R power final

A

Project Report

On

“STUDY ON CAPITAL STRUCTURE OF RELIANCE POWER AND
COMPARISION WITH OTHER COMPANY”

International Institute of Information Technology

Submitted By

VIVEK SETHIA

NISHIT DHOLAKIA

NITIN KIRNAPURE

(BM JULY-09)

International Institute of Information Technology

P-14 RAJIV GANDHI INFOTECH PARK

HINJEWADI

PUNE –411057

(2010-11)

Project Report on Power Sector Capital Structure

In Comparison with

IT , FMCG & Automobile Industry

Index
SR. NO. TOPIC

1. Project Introduction

2. Capital Structure (Theory)

3. Factor affecting Capital Structure

4. Company Profile of Reliance Power

5. Capital Structure of Reliance Power

6. Company Profile of Tata Power

7. Capital Structure of TATA Power

8. Company Profile of NTPC

9. Capital Structure of NTPC
10. Company Profile of TATA Motors
11. Capital Structure of TATA Motors
12. Company Profile of HUL
13. Capital Structure of HUL
14. Company Profile of Infosys
15. Capital Structure of Infosys

Project Introduction
The Project is all about study of Capital Structure of Power Sector. How the Co. raise
funds to finance their project on power generation. Apart from it we have done some
research on other industry one from each sector of IT, FMCG and Automobile industry

Company Studied Are:-
1. RELIANCE POWER
2. TATA POWER
3. NTPC
4. TATA MOTOR
5. HUL
6. INFOSYS

Capital Structure - What It Is and Why It Matters

The term capital structure refers to the percentage of capital (money) at work in a business
by type. Broadly speaking, there are two forms of capital: equity capital and debt capital. Each has its
own benefits and drawbacks and a substantial part of wise corporate stewardship and management
is attempting to find the perfect capital structure in terms of risk / reward payoff for shareholders.

CAPITAL STRUCTURE

The combination of debt and equity used to finance a firm’s
projects is referred to as its capital structure. The capital structure of
a firm is some mix of debt, internally generated equity, and new
equity. But what is the right mixture? The best capital structure
depends on several factors.

Theories of Capital
structure
1. Pecking Order Theory

In the theory of firm's capital structure and financing decisions, the
Pecking Order Theory or Pecking Order Model was developed by Stewart C.
Myers and Nicolas Majluf in 1984.

It states that companies prioritize their sources of financing (from internal
financing to equity) according to the Principle of least effort, or of least
resistance, preferring to raise equity as a financing means of last resort. Hence,
internal funds are used first, and when that is depleted, debt is issued, and when
it is not sensible to issue any more debt, equity is issued.

2. Trade-Off Theory

The Trade-Off Theory of Capital Structure refers to the idea that a
company chooses how much debt finance and how much equity finance to use
by balancing the costs and benefits. The classical version of the hypothesis goes
back to Kraus and Litzenberger who considered a balance between the dead-
weight costs of bankruptcy and the tax saving benefits of debt. Often agency
costs are also included in the balance. This theory is often set up as a competitor
theory to the Pecking Order Theory of Capital Structure. A review of the
literature is provided by Frank and Goyal.

An important purpose of the theory is to explain the fact that corporations
usually are financed partly with debt and partly with equity. It states that there is
an advantage to financing with debt, the tax benefits of debt and there is a cost
of financing with debt, the costs of financial distress including bankruptcy costs
of debt and non-bankruptcy costs (e.g. staff leaving, suppliers demanding
disadvantageous payment terms, bondholder/stockholder infighting, etc). The
marginal benefit of further increases in debt declines as debt increases, while
the marginal cost increases, so that a firm that is optimizing its overall value
will focus on this trade-off when choosing how much debt and equity to use for
financing.

3. Agency Cost

A type of internal cost that arises from, or must be paid to, an agent
acting on behalf of a principal. Agency costs arise because of core
problems such as conflicts of interest between shareholders and
management. Shareholders wish for management to run the company in a
way that increases shareholder value. But management may wish to grow
the company in ways that maximize their personal power and wealth that
may not be in the best interests of shareholders.

