Impact of capital structure on Profitability

and Value of Firm : An Empirical Study

St. Xavier’s college, Patna

A project submitted in partial fulfillment of Degree in Bachelor of Commerce

By:
Shreyansh
Roll No.58

Under the supervision of

Professor : Ashok Kumar Singh

Department of Commerce
HOD certificate
Supervisor certificate
Declaration
I hereby declare that the research paper titled “ Impact of capital structure on Profitability and Value of
firm: An empirical Study “ submitted by me is based on actual and original work carried out by me. Any
reference to work done by any other person or institution or any material obtained by other sources
have been duly cited and referenced. I further certify that the research paper has not been published or
submitted for publication anywhere else nor it will be sent for publication in future.

I cede the copy right of research paper in favor of management wing, St Xavier’s college, Patna

I hereby warrant and declare that this research paper authored by me is an original and genuine work. It
dose not infringe on the right of the right of the others and does not contain any libelous or unlawful
statement. I have taken permission from the copyright holder to reproduce the matter not owned by me
and acknowledged the source. I permit the editors to publish the said paper in the journal or any other
means with editorial modification if any. I assign all the copyright of this article to the journal and have
not assigned any kind of rights for its publication to any other publishers. I agree to indemnify the
editors, against all claims and expenses arising from any breach of warrant on my behalf in this
agreement. In case of a paper by multi authorized article, corresponding author have obtained
permission to enter into agreement and assign copyright from all the co-authors, in writing all the co-
authors have thoroughly read and agreed with above warranties and authorization. In case of the
publication of the article in in the journal, I hereby assign the copyright to the management wing, St
Xavier’s college for its publication in any form/language including all media (print and electronics, or
presently unknown), and exclusive right to use the matter for life of the work(no time restriction on use
of matter). Management Wing, St Xavier’s college may assign its right under the agreement.
Acknowledgement
I wish to express my sincere gratitude to Mr. Ashok sir, Department of commerce for providing me an
opportunity to prepare a research paper on the topic “ Impact of capital Structure in Profitablity and
Value of firm: An empirical study”.

I sincerely thank Mr. Ranjeet sir and to all the other faculty members for their guidance and
encouragement in carrying out this project work. I also wish to express my gratitude to my friends and
the group members who were also involved in the preparation of this research paper.

I also sincerely thank nestle India for providing me the annual reports which were the basis of project
and acted as the secondary data for the purpose of comparison.

At last but not the least I would like to my parents for their unconditional love and support with the help
of which this research paper has been completed.
Contents
1. INTRODUCTION 1-2
2. LITERATURE REVIEW 3-5
3. RESEARCH METHODOLOGY 6-8
4. DATA ANALYSIS 9-11
5. CONCLUSION, SUGGESTIONS AND LIMITATIONS 12-13
6. REFERENCES 14
Introduction
Capital structure decision poses a lot of challenges to firms. Determining an appropriate mix of equity
and debt is one of the most strategic decisions public interest entities are confronted with. A wrong
financing decision has the tendency of stalling the fortunes of any business. Therefore, if managers are
to achieve the goals of wealth maximization, conscious steps must be taken into cognizance in
determining appropriate financing mix. It is upon this premise that this conceptual piece is designed to
guide the top echelons of corporate managers in capital structure decisions. The paper explores a vast
body in literature in articulating critical issues in capital structure decision.

Theoretical overview
Capital structure refers to the different options used by firms in financing its assets. Generally, a firm can
go for different level /mixes of debts ,equity or other financial arrangements. The foundation for
theories and research focus on the subject of capital structure began with the introduction of
Modigliani and Miller’s (M&M) theoretical model about corporate capital structure in 1958 which is
considered to have created the the turning point for modern corporate finance theory. The theory
provides insights into firm’s capital structure decision in capital market free of taxes, transaction costs,
and other frictions.

