3.02 1.74 1.53 2.15 0.81 0.67 0.7 6.7 6.06 2.06
5 Consumer Durables 0.61 0.61 0.75 0.75 0.71 2.4 1.4 1.54 1.31 1.11 0.6 2.4 1.8 1.12
6 Capital Goods 0.57 0.64 0.67 0.77 0.73 0.72 0.62 0.61 0.64 0.61 0.6 0.8 0.21 0.66
7 Diversified 0.86 0.82 0.78 0.8 0.83 0.75 0.9 1.16 1.86 1.72 0.8 1.9 1.1 1.05
8 FMCG 0.51 0.49 0.35 0.34 0.5 0.49 1.62 0.37 0.36 0.33 0.3 1.6 1.29 0.54
9 Healthcare 0.51 0.44 0.35 0.39 0.44 0.44 0.38 0.4 0.53 0.66 0.4 0.7 0.31 0.45
10 Housing Related 1 1.11 1.56 1.31 2.06 1.7 1.28 1.45 2.66 1.07 1 2.7 1.66 1.52
11 Information Technology 0.26 0.29 0.31 0.44 0.3 0.21 0.27 0.27 0.38 0.33 0.2 0.4 0.22 0.31
12 Media & Publishing 0.35 0.41 0.51 0.48 0.34 0.41 0.39 0.58 0.56 0.3 0.6 0.25 0.45
13 Metal, Metal Products &
Mining 1.36 2.48 0.92 1.24 3.59 3.6 1.61 1.16 1.16 0.74 0.7 3.6 2.86 1.79
14 Miscellaneous 0.58 0.68 0.79 0.77 0.8 0.91 1.07 0.77 0.68 0.58 0.6 1.1 0.49 0.76
15 Oil and Gas 0.48 0.52 0.59 0.65 1.03 0.98 0.7 5.63 0.73 0.5 0.5 5.6 5.16 1.18
16 Telecom 0.66 0.54 0.56 1.36 2.02 0.97 1.19 1.02 1.01 1.22 0.5 2 1.49 1.05
17 Textiles 1.04 1.62 0.97 0.67 0.66 0.77 0.95 0.89 0.87 0.84 0.7 1.6 0.95 0.93
18 Tourism 1.09 1.08 1.03 0.83 0.82 0.96 1.15 1 0.86 0.73 0.7 1.2 0.42 0.96
19 Transport Equipments 0.6 0.62 0.58 0.63 0.62 0.57 0.58 0.63 0.61 0.53 0.5 0.6 0.1 0.59
Min 0.26 0.29 0.31 0.34 0.3 0.21 0.27 0.27 0.36 0.33
Max 1.36 2.48 7.4 7.45 3.59 3.6 1.7 5.63 2.66 1.72
Range 1.09 2.18 7.09 7.12 3.29 3.39 1.42 5.36 2.3 1.39
Average 0.71 0.81 1.12 1.49 1.2 1.16 1.04 1.26 1 0.82