Agency Costs
Some common examples of the principal-agent relationship include:
management (agent) and shareholders (principal), or politicians (agent)
and voters (principal).

Agency costs are inevitable within an organization whenever the
principals are not completely in charge; the costs can usually be best
spent on providing proper material incentives (such as performance
bonuses and stock options) and moral incentives for agents to properly
execute their duties, thereby aligning the interests of principals (owners)
and agents.

FACTORS AFFECTING CAPITAL STRUCTURE

Size of the company
Growth and Stability of
Sales
Growth Opportunities
Profit Margin
Tangible Assets
Cash Flow Ability
Taxes
Non-debt Tax shield
Risk
Floatation Cost
Financial Slack
Cost of Financial
Distress
1. Size:-
From the theoretical point of view, the effect of size on leverage is ambiguous.
“Larger firms tend to be more diversified and fail less often, so size may be an inverse proxy
for the probability of bankruptcy. If so, size should have a positive impact on the supply
debt.

However, size may also be a proxy for the information outside investors have, which should
increase their preference for equity relative to debt.

2. Growth and Stability of Sales:-
There are no consistent theoretical predictions on the effects of Growth in sales on
leverage. If company’s sales are growing then and there is more possibility of increase in
sales growth rate then company should use more equity financing but it will be affect by
profit margin. If profit is increasing than company should prefer more leverage because it
will give tax shield.

If company’s sales are stable and sales are growing at a steady rate company should not
prefer high leverage. Because it’s increase cost of capital.

3. Growth Opportunity:
Firms with high future growth opportunities should use more equity financing, because a
higher leveraged company is more likely to pass up profitable investment opportunities. If
there is a growth opportunity then such an investment effectively transfers wealth from
stockholders to debt holders. Therefore a negative relation between growth opportunities
and leverage is predicted. As market-to-book ratio is used in order to proxy for growth
opportunities, there is one more reason to expect a negative relation – “The theory predicts
that firms with high market-to-book ratios have higher costs of financial distress, which is
why we expect a negative correlation.”

4. Profit margin:-
There are no consistent theoretical predictions on the effects of profitability on leverage.
From the point of view of the trade-off theory, more profitable companies should have
higher leverage because they have more income to shield from taxes. The free cash-flow
theory would suggest that more profitable companies should use more debt in order to
discipline managers, to induce them to pay out cash instead of spending money on
inefficient projects.

However, from the point of view of the pecking-order theory, firms prefer internal financing
to external. So more profitable companies have a lower need for external financing and
therefore should have lower leverage.
5. Tangible assets:-
It is assumed, from the theoretical point of view that tangible assets can be used as
collateral. Therefore higher tangibility lowers the risk of a creditor and increases the value of
the assets in the case of bankruptcy. The more tangible the firm’s assets, the greater its
ability to issue secured debt and the less information revealed about future profits. Thus a
positive relation between tangibility and leverage is predicted.

6. Cash flow:-
If free cash flow is showing increasing trend then company should prefer less leverage. If
free cash flow is not increasing or is not sufficient then company can increase leverage
based on growth rate or growth opportunity and profit margin and other factors.

7. Taxes
According to the trade-off theory, a company with a higher tax rate should use more debt
and therefore should have higher leverage, because it has more income to shield from
taxes.

8. Non-debt Tax shield:-
Other items apart from interest expenses, which contribute to a decrease in tax payments,
are labelled as non-debt tax shields (for example the tax deduction for depreciation).
Depreciation is an effective tax shield, and thus it offsets the tax shield benefits of leverage.
So Non-debt tax shield has a negative relation with leverage.

9. Risk:-
Here risk means probability of bankruptcy. So risks have negative relation with leverage.

10. Floatation Cost
The expense involved in selling a new security issue. This expense includes items such as
registration of the issue and payment to the investment banker. Flotation costs depend on
the size and riskiness of an issue as well as on the type of security to be sold. If floatation
cost increase its increase cost of capital. So floatation cost has negative relation with
leverage.