Concept of Capital Structure

In their attempt to maximize the overall value, firms differ with respect to capital structures. This has
given birth to different capital structure theories that attempt to explain the variation in capital
structures of firms over time or across regions (Shah & Hijazi 2004). The capital structure of a firm
consists of various sources., which are presented in the equity and liability side of the balance sheet.
Huang and VuThi,(2003) note that a firm has three main sources of financing, also called capital
components at their disposal to fund new investment opportunities. It includes the use of retained
earnings (internal equity), issuing new shares (external equity) or borrowing money through debt
instruments (debt capital). These sources of financing constitute the capital structure of a firm and also
reflect the ownership structure of the firm.

Debt Financing
Debt is one of the important items in the capital structure of companies and it provides a medium of
corporate financing as firms borrow money in order to obtain the capital structure they require for
capital expenditure. It represents any agreement between a lender and a borrower: notes, certificates,
bonds, debentures, mortgages and leases. The main characteristic of debt financing is that the amount
borrowed, plus interest, must be paid back to the providers of debt over a given period of time. The
interest rate that must be paid on the borrowed money, together with a repayment schedule will be set
out in the contrast between the lender and the borrower. If the borrower dose not fulfill the obligations
set out in the contract, it can negatively impact on the credit rating, which in turn can make it more
difficult for them to obtain funds in the future and it can also lead to financial failure.
Equity
According to Sibilkov (2009) equity enables the firms to obtain funds without incurring debt. This means
that the fund obtained through equity do not have to be repaid at a particular time. The investors who
purchase shares in the firm hope to reclaim their investments in the future profits. The shareholders
have the privilege to share in the profits of the firm in the form of dividends or future capital gains.
However if the firm suffers a loss, the shareholders have limited liability, which means that the only loss
they face is the amount that they had invested in the firm.

There are two kinds of equity :internal and external equity (Myers, 1984). Internal equity
refers to the retained earnings of a firm which forms part of the firm’s distributable reserves. When
distributable profit is determined in the income statement, the firm has to decide what proportion of
that profit will be paid out as dividends to the ordinary shareholders. The remaining amount represents
the retained earnings and this amount will be carried over to the firms distributable reserves in the
balance sheet. The retained earnings therefore represent the amount that is reinvested back into the
firm. External equity refers to the outside capital which is obtained through the issuing of new share.

Value of Firm
The debate over the significance of a company’s choice of capital structure is esoteric. But, in essence, it
concerns the impact on the total market value of the company ( i.e; the combined value of its debt and
its equity) of splitting the cash flow stream into the debt component and earn equity component.
Financial experts traditionally believed that increasing a company’s leverage, i.e, increasing the
proportion of debt in the company’s capital structure, would increase value upto a point. But beyond
that point, further increases in leverage would increase the company’s overall cost of capital and
decrease its total market value.

Combination of debt and equity

When considering the characteristics of and the various advantages and disadvantages associated with
debt and equity, it is clear that firms should consider a combination of these different sources of
financing. As already mentioned, using only debt in the capital structure can be very risky (especially due
to the risk of bankruptcy, because the more debt affirm uses, the higher the bankruptcy risk) (Huang &
Vu Thi, 2003). During periods of high interest rates, it can cause the earnings on an investment to be
wiped out by high interest payments (Huang & Vu Thi, 2003). Issuing only shares in attempt to raise
funds can also be a very risky option.

Profitability
Profitability indicates how efficiently management utilizes its total assets in order to generate earning.
Shareholders are concerned with profitability of a firm because this can predict the future earnings of
that firm. Outside investors will, therefore, include profitability in their analysis of the firm when making
financial decisions. Traditional financial literatures states that profitable firm can employ more debt
because they are exposed to lower risks of bankruptcy and financial distress. Most studies found
negative relationship between profitability and leverage, which supports the pecking order theory
where firms prefer internal financing to external financing.
Literature Review
Capital structure is one of the most sensitive issues of any organization because it directly relates to
competitive environment. It is stated that capital structure area is widely revisited by academia in order
to postulate firm’s profitability. It has been approached in numerous ways. Capital structure is a factor
that cannot be ignored by any organization weather profit making and nonprofit making. Capital
structure can also determine the organization’s profitability. Most profit making firms major goal is
profit maximization. According to Salim and Yadav (2012) firm’s profitability is significantly affected by
various factors and capital structure is one of the significant factors among them.