26
 Table A3 Summary of 10 Years TDE for 19 Industries

S.No. Industry 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 Min Max Range Average
1 Agriculture 1.1 1.06 1.43 1.67 1.88 2.06 2.06 2.18 2.14 1.41 1.06 2.18 1.12 1.7
2 Capital Goods 0.9 1.02 1.08 1.16 1.09 1.11 0.98 0.94 1 0.96 0.9 1.16 0.26 1.02
3 Chemical and Petrochemicals 0.96 1.51 11.13 12.04 2.81 1.97 1.76 1.87 1.46 1.34 0.96 12.04 11.07 3.69
4 Consumer Durables 1.49 1.47 1.62 1.48 1.3 3.04 1.96 2.07 1.94 1.87 1.3 3.04 1.74 1.82
5 Diversified 1.23 1.22 1.2 1.18 1.24 1.18 1.21 1.51 2.32 2.24 1.18 2.32 1.14 1.45
6 FMCG 0.77 0.8 0.74 0.95 1.01 0.99 2.02 0.74 0.67 0.66 0.66 2.02 1.36 0.93
7 Healthcare 0.72 0.64 0.55 0.6 0.67 0.67 0.57 0.58 0.75 0.91 0.55 0.91 0.36 0.67
8 Housing Related 1.24 1.4 1.88 1.57 2.32 1.93 1.51 1.71 2.88 1.3 1.24 2.88 1.64 1.77
9
Information Technology 0.38 0.39 0.42 0.64 0.49 0.36 0.42 0.5 0.74 0.54 0.36 0.74 0.38 0.49
10 Media & Publishing 0.44 0.56 0.63 0.55 0.39 0.46 0.43 0.65 0.73 0.39 0.73 0.34 0.54
11 Metal, Metal Products & Mining 1.29 1.96 1.16 1.5 3.57 4.18 1.6 1.08 1.21 0.83 0.83 4.18 3.35 1.84
12 Miscellaneous 1.19 1.29 1.43 1.37 1.32 1.36 1.41 1.19 1.12 0.93 0.93 1.43 0.51 1.26
13 Oil and Gas 0.61 0.65 0.71 0.89 1.11 1.18 0.94 0.83 0.89 0.64 0.61 1.18 0.57 0.84
14 Power 1.06 0.77 0.78 1.89 1.37 1.88 2.04 1.86 1.59 1.54 0.77 2.04 1.26 1.48
15 Telecom 0.8 0.64 0.6 1.42 2.8 1.36 1.61 1.41 1.48 2.07 0.6 2.8 2.2 1.42
16 Textiles 1.58 2.48 1.55 1.13 1.05 1.22 1.46 1.38 1.33 1.19 1.05 2.48 1.43 1.44
17 Tourism 0.44 0.55 0.82 0.74 0.54 0.41 0.29 0.24 0.16 0.14 0.14 0.82 0.69 0.43
18 Transport Equipments 0.93 0.93 0.85 0.88 0.92 0.89 0.88 0.92 0.92 0.8 0.8 0.93 0.13 0.89
19 Transport Services 1.31 1.05 1.89 6.82 3.17 1.85 1.63 2.25 0.92 0.68 0.68 6.82 6.14 2.16
Min 0.38 0.39 0.42 0.55 0.39 0.36 0.29 0.24 0.16 0.14
Max 1.58 2.48 11.13 12.04 3.57 4.18 2.06 2.25 2.88 2.24
Range 1.2 2.09 10.71 11.48 3.18 3.82 1.77 2.01 2.72 2.1
Average 0.97 1.07 1.6 2.02 1.53 1.48 1.3 1.26 1.28 1.11

27
 Table A4 Industry wise Normal Distribution Test Results for LTD

LTD AGRI CG CP CD DIV FMCG HC HR IT MP

Jarque Bera 0.91 0.65 3.13 2.26 2.74 18.95 2.23 2.24 0.87 0.77
Probability 0.63 0.72 0.19 0.32 0.25 0 0.33 0.33 0.65 0.68
Anderson Darling (A2) 0.33 0.32 1.75 0.59 1.35 2.06 0.49 0.48 0.36 0.28
Probability 0.44 0.45 0 0.08 0 0 0.167 0.175 0.35 0.53

LTD MMMP MIS OG PO TELE TEX TSM TE TS

Jarque Bera 1.68 0.74 21.17 1.25 1.26 6.93 0.69 1.51 1.06
Probability 0.43 0.69 0 0.53 0.53 0.03 0.71 0.47 0.01
Anderson Darling (A2) 0.87 0.34 2.41 0.66 0.38 0.41 0.25 0.42 1.11
Probability 0.01 0.41 0 0.055 0.32 0.26 0.65 0.26 0

Table A5 Industry wise Normal Distribution Test Results for TDE

TDE AGRI CG CP CD DIV FMCG HC HR IR MP

Jarque Bera 13.6 2.28 1.9 1.33 0.7 2.8 1.5 0.69 0.69 7.87
Probability 0 0.32 0.39 0.52 0.7 0.25 0.47 0.71 0.71 0.02
Anderson Darling (A2) 43 0.23 1.85 0.66 1.69 1.41 0.42 0.43 0.42 0.28
Probability 0.23 0.73 0 0 0 0 0.25 0.24 0.24 0.52

TDE MMMP MIS OG PO TEL TS TEX TSM TE

Jarque Bera 0.63 1.9 13.6 2.28 1.9 1.33 0.67 2.8 1.5
Probability 0.73 0.39 0 0.32 0.39 0.52 0.72 0.25 0.47
Anderson Darling (A2) 1.05 0.37 0.32 0.44 0.41 0.83 0.21 0.55 1.06
Probability 0 0.34 0.47 0.22 0.27 0.02 0.79 0.11 0