11. Financial Slack
Financial Slack can be defined as the amount of funds a firm has available to invest without
visiting the external financial markets after paying interest and before paying dividends and
Depreciation.

The following factors influence whether firms should have more equity (financial slack) or
more Debt in their capital structures.
 Firms Track Record of Picking Good Investments.
 The likelihood of good investments and opportunities rising.

12. Financial Distress:-
A condition where a company not able to meet or has difficulty paying off its financial
obligations to its creditors. The chance of financial distress increases when a firm has high
fixed costs, illiquid assets, or revenues that are sensitive to economic downturns.

A company under financial distress can incur costs related to the situation, such as more
expensive financing, opportunity costs of projects and less productive employees. The firm's
cost of borrowing additional capital will usually increase, making it more difficult and
expensive to raise the much needed funds. In an effort to satisfy short-term obligations,
management might pass on profitable longer-term projects. And financial distress has a
negative relation with leverage.

13. Dividend policy:-
Some time dividend policy will affect the capital structure. Sometime company have a policy
to pay high amount of profit as a dividend then this type of condition will affect the capital
structure in recession time or company have a shortage of investment in near future time to
maintain a high growth rate and to maintain dividend policy.

Company Profile
Of
Power Sector

Reliance Power Limited is a part of the Reliance Anil Dhriubhai Ambani Group group,
one of India‟s largest business houses. The group comprises companies in the
telecommunications, financial services, media and entertainment, infrastructure and energy
sectors. The energy sector companies include Reliance Infrastructure Ltd, Reliance
Natural Resources Limited and Reliance Power Limited.

Reliance Power has been established to develop the Reliance Anil Dhirubhai Ambani Group
and is established to develop, construct and operate power projects domestically and
internationally. The Company on its own and through subsidiaries has a portfolio of almost
35,000 MW of power generation capacity, both operational as well as under development.

The power projects are planned to be diverse in geographic location, fuel type, fuel source
and off-take, and each project is planned to be strategically located near an available fuel
supply or load center. The company has 600 MW of operational power generation assets. The
projects under development include seven coal-fired projects to be fueled by reserves from
captive mines and supplies from India and abroad, two gas-fired projects to be fueled
primarily by reserves from the Krishna Godavari Basin (the "KG Basin") off the east coast of
India, and seven hydroelectric projects, six of them in Arunachal Pradesh and one in
Uttarakhand.

The company has won three of the four Ultra Mega Power Projects (Sasan UMPP,
Krishnapatnam UMPP & Tilaiya UMPP) awarded by the Govt of India till date. The UMPP
is an initiative by the government to collaborate with power generation companies to set up
4,000 MW projects to ease the country‟s power deficit situation.

Besides these, Reliance Power is also considering the development of coal bed methane
(CBM) power generation projects based from CBM blocks being exposed by its affiliates.
The company is also planning to register projects with the Clean Development Mechanism
executive board for issuance of CER certificates to augment its revenues

Mission

 To attain global best practices and become a leading power generating company.
 To achieve excellence in project execution, quality, reliability, safety and operational
efficiency.
 To relentlessly pursue new opportunities, capitalizing on synergies in the power generation
sector.
 To consistently enhance our competitiveness and deliver profitable growth.
 To practice highest standards of corporate governance and be a financially sound company.
 To be a responsible corporate citizen nurturing human values and concern for society.
 To improve the lives of local community in all our projects.
 To be a partner in nation building and contribute towards India’s economic growth.
 To promote a work culture that fosters learning, individual growth, team spirit and creativity
to overcome challenges and attain goals.
 To encourage ideas, talent and value systems and become the employer of choice.
 To earn the trust and confidence of all stakeholders, exceeding their expectations.
 To uphold the guiding principles of trust, integrity and transparency in all aspects of
interactions and dealings.