Different researchers discovered different result as far as the relation of capital structure to
profitability is concerned. Salim and Yadav (2012) stated that a lot of empirical studies have been done
to explore if there is any ( positive, negative or no relationship) between firm’s profitability and capital
structure and these studies produced mixed results. These outcomes are stated below with major
theories in capital structure and profitability.

Factors influencing firms in their decision on certain capital structure have been made cause for
debate for decades among academics. Each researcher is coming out with different outcome, confusing
the firm on which one is the best structure. Goyal (2014) in the research consortium, results shoes that
there exists a positive relationship between size and profitability of Indian public sector banks.

Number of studies at National and international level were conducted related to determinants of
capital structure. Some of them are presented hereunder

Overall growth of firm is positively related to leverage. Size is also positively related to debt
equity ratio. Return on assets after tax is negatively related to total debt equity ratio. It is observed that
Dividend payout ratio is positively related to total debt ratio. Whereas size and profitability is negatively
related to debt ratio.

Gupta (1969) conducted a study on the ‘’Financial structure of American manufacturing

enterprises’’. The main aim of the study was to analyse the industry effect and the growth effect on the
financial structure of American Manufacturing Enterprises. It was a cross sectional study for the year
1961-62. The study confirmed that total debt equity ratios were positively related to growth and
negatively related to size of the organization and also found that there is a significant industry effect on
debt-equity ratio.

Toy et al (1974) found that companies with higher operating risk showed, higher debt-equity ratio.
They found that debt-equity ratio. They found that debt-equity ratios were positively related to growth
typically measured as growth of sales and return on investments was negatively related to debt-equity
ratio. Moreover, they found that there is no evidence to conclude that size of the firm and the class or
industry thus belong to one determinants of debt-equity ratios. Chakroborty (1977) has also conclude a
study to investigate “debt equity ratio in the private sector in India”. He tested the relationship of debt
equity ratio with age, total assets, retained earnings and profitability and capital intensity. He found that
age, retained earnings, and profitability were negatively related while total assets and capital intensity
was positively related to debt-equity ratio. He also provided a glimpse of the regression patterns of debt
equity ratio in different industrial cluster in India. He used very simple methodology of calculating the
cost of capital and showed that the capital for 22 firms increased from 7.36% to 12.36% over years. The
average cost of capital for all consumer goods industry firms taken together was the highest while it was
lowest for the firms of intermediate goods.

Ferrari and Jones (1979) examined the determinants of financial structure. The objective of
their study was to investigate the relationship between a firm’s financial structure and its industrial
class, size, variability of income and operating leverage. They found that the industry class was linked to
the firm’s leverage, secondly: a firm’s use of debt is related to its size. Finally, operating leverage has
influence on the level of debt in a firm’s financial structure.

Bhat (1980) studied the impact of size, growth, business risk, dividend policy, profitability, debt
service capacity and the degree of operating leverages on the leverage ratio of the firm by using sample
of 63 companies pertaining to engineering industry. He used multiple regression models to find out the
contribution of each characteristic. Business Risk (defined as earning instability), profitability, dividend
payout, and debt service capacity were found to be significant determinant of leverage ratio.

According to the net income approach the capital structure decision is relevant to the valuation
of the firm. As such, a change in the capital structure causes an overall change in the cost of capital and
also in the total value of the firm. A higher debt content in the capital structure indicates a high degree
of financial leverage which causes to decline in overall or weighted average cost of capital. This result
tends to increase in the value of the firm and also enhances the value in earning per share. Durand
(1952) advocated the average cost of capital will be reduced with greater use of debt and the equity
shareholders will not insist for higher return with increased level of gearing caused by the use of
increasing level of debt component. It is also assumed that lenders will also not insist for higher return
with increasing level of debt. Hence, the average cost of capital falls until the level of debt is reached
since there is no return in the cost either equity or debt is reached since there is no return in cost either
equity or debt.