28
 Table A6 TDE Industry Constraint Equations (19 Industries)

S. Variables Negatively
No. Industry TDE Constraint Equation Explanatory Power Variables Positively Correlated with (r =0.90) Correlated (r=-0.90)

R R2 S.E. With TDE with TDE

TDE = 1.071 + 0.979 LTD - 0.0007
PBIT + 0.003 REFX +
0.002ROGPBIDT + 0.002ROGGB+.
1 Agriculture 040 CEFX +.001ROGCE + .001 FAR 1 1 79 PBDTM,CPM, PAT,PBT,PBDT,MC,CP,LTD None

TDE = 0.754+0.001ROGMC -0 CFFO,EP,ROGCOP,ICR,OI,IR,CEXFX,DR,PBIDTM,C

2 Capital Goods .002CFFF + 0.014 PBIDTM 0.976 0.953 0.02048 V,PBDTM,ROCE,PBITM,CPM,LTD,CEFX and PO VOTA
Chemical and TDE= -2.295 + 1.502LTD -
3 Petrochemicals .000ROGCP + .003CE 1 0.999 0.1216 LTD None
Consumer TDE= .397 + 1.21LTD + .028 OI -
4 Durables .013CEPS -.002PBT 1 0.999 0.01933 LTD None
Diversified TDE= .530 + 1.087LTD - .073CR +
5 Industry .008EPS 0.999 0.998 0.02427 LTD None
REXFX,ROGNS,ROGTA,IR,ROGGS,REFX,CEXFX,I
CR,REXFX,MC,PAT,PBT,CP,NWCPBDT,DIV,PBIT,P
BIDT,NET,CFFO,
CL,CA,CE,OI,COP,VOGB,NS,VO,GS,CEPS,GBTAL,S
C,PBITM,EPS,ROCE,PO,PBIDTM,DV,BV,CR,DR,FA
6 FMCG TDE= 1.038 + .092VOGB -.008APATM 1 0.999 0.08282 R,EP,CV,VOTA and LTD CFFF, CFFI
7 Healthcare TDE= .142 + 1.155 LTD 0.993 0.987 0.0122 LTD None
0.03107
8 Housing Related TDE= .188 + 1.022LTD +.000ROGMC 0.999 0.999 1 LTD PBIDTM
Information
9 Technology TDE= -.070 + 2.069LTD - .001DIV 0.966 0.934 0.0335 None None

29
S. Variables Negatively
No. Industry TDE Constraint Equation Explanatory Power Variables Positively Correlated with (r =0.90) Correlated (r=-0.90)

R R2 S.E. With TDE With TDE

Media and TDE=.434 +.866LTD + .139CR +
10 Publishing .005CV + .000PBT-.001DV + .000EP 1 1 0.0007 LTD None
TDE= .045 + 1.098LTD+ .001ROGGS
Metal and Metal +.000ROGPBIDT+.002ICR+.000ROGG
11 Product B-.002CV 1 1 0.0049 LTD None
Miscellaneous TDE = 1.470 - .062APATM +
12 Industry .001ROGMC 0.949 0.901 0.0497 None None
Oil and Gas
13 Industry TDE= 1.715 - .004ROGPBDT 0.868 0.754 0.05673 LTD None
TDE =0.523 + 0.962LTD - 0.3.1CPM+
14 Power 0.021 PBITM 0.999 0.999 0.0183 LTD None
TDE = -1.168 + 1.525LTD -
0.361VOGB + 0.000PAT
15 Telecom +.001ROGPAT 1 1 0.0163 LTD None
TDE = -0.176 + 1.493LTD +
16 Textile 0.001ROGMC + 0.031FAR 1 0.999 0.01369 CEPS,BV,EPS and LTD
17 Tourism TDE= 0.015 + 1.049LTD 0.999 0.998 0.01134 LTD None
Transport TDE =0 .196 + 0.1073LTD+ .0.004CV
18 Equipments - .014CPM 0.968 0.937 0.01185 None None
Transport TDE= -.134 + 1.047LTD + 0. 005DV - 0.00503
19 Services 0.001ROGMC+0.005ROCE 1 1 2 ROGMC,LTD None

30
 Table A7 LTD Industry Constraint Equations (19 Industries)

Variables with Negatively

S.No. Industry LTD Constraint Equation Explanatory Power Variables with Positively Correlation (r =0.90)
Correlation (r=-0.90)