Vision

 To build a global enterprise for all our stakeholders
 To be the largest private sector power generation company in India
 To be the largest hydro power generation company in India
 To be the largest green power company in India
 To be the largest coal mining company in India

Board of Directors

 Shri. Anil Dhirubhai Ambani
 Shri S. L. Rao
 Shri J. L. Bajaj
 Dr. V. K. Chaturvedi
 Shri. K.H. Mankad
 Dr. Yogendra Narain

Capital structure of R-Power
R-Power is a fully equity finance company as on 31-03-2010. R-power capital structure
is good and it is as per company condition and company requirement and future
growth.

Year 2006 2007 2008 2009 2010

Equity 0.05 200.04 2,259.95 2,396.80 2,396.80

Debt 0.00 0.00 0.00 0.00 0.00

Total 0.05 200.04 2,259.95 2,396.80 2,396.80

Equity ratio 1 1 1 1 1

Debt ratio 0 0 0 0 0

Cost of Equity 0 0 0 20.86 14.13

Cost of Debt 0 0 0 0 0

WACC 0 0 0 20.86 14.13

Revenue (sales + Other) - - 112.83 273.81 223.79

Profit Margin:

Net Profit Margin - 7.19 83.9 90.9 122.09

Return On Long term Fund - 0.68 0.64 1.45 0.89

EPS -25.57 0.01 0.41 1.04 1.14

DPS 0 0 0 0 0

Leverage ratios
Long term debt / Equity - - - - -

Total debt/equity - - - - -

Owners fund as % of - 100 100 100 100
total source
Fixed assets turnover - 0.03 - - -
ratio
Liquidity ratios

Current ratio 1.72 9.16 12.6 167.36 189.31

Current ratio (inc. st 1.72 9.16 12.6 167.36 189.31
loans)
Quick ratio 1.72 9.16 12.6 167.36 189.31

Inventory turnover ratio - - - - -

Payout ratios

Dividend payout ratio - - - - -
(net profit)
Dividend payout ratio - - - - -
(cash profit)
Earning retention ratio - 100 100 100 100

Cash earnings retention - 100 100 100 100
ratio
Coverage ratios

Adjusted cash flow time - - - - -
total debt
Financial charges - 1.67 15.27 113.42 74.91
coverage ratio
Fin. charges cov.ratio - 1.2 17.54 142.03 162.62
(post tax)
Free Cash flow -0.13 -38.88 -4811.17 -2271.98 765.22

TAX 0.02 0.38 6.2 7.57 15.71

Non Debt Tax Shield

Depriciation - - - 0.2 0.51

Factors affecting Capital Structure R-Power
1. Size :-

Reliance Power Limited is a part of the Reliance Anil Dhriubhai Ambani Group, one
of India‟s largest business houses. The group comprises companies in the
telecommunications, financial services, media and entertainment, infrastructure and energy
sectors. The energy sector companies include Reliance Infrastructure Ltd, Reliance Natural
Resources Limited and Reliance Power Limited.

Reliance Power has been established to develop the Reliance Anil Dhirubhai Ambani
Group and is established to develop, construct and operate power projects domestically and
internationally. The Company on its own and through subsidiaries has a portfolio of almost
35,000 MW of power generation capacity, both operational as well as under development

Reliance power is a big company and when it comes into market in 2008. That was
the biggest IPO in Indian Capital market history. So here R power can raise debt without any
problem but R-Power is an initial stage and production will start from 2011. So leverage is
not good for company because its increase cost of capital and cash will be go out for
company.

R-Power is fully equity company its good for company because there will be high
growth opportunity in future. More debt means extra burden on cash and its affect investment
and its not good for company in future.

2. Growth and stability in Revenue:-

R-Power production will start from 2011. So here is not income from sales. In this
case growth and stability of revenue does not affect the capital structure of R-Power. R-
Power other income is growing and showing increasing trend and its shows a negative
relation with leverage but profit margin is also increasing so in this condition company
should use debt financing.

3. Growth opportunity:-

In energy and power sector there are lots of opportunities and India has deficit of
energy and power. So company have a very good growth opportunity and company will grow
with high growth rate. High growth opportunity has a negative relation with leverage.