Modigliani and Miller stated that the market value of a firm dose not depend upon its capital
structure and if firm do not provide the required returns, then individuals can get desired returns by
creating synthetic portfolios. Many scholars have found the theory of capital structure irrelevance by
Modigliani and Miller to be objectionable and have constantly challenged it. Walter argued that he
famous separation analogy of splitting milk into cream and skim milk for debt and equity bearing the
same cost as whole milk cannot be considered in a similar fashion when looking at splitting of operating
income. It was shown that an optimal capital structure exists with a certain debt level where the
marginal cost of raising additional debt should be greater than or equal to the average cost of capital as
appointed out by Salamon.

Various studies have tried to find empirical evidence for these theories by using firm specific
variables to determine their impact on firm value and capital structure. The literature has evolved in two
areas. One analyzes the determinants of capital structure i.e the factors affecting firm leverage. The
other analyzes the impact of firm capital structure on firm market value. Moreover, studies have been
done on both listed and non listed firms. This study caters to the impact of firm capital structure and
quality on firm market value by studying listed results.
 In Indian context the empirical evidence of capital structure determinants has been done in a
limited way and mostly restricted to manufacturing sector. Major works include those of Sarma and Rao,
Dhankar and Boora, Bhduri and recent works by Mukherjee and Mahakud and Chada & Sharma have
given mixed results. Moreover, majority of these studies have attempted to establish the relation
between firm capital structure and firm specific determinants. Impact of them on firm value is not
explored much in Indian context. This study contributes to the existing literature by analyzing the impact
of capital structure and firm specific variables on firm value of Indian hotel industry.

A conceptual frame of the linkages of firm attributes, firm quality and capital structure on firm
value. The framework indicates the sign of relationship based on the trade of theory. It has been used to
develop hypothesis of examining the relationship between the variables.
Research Methodology
The research methodology section provides the reader with the road map of what is to be done and
why, letting the readers understand how data were collected and analyzed. It acts as a guidance of how
and where information is going to come from and that is linked to the objectives of the study. It is
revealed that research design provides the basic directions or recipe for carrying out the project. The
major types being non-experimental and experimental method. Non-experimental research design
include descriptive, historical, correlational and qualitative. While experimental involves true
experimental, quasi-experimental and quantitative.

Meaning of Research
Research in common parlance refers to a search for knowledge. Once can also define research as a
scientific and systematic search for pertinent information on a specific topic. In fact, research in an art of
scientific investigation. The Advance learner’s dictionary of current English lays down the meaning of
research as “a careful investigation or inquiry specifically through search of new facts in any branch of
knowledge.” Redman and Mory define research as a “systemized effort to gain new knowledge.” Some
people consider research as a movement, a movement from the known to the unknown. It is actually a
voyage of discovery. We all possess the vital instinct of inquisitiveness for, when the unknown confront
us, we wonder and our inquisitiveness makes us probe and attain full and fuller understanding of the
unknown. The inquisitiveness is the mother of all knowledge and the method, which man employs for
obtaining the knowledge of whatever the unknown, can be termed as research.

Research is an academic activity as such the term should be useful in the technical sense.
According to Clifford Woody research comprises defining and redefining problems, formulating
hypothesis or suggested solutions: collecting, organizing and evaluating data: making deductions and
reaching conclusions: and at last carefully testing the conclusion to determine weather they fit the
formulating hypothesis. D.Slesinger and M. Stephenson in the encyclopedia of Social sciences define
research as “the manipulation of things, concepts or symbol for the purpose of generalizing to extend,
correct or verify knowledge, weather that knowledge aids in construction of theory or in the practice of
an art.” Research is thus, an original contribution to the existing stock of knowledge making for its
advancement. It is the persuit of truth with the help of study, observation, comparision and experiment.
In short the search of knowledge through objective and systematic method of finding solution to
problem is research. The systematic approach concerning generalization and the formulation of theory
is also research.