R R2 LTD with LTD

S.E.
LTD = -.812 + 1.085 TDE + .001
NWC -.016DV+.013PO + .000MC +
1 Agriculture 1 1 0.0012 TDE APATM
.001CFFI +
.010PBIDTM+.008CEFX
CFFO, EP, CFFF, ROGCOP, ICR, OI, IR,
LTD = .304 + .000PO - .571TDE -
2 Capital Goods 1 1 0.01146 CEXFX, DR, PBIDTM, CV, PBDTM, ROCE, VOTA
.157CR
PBITM, CPM, CEFX, PO and TDE
Chemical and LTD = 1.574 + .664TDE - EP, ICR, GB, CPM, APATM, REFX, ROGNS,
3 1 0.999 0.08091 None
Petrochemicals .000ROGCP - .002CE ROGGS, PBDTM, CFFO, ROGMC and TDE
LTD= 1.509 + 1.001TDE
4 Consumer Durables 1 0.996 0.0417 TDE None
+.035VOGB +.000REXFX
LTD= -.133 + .0839TDE -
5 Diversified Industry 0.002CFFO +.001ROGCP + 1 1 0.00731 TDE None
.001RONW + .001ROGGS

31
 Variables with Negatively
S.No. Industry LTD Constraint Equation Explanatory Power Variables with Positively Correlation (r =0.90)
Correlation (r=-0.90)

ROGGS, ROGPAT, IR, REFX, CEXFX, ICR,

REXFX, PAT, MC, PBT, CP, PBDT, PBIDT,
CFFO, NWCCL, NET, CA, OI, SC, CEPS, COP,
6 FMCG LTD= -.013 + .582 TDE 0.99 0.982 0.1774 CFFF, CFFI
VOGB, NS, VO, CE, DIV, PBIT, GS, EPS, GB,
ROCE, TAL, PBITM, BV, PBIDTM, DV, PO,
DR, FAR, EP, CV, VOTA, CR and TDE

DR, CFFI, CEPS, VOTA, PO, CR, BVVOGB,

7 Healthcare LTD= -.046 + .857 TDE -.004ROCE 1 1 0.00055 None
FAR and TDE
LTD= -.179 + 0.976TDE + PO, ROGPAT, BV, ROGCE, CFFI, VOTA,
8 Housing Related 1 0.999 0.03036 PBIDTM
0.000ROGMC ROGNW and TDE
Information LTD= -.025 + .476TDE + .001DIV +
9 0.97 0.934 0.0335 NONE None
Technology .000CFFF +.006FAR
Media and
10 LTD= .130 + .707TDE - .005RONW 0.97 0.93 0.02422 TDE NONE
Publishing
LTD = -.041 + .911TDE +
Metal and Metal .001ROGGS + .002ICR +
11 1 1 0.0044 TDE NONE
Product .000ROGGB -
.002CV+.000ROGPBIDT
Miscellaneous LTD= 1.715 - .072ROCE
12 0.97 0.939 0.0394 TDE ROCE
Industry +.005ROGTA
LTD = 0.311 + 0.150CEPS -
13 Oil and Gas Industry 1 0.99 0.19315 TDE None
0.205EPS
LTD = -0.023 + 0.883TDE -0.000CL
14 Power 1 0.997 0.0309 TDE None
+ .000CFFF
LTD =0.767 + 0.655TDE -
15 Telecom 0.237VOGB + .000PAT 1 1 0.0107 TDE None
+.000ROGPAT
16 Textile LTD= 0.118 + 0.669TDE - 1 0.999 0.00916 TDE None

32
 Variables with Negatively
S.No. Industry LTD Constraint Equation Explanatory Power Variables with Positively Correlation (r =0.90)
Correlation (r=-0.90)
0.001ROGMC
17 Tourism LTD = 0.013 + 0.951TDE 1 0.998 0.0108 TDE None
Transport
18 LTD= 0.126 + 0.554TDE 0.83 0.691 0.0154 None None
Equipments
LTD=0.128 +0.955TDE - 0.005DV +
19 Transport Services 1 1 0.0048 ROGPBIT, ROGMC and TDE None
.001ROGMC -.004ROGCE

33
 Table A8 Abbreviations Explanations to the Tables 1.1

1. Z = Goal Function to be minimized

2. ROE = Return on Equity
+
3. d1 = Positive deviation from goal 1
-
4. d1 = Negative deviation from goal 1 (Violating Variable)