4. Profit Margin:-

From 2008 company profit margin is increasing and company have to pay tax on it. If
profit margin is high company should use leverage to save tax. EPS is also increasing from
2007. But company is not using leverage because company is in his initial stage and company
require the cash to invest in the plant and machinery. Company assuming that company will
grow at higher rate in future so company is not using leverage. As sales will increase in future
time, company may use leverage to save taxes.

5. Tangible Assets:-

Fixed asset are increasing and it will help the company to raise debt from market. But
company is in his initial stage and it is high growth company and so company prefer no
leverage but in near future this factor will help to lever the company.

6. Cash Flow:-

In this company free cash flow is negative. In this case equity finance is better rather than
debt financing.

Free Cash Flow
NOPAT -0.13 0.17 75.47 190.81 108.97

Add: DEP 0 0 0 0.2 0.51

Less: Change in 0 38.55 4,886.50 2,452.22 -658.72
WC
Less: Capital 0 0.5 0.14 10.77 2.98
Expenditure
Free Cash flow -0.13 -38.88 -4811.17 -2271.98 765.22

7. Taxes:-

Production will start from 2011. So here tax will not affect the capital structure. All other
factors are in favour of equity finance rather than debt finance.

8. Non- debt Tax shield:-

In R-Power depreciation is negligible. So this factor is not effective in this case.

9. Risk:-

Bankruptcy cost is in this case is negligible because R-power belongs to ADAG
Group. So here is no bankruptcy cost because of financial support from ADAG Group and R-
Power is a Big name in Indian market.

10. Dividend policy:-

Right now company is not paying any dividend. And this kind of policy help in equity
finance company.

Conclusion:-
R-Power is fully equity finance company because there are following reason:
 Company is in his initial stage.
 High growth company.
 High growth opportunity in near future time.
 Right now production is not started.
 Company need high investment.
 Company have a big financial support of ADAG group.
 Company have no fear of high tax.

So above factors are favour in fully equity finance. So company prefer no leverage.
Because of this company have Zero dividend policy.

(Chairmen:- Shri Ratan Tata)

Lighting up Lives!
Recognised as India‟s largest private sector power utility, with a reputation for
trustworthiness, built up over nearly nine decades, Tata Power surges ahead into yet another
year with plans of sustained growth, greater value to consumer and reliable power supply.

Led by a powerful vision, Tata Power pioneered the generation of electricity in India.
It has now successfully served the Mumbai consumers for over ninety years and has spread
its footprints across the nation. Today, it is the country‟s largest private player in the sector.
Apart from Mumbai and Delhi, the company has generation capacities in Jojobera, Jharkhand
and Karnataka.

Tata Power has an installed power generation capacity of about 3000 Mega Watts,
with the Mumbai power business, which has a unique mix of Thermal and Hydro Power,
generated at the Thermal Power Station, Trombay, and the Hydro Electric Power Stations at
Bhira, Bhivpuri and Khopoli, accounting for 1797 MW. Its diverse generation capability
facilitates the company in producing low cost energy, thereby giving its consumers a greater
value for money.

Among its many achievements that Tata Power can proudly boast of are the
installation and commissioning of India‟s first 500 MW unit (at its Thermal Power
Generating Station, Trombay) the 150 MW Pumped Storage Unit at its Hydro Generating
Station, Bhira, and environmental control systems like the Flue Gas Desulphurisation plant.

Tata Power has a first of its kind joint venture with Power Grid Corporation of India
for the 1200 km Tala Transmission Project.

North Delhi Power Limited

A joint venture with the State Government of Delhi for its North Delhi consumers, the
NDPL serves over 8 lakhs satisfied consumers with a peak load of 1050 MW, also providing
state-of-the-art technology driven processes for enhancing consumer billing and related
services.

Tata Power Trading Company Limited (TPTCL), a wholly owned subsidiary of the
Tata Power Company has been awarded the first ever power trading license by the Central
Electricity Regulatory Commission (CERC) under section 14 of the Electricity Act 2003,
enabling it to carry out transactions all over India.