Population of Study
For some studies, the population may be small enough to warrant the inclusion of all of them in the
study. But a study may entail a large population which cannot all be studied. That portion of the
population that is studied is called a sample of the population. A sample study is, therefore, a smaller
group of elements drawn through a definite procedure from an accessible population. The elements
making up this sample are those which are actually studied.
In this research “Impact of capital structure on profitability and value of a firm: an empirical study” the
population is not quiet small neither very large. The annual reports of Nestle India is taken as the
primary data for the purpose of analysis With the help of these annual reports the balance sheet and
profit and loss statements of previous 5 years are the basis of comparision in the study.

Sample size of the study

Sample size determination is the act of choosing the number of observations or replicates to include in
statistical sample. The sample size is an important feature for any empirical study in which the goal is to
make inference about a population from a sample. In practice the sample size used in the study is
determined based upon the expense of data collection, and the need to have sufficient statistical power.
In complicate studies there may be several different sample sizes involved in the study: for example, in a
stratified survey there would be different sample sizes for each stratum. In a census, data are collected
on the entire population, hence the sample size is equal to the population size.

In this research the sample size of study is the analysis of the annual reports of five previous
years, in which the main sample for this research is the comparison of balance sheets in which %of debt
and %of equity is been compared with the %of increase or decrease in the profits(profit & loss A/c) . And
the same debt and eqity is also compared with the value of firm in the particular year. The overall
results of the five consecutive years will be thus analysed giving us the conclusion of our research in
relation to the profitability as well as the the value of firm.

Period of study
The period of study is defined as the time frame in which the sample of study is taken from. The period
of study may be short, medium or long depending upon the type of research which has to be done. The
period of study also effects the results as in the case of analysis of the results they may get reflected in
the long term run or in the short term run.

In this research paper “Impact of capital structure on profitability and value of firm: An empirical
study” the period of study is from 2012-13 to 2016-17. It is the analysis of 5 cosecutive year’s balance
sheet and profit and loss statements.

Statistical tools used

Statistical method involved in carrying out a study include planning, designing, collecting data, analyzing,
drawing meaningful interpretation and reporting of the research findings. The statistical analysis gives
meaning to the meaningless numbers, thereby breathing life into a lifeless data. The results and
inferences are precise only if proper statistical tests are used. The article will try to acquaint the reader
with the basic research tools that are utilized while conducting various studies.

In this article the basic statistical tools used is the process of comparision of % change in the debt
and equity to the %change in the profitability as well as the value of the firm. The results will be thus
ultimately compared with the result of the previous years results and on the basis of that this process
will be followed for 5 consecutive year’s data and after the final results are there, then the ultimate
conclusion will be made that weather with a change in the capital structure makes its effect on the
profitability as well as on the value of the firm or not.

Variable of study
A variable in the research simply refers to a person, place, thing, or phenomenon that you are trying to
measure in some way. The best way to understand the difference between a dependent and
independent variable is that the meaning of each is implied by what the words tell us about and the
variable you are using.

Dependent variables are those variable that depends upon other factors that are measured.
These variables are expected to change as a result of an experimental manipulation of the independent
variable or variables. It is the presumed cause.

Independent variables are those variable that is stable and unaffected by other variables that you
are trying to measure. It refers to the condition of an experiment that is systematically manipulated by
the investigator. It is the presumed cause.

In this research paper there are two independent variable and two dependent variable as well.
The two independent variable are Debt & Equity and on the other hand the two dependent variable are
Profitability & Value of a firm.
Data Analysis
In this process of systematically applying statistical or logical techniques to describe and illustrate,
condense and recap, and evaluate data. According to some researchers various analytic procedures
provide a way of drawing inductive inference from data and distinguishing the signal from the noise
present in the data. While data analysis in qualitative research can include statistical procedures, many
times analysis becomes an ongoing irrelevant process where data is continuously collected and analyzed
almost simultaneously. Indeed, researchers generally analyze for patterns in observations through the
entire data collection phase. The form of analysis is determined by the specific qualitative approach
taken( field study, ethnography content analysis, oral history, biography, unobtrusive research) and the
form of the data (field notes, documents, audiotape, videotape).