5. ROGNS = Rate of growth of net sales

+
6. d2 = Positive deviation from goal 2
-
7. d2 = Negative deviation from goal 1 (Violating Variable)

8. ROGCE = Rate of growth of capital employed (ROGCE)

9. d 3+ = Positive deviation from goal 3 (Violating Variable)

10. d3- = Negative deviation from goal 3 (Violating Variable)

11. TDE = Total debt to equity ratio

12. LTD = Long term debt to equity
13. PBIT = Profit before interest and taxes
14. REFX = Revenue earning from foreign exchange
15. PBDT = Profit before depreciation and taxes
16. ROGGB = Rate of growth of gross block
17. CEFX = Capital earning in foreign exchange
18. ROGCE = Rate of growth of capital employed
19. NWC = Networking capital
20. DV = Debtors velocity
21. PO = Payout
22. MC = Market capitalization
23. CFFI = Cash flow from investing activities
24. PBIDTM = Profit before interest, depreciation, tax margin
25. ROGPBIT = Rate of growth of profit before interest and taxes
26. ROGNS = Rate of growth of net sales
27. ROGLTD = Rate of growth of long term debt
28. ROGRE = Rate of growth retained earning

34
 Table A9 Endnotes to Table 1.1

1 Target values for the goals are based on the firm’s preferences and determined with the help of
the management participation.
2 Total debt to equity (TDE) in the agriculture industry is dependent on long term debt (LTD),
profit before interest and tax (PBIT), revenue earning in foreign exchange (REFX), rate of growth
in profit before interest, depreciation and tax (ROGPBIDT), rate of growth of gross block
(ROGGB), capital earning in foreign exchange (CEFX), rate of growth of capital employed
(ROGCE) and fixed asset ratio (FAR). This has been identified through the stepwise regression,
please refer Table A6.
3 Long Term debt to equity (LTD) in the agriculture industry is dependent on total debt to equity
(TDE), net working capital (NWC), debtors velocity (DV), payout (PO), market capitalization
(MC), cash flow from investing activities (CFFI), profit before interest, depreciation, tax margin
(PBIDTM), capital earning in foreign exchange (CEFX). This has been identified through a
stepwise regression, please refer Table A7.
4 Rate of Return on Equity (ROE) is dependent on the rate of growth of capital employed (ROCE)
and rate of growth of profit (ROGPAT) which has been developed using the firm's 10 years data
and multiple regression analysis.
5 Rate of growth of capital employed is dependent on rate of growth of retained earnings (ROGRE)
and Rate of growth of long term debt (ROGLTD). The rate of growth of paid up equity is not
considered as the equity in the past 10 years has remained constant at Rs. 1.29 crores and the firm
does not intend to change ROGCE.
6 Rate of growth of profit before interest and taxes (ROGPBIT) is dependent on the rate of growth
of net sales (ROGNS).
7 Rate of growth of profit after tax (ROGPAT) is dependent on long term debt (LTD), total debt to
equity (TDE), rate of growth of profit before interest and taxes (ROGPBIT).
8 Net working capital (NWC) and total debt to equity (TDE) relationship has been determined,
keeping TDE as independent and assuming that current liabilities finance most of the current
assets and the total debt is used to finance it.
9 Profit before interest and Taxes (PBIT) has to be higher than the present level of operations in the
year 2007 at Rs. 153.88 crores.
10 Rate of Growth of gross block (ROGGB) is 3.88 which can be greater than the previous year as
the firm intends to purchase equipments.
11 Net Working Capital (NWC) of the firm with present operation is Rs.147.31 crores and it cannot
reduce it with its present form of operation and terms.
12 Firm intends to maintain its debtors velocity at 48 days, it may choose to reduce it in future but
not at present. Firm does not intend to increase it as would then increase its requirement for the
net working capital.
13 The firm with its operation has profit before interest, depreciation and tax margin (PBIDTM) as
Rs. 12.29 crores which is retainable with cost efficiencies.
14 The firm stands invested in a manner that provides for cash from investing activities (CFFI)
which Rs. 42.53 crores and there is no scope for improvement.
15 Market Capitalization is attempted to be higher than the present level, management is not
interested in maintaining its market capitalisation and only in increasing it.
16 Firm does not have Capital earning from foreign exchange (CEFX) and does not intend to have
the same in future.
17 Firms wants that Profit before depreciation and tax (PBDT) should not fall below the present
level of Rs.166.24 crores.

35
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