International Projects

Leveraging upon its engineering skills and understanding of the power business, Tata
Power has carried out several overseas projects and successfully completed erection, testing
and commissioning of major power projects in Saudi Arabia, Bangladesh, Kuwait, Algeria,
Myanmar and Thailand. The company has also undertaken projects pertaining to power plant
/ operations management and plant operations training.

Strategic Electronics Division (SED)

The Strategic Electronics Division of Tata Power has been in operation for over 30
years and has been pursuing development and production activities for the Indian defence
sector. SED successfully developed the Multi Barrel Rocket Launcher, „Pinaka‟, proven in
the field through extended user trials which led to its induction into the Indian Army. The
Division has developed specialised equipment for Air Defence and Naval Combat systems.

Corporate Social Responsibility

Tata Power is committed to setting high standards in its pursuit of social
responsibility and remaining sensitive to the issues of resource conservation, environment
protection and enrichment and development of local communities in its areas of operations.
The company has a simple philosophy that guides its activities in these matters, “Giving back
is a means towards going ahead".

Our widespread programmes on biodiversity conservation, afforestation, pisciculture,
family planning, health services, primary and secondary education and many more have made
inroads into the tiny hamlets and tribal regions of our hydro catchment areas and it is our
endeavour to light up these dark and narrow streets to new dawns.

Capital structure of Tata Power
Tata Power is a levered company as on 31-03-2010.

Year 2006 2007 2008 2009 2010

Equity 197.92 197.92 220.72 221.44 237.33

Debt 2,796.81 3,675.52 3,083.35 5,247.06 5,963.42

Total 2,994.73 3,873.44 3,304.07 5,468.50 6,200.75

Equity ratio 0.0660894 0.0510967 0.0668025 0.0404937 0.038274

Debt ratio 0.9339106 0.9489033 0.9331975 0.9595063 0.961726

Cost of Equity 25.08 33.6 12.89 19.69 19.25

Cost of Debt 5.4569313 5.09070825 5.5725104 6.2078574 7.053671

WACC 5.02 4.89 4.28 4.77 5.22

Growth in sales 4,553.23 4,918.53 5,909.60 7,257.05 7,104.22

Profit Margin:

Net Profit Margin 12.92 13.26 14.35 12.32 12.88

Return On Long term Fund 8.72 7.62 7.18 7.67 9.94

EPS 45.41 50.46 52.81 56.72 60.07

DPS 8.5 9.5 10.5 11.5 12

Leverage ratios

Long term debt / Equity 0.49 0.6 0.34 0.52 0.55

Total debt/equity 0.5 0.61 0.38 0.6 0.56

Owners fund as % of total 66.34 61.97 72.15 62.22 63.84
source
Fixed assets turnover ratio 0.76 0.78 0.91 0.8 0.7

Liquidity ratios

Current ratio 2.22 2.25 2.04 2.1 2.45

Current ratio (inc. st loans) 2.18 2.22 1.78 1.64 2.39

Quick ratio 1.85 2 1.75 1.77 2.17

Inventory turnover ratio 498.76 6,072.41 18.7 15.49 18.98

Payout ratios

Dividend payout ratio (net 31.41 31.6 30.84 31.2 34.08
profit)
Dividend payout ratio 21.34 22.05 23.02 22.9 22.65
(cash profit)
Earning retention ratio 56.37 54.01 43.09 40.16 63.82

Cash earnings retention 73.65 71.79 65.02 64.68 76.44
ratio
Coverage ratios

Adjusted cash flow time 3.84 4.71 4.02 6.44 4.35
total debt
Financial charges coverage 6.63 5.55 6.23 4.15 5.02
ratio
Fin. charges cov.ratio 6.89 6.34 7.78 4.86 4.39
(post tax)
Free Cash flow 718.01 -144.91 771.19 -2172.38 -737.07

TAX 130.68 70.03 132.35 210.91 320.72

Non Debt Tax Shield

Depriciation 278.34 291.92 290.5 328.85 477.94

Fixed Assets 5,924.74 6,229.71 6,481.99 8,985.86 10,010.80

Factors affecting Capital Structure of Tata Power
1. Size :-

Recognized as India largest private sector power utility, with a reputation for
trustworthiness, built up over nearly nine decades, Tata Power surges ahead into yet another
year with plans of sustained growth, greater value to consumer and reliable power supply.