Table 1.1 Nestles Debt and Equity of the previous five years

Year Equity Debt

2012 17984 22370

2013 23983 25983

2014 28372 16268

2015 28178 17868

2016 30137 21595

Table 1.2 Nestles Profit and Value of the previous fiver years

Year Profit Value

2012 10,679 25,454

2013 11,171 26,645

2014 11,846 25,004

2015 5,632 21,433

2016 9,265 19,942

 Table 2.1 %of Debt and Equity to change in %profit
Year %Equity %Debt Change in Profit (%)

2012 44% 56% 9.99 %(increase)

2013 48% 52% 4.04 %(increase)

2014 63.5% 36.5% 5.69 %(increase)

2015 61.2% 38.8% 52.4% (decrease)

2016 58.25% 41.75% 64.5% (increase)

Table 2.2 % of Debt and Equity to change in %value

Year %Equity %Debt Change in Value (%)

2012 44% 56% 2.3% (increase)

2013 48% 52% 4.5% (increase)

2014 63.5% 36.5% 6.5% (decrease)

2015 61.2% 38.8% 16.6% (decrease)

2016 58.25% 41.75% 7.47% (decrease)

Table 1.1 shows the amount of Debt and Equity for the previous five 5 years of “Nestle India” and the
data is obtained from the annual reports in which the data has been specified

Table1.2 shows the amount of profit and the value of the firm which is also obtained from the annual
report of “Nestle India”.

These are the data which are used from the secondary sources and their purpose is to simply compare
the profitability and value with change in the capital structure (debt + equity).

Table2.1 shows the percentage of debt and equity with change in the percentage of profit weather
increase or decrease comparative to the previous year.

Table2.2 shows the percentage of debt and equity with change in the percentage of value of firm
weather increase or decrease comparative to the previous year.

All the data used is clearly stated in annual reports of the Nestle India and this data is of
secondary nature.
An overall description of the analyzed data is done in the table3.1 which is below and it helps us making
the conclusion quiet clear.

year Equity Debt %Equity %Debt Change in Change in

%Profit %Value
2012 17984 22370 44% 56% 9.99% (inc.) 2.3% (inc.)
2013 23983 25983 48% 52% 4.04% (inc.) 4.5% (inc.)
2014 28372 16268 63.5% 36.5% 5.69% (inc.) 6.5% (dec.)

2015 28178 17868 61.2% 38.8% 52.4% (dec.) 16.6% (dec.)

2016 30137 21595 58.25% 41.75% 64.5% (inc.) 7.47% (dec.)

Now, the data with us is sufficient enough to make us a conclusion on the topic of our research “Impact
of capital structure on Profitability and Value of firm: An Empirical Study”. So with the above
information conclusions can be made and are discussed below.
Conclusions, Suggestions & Limitations
Conclusion
The purpose of conclusion is to give readers a sense of the use value of the completely developed
argument or thoroughly answered question. Consider conclusion from the reader’s perspective. At the
end of the of a paper, a reader wants to know what your analysis or argument means, or how to benefit
from the work you accomplished in the paper.

To write a purposeful conclusion, show how the work you accomplished in one paper can help us
to think about another subject or discipline. The conclusion should be to the point and should deal with
the facts analyzed. The readers should be able to understand the basis on which the conclusion has
been made. So now moving towards the topic I would like to discus about the analysis of my research
work.

From the tables of the companies analyzed, there is no relationship between the capital structure
and profitability of the company. At times the %of debt and equity and the percentage of profitability
were going in the same directions thus positive relationship and at times they would go in different
direction meaning a negative relationship. The outcomes are haphazard there is no uniformity and
consistence on the outcomes.

Other hindrances were also discovered and these could be attributed by the environmental
factors of the company, thus economic, political, and social and all other external forces the company is
exposed to. It seems most the company was increasing their debt and equity at times because the
company is now well established. Now the company could definitely borrow money from banks yet they
do not maximize the debt for profit making.