Led by a powerful vision, Tata Power pioneered the generation of electricity in India.
It has now successfully served the Mumbai consumers for over ninety years and has spread
its footprints across the nation. Today, it is the country‟s largest private player in the sector.
Apart from Mumbai and Delhi, the company has generation capacities in Jojobera, Jharkhand
and Karnataka.

Tata Power has an installed power generation capacity of about 3000 Mega Watts,
with the Mumbai power business, which has a unique mix of Thermal and Hydro Power,
generated at the Thermal Power Station, Trombay, and the Hydro Electric Power Stations at
Bhira, Bhivpuri and Khopoli, accounting for 1797 MW. Its diverse generation capability
facilitates the company in producing low cost energy, thereby giving its consumers a greater
value for money.


Tata Power sales is showing increasing trend from 2006 and profit margin is average
more than 12.5. Because of Revenue increasing and also profit is increasing more income
comes under tax. So company prefer more debt financing. Debt financing is more risky but
company have a support from tata group.


In energy and power sector there are lots of opportunities and India has deficit of
energy and power. So company have a very good growth opportunity and company will grow
with high growth rate. High growth opportunity has a negative relation with leverage. But in
case of Tata power this company is stable company and revenue is growing and profit is
growing and company does not need high investment like R-Power so thats why company is
high debt financing company.

4. Profit Margin:-

From 2006 to 2008 company profit margin is increasing and in 2009 profit margin is
decreased but also growing in 2010. Company have to pay tax on it. If profit margin is high
company should use leverage to save tax. EPS is also increasing from 2006. Because of
profit margin and EPS is increasing company prefer more debt.


Fixed asset are increasing and it will help the company to raise debt from market. If
tangible assets are increasing company is able to raise secure debt. That‟s why company is
able to maintain high debt Ratio.

6. Cash Flow:-

Free Cash Flow
NOPAT 439.67 478.75 471.44 480.77 892.75

Add: DEP 278.34 291.92 290.5 328.85 477.94

Less: Change in WC 0.00 610.61 -261.53 478.13 1,082.82

Less: Capital Expenditure 0 304.97 252.28 2,503.87 1,024.94

Free Cash flow 718.01 -144.91 771.19 -2172.38 -737.07

Equity ratio 0.0660894 0.0510967 0.0668025 0.0404937 0.038274
Debt ratio 0.9339106 0.9489033 0.9331975 0.9595063 0.961726
WACC 5.02 4.89 4.28 4.77 5.22

According to this table when ever company has a negative cash debt ratio is increase and
whenever company has a positive cash flow equity ratio is increasing so, that‟s why company
prefer more debt finance.

7. Taxes:-

In Tata Power case sales is growing and here tax is also growing. That‟s why
company prefer more debt financing company.


In Tata power depreciation is growing. But here this factor is not effective to
influence capital structure.

9. Risk:-

Bankruptcy cost is in this case is negligible because Tata power belongs to Tata
Group. So here is no bankruptcy cost because of financial support from Tata Group and Tata
Power is a Big name in Indian market.

Equity ratio 0.0660894 0.0510967 0.0668025 0.0404937 0.038274

Debt ratio 0.9339106 0.9489033 0.9331975 0.9595063 0.961726

Cost of Equity 25.08 33.6 12.89 19.69 19.25

Cost of Debt 5.4569313 5.09070825 5.5725104 6.2078574 7.053671

WACC 5.02 4.89 4.28 4.77 5.22

Whenever cost of equity is increasing ratio of equity is also decreasing and whenever cost of
debt is increasing company prefer equity financing. Here little change in cost of equity and
coat of debt affect the capital structure.

Conclusion:-
Tata Power is highly debt finance company because there are following reason:
 Tata power is developed company
 High growth company and also sales revenue is increasing
 No need of too much investment
 Company have a big financial support of Tata group.
 Company have no fear of bankruptcy cost
 Growing profit and growing tax affect the capital structure.
 When Cost of debt increase company prefer equity financing.