The relationship between capital structure and profitability has other factors that effect them. For
example if two companies have the same capital structure but they are different industries they can
experience different relationship of the capital structure and profitability. There are some external
environmental factors that also hinder the relationship between capital structure and profitability.

From the tables analyzed from the company it seems that at initial stage there is a slight increase in
the value of firm when the equity and debt are 44%-%56% and after that when equity increases by 4%
and debt decreases then there is again a slight increase in the value of the firm, but a major change can
be identified in the value of the firm when the %of equity becomes more than the % of the debt and the
decrease of the value of the firm goes on decreasing when the % of equity is more than the % of debt.
This can be easily analyzed by seeing the figures of 2014, 2015, 2016 of the company so by this analysis
this can be understood that as there seems to be a uniformity in the increase or decrease of the firm’s
value with the increase or decrease in the value of debt.

So from this analysis there seems to be a relationship between the capital structure and the value
of the firm as when the equity decreased decreases the value of the firm increases and the this shows
the inverse relationship between the equity and value and thus shows that there is direct relationship
between the debt and value of the firm. So from this analysis this is clearly stated that there is a
relationship between capital structure and the value of the firm.
Suggestions
The corporate sector is the backbone of the Indian economy, so far it provides a vital, effective and
organized system for the growth of industrial as well as non-industrial sectors of the economy. The
contribution of the corporate sector towards the balanced development of the various areas of an
organized activity can easily be seen in the combined efforts of various companies in achieving the goal
of industrialization and increased production. Corporate sectors have short term goals such as improving
annual profits as well as long term goals in terms of contribution to national wealt, creation of more
employment, building infrastructural fascilities, building up a healthy capital structure, in the operation
of essential services, creating export potential and thus participating actively in the overall economic
growth of the country and improving the standard of living of its people.

The study in general, aims at examining the pattern of capital structure and analysis of profitability
of the Nestle industry. The primary purpose of this study, is to obtain a true insight into the design of
capital structure of Nestle industry, the pattern of capital structure, the profitability of firms and its
effect on capital structure, the impact of capital structure with special reference to size and
growth of firms, the empirical relationship between the capital structure and the cost of capital and
the determinants of corporate capital structure of selected large scale companies in Nestle industry
The suggestion on this paper is very limited and using long term analysis may be more beneficial as
in short term use capital structure and profitability shows no relationship but in case of value of the
firm this short term study clarifies the gap that it is with the increasing debt and decreasing equity the
value of a firm can increase.

Limitations
In the process of research work there are certain limitations which were used for this research process.
Debt, Equity, profitability, Value were only taken from the annual reports of Nestle and rest all other
things were assumed to be constant. This project carries out a very short period of research i.e only 5
years so it was one of the major limitations as the results might would have been different if the period
of study and analysis of data would have been longer. The another limitations were the comparison of
the provided data in the percentage form so that it would have been easily calculated and the other
approaches and methods of evaluating the data has not been used.

In every research work there are some limitations and without limitations a research work
cannot be completed and so is the case with this research work. Limitations are the bounding which
have to be there in the research work because if there will be no limitation then there are several ways
in which a research work can be done so for the purpose of this limitations are used to make the work
easier for the researcher hence the use of limitation is very important in the process of research work.

The limitation section of the research proposal describe situations and circumstances that may
effects or restrict the method and analysis of research data. Limitations are influences that researchers
cannot control. They are the shortcomings, conditions or influences that cannot be controlled by the
researcher that place restrictions on your methodology and conclusions. Any limitation that might
influence the result should be mentioned.
References
Books Refered
1. Prasanna Chandra 2008. Financial Management: theory and practice. Tata McGraw Hill, New
Delhi
2. Sharma, S. 2000. Financial Management for 21st century. ADB Publishers, Jaipur.
3. Capital structure and profitability: A case of Jse listed companies.
4. Fundamental of Financial Management, University of Delhi.

Websites Refered
1. www.iosrjournals.org/iosr-jbm/papers/Vol18-issue4/Version-3/E1804032127.
2. www.pbr.co.in/January2016/6
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