NATIONAL THERMAL POWER CONSERVATION

India‟s largest power company, NTPC was set up in 1975 to accelerate power
development in India. NTPC is emerging as a diversified power major with presence in the
entire value chain of the power generation business. Apart from power generation, which is
the mainstay of the company, NTPC has already ventured into consultancy, power trading,
ash utilisation and coal mining. NTPC ranked 317th in the „2009, Forbes Global 2000‟
ranking of the World‟s biggest companies. NTPC became a Maharatna company in May,
2010, one of the only four companies to be awarded this status.

The total installed capacity of the company is 32,694 MW (including JVs) with 15
coal based and 7 gas based stations, located across the country. In addition under JVs, 5
stations are coal based & another station uses naptha/LNG as fuel. The company has set a
target to have an installed power generating capacity of 1,28,000 MW by the year 2032. The
capacity will have a diversified fuel mix comprising 56% coal, 16% Gas, 11% Nuclear and
17% Renewable Energy Sources(RES) including hydro. By 2032, non fossil fuel based
generation capacity shall make up nearly 28% of NTPC‟s portfolio.

Vision

“To be the world’s largest and best power producer, powering India’s
growth.”

Mission

“Develop and provide reliable power, related products and services at
competitive prices, integrating multiple energy sources with innovative
and eco-friendly technologies and contribute to society.”

Capital structure of NTPC
NTPC is a levered company as on 31-03-2010.

Year 2006 2007 2008 2009 2010

Equity 8245.5 8245.5 8245.5 8245.5 8245.5

Debt 20,638.10 25,141.10 27,190.60 34,567.80 37,797.00

Total 28,883.60 33,386.60 35,436.10 42,813.30 46,042.50

Equity ratio 0.2854734 0.24697034 0.2326864 0.192592 0.1790845

Debt ratio 0.7145266 0.75302966 0.7673136 0.807408 0.8209155

Cost of Equity 35.55 164.03 9.04 13.38 13.81

Cost of Debt 9.7131034 8.17665098 7.2900193 5.0249076 4.9260523

WACC 14.88 45.05 5.78 5.24 5.19

Growth in sales 26,142.90 32,631.70 37,091.00 41,975.20 46,377.70

Profit Margin:



EPS 7.06 8.33 8.99 9.95 10.59

DPS 2.8 3.2 3.5 3.6 3.8

Leverage ratios



source

Liquidity ratios

Current ratio 2.11 2.42 2.36 2.89 2.81


Quick ratio 1.84 2.18 2.16 2.59 2.5

Inventory turnover ratio 25.14 30.5 33.59 28.21 27.54

Payout ratios

profit)
(cash profit)

ratio
Coverage ratios

total debt
ratio
(post tax)
Free Cash flow 7005.7 -1567.5 4278.9 -2048 6826.4

TAX 1,082.40 2,163.70 2,994.20 2,554.70 2,682.70

Non Debt Tax Shield

Depriciation 2,047.70 2,075.40 2,138.50 2,364.50 2,650.10

Factors affecting Capital Structure of NTPC
1. Size :-

NTPC is a big company and chances of failure of a big company is less. So company can be
high equity finance company and can be high debt finance company.

NTPC sales is showing increasing trend from 2006. Because of Revenue increasing and also
profit is increasing more income comes under tax. So company prefer more debt financing.
Debt financing is more risky but company save some amount by Tax shield.


In energy and power sector there are lots of opportunities and India has deficit of energy and
power. So company have a very good growth opportunity and company will grow with high
growth rate. High growth opportunity has a negative relation with leverage. But in case of
NTPC this company is stable company and revenue is growing and profit is growing and
company does not need high investment like R-Power so thats why company is high debt
financing company.

4. Profit Margin:-

From 2006 company profit margin is decreased but overall profit is increasing. Company
have to pay tax on it. If profit margin is high company should use leverage to save tax. EPS is
also increasing from 2006. Because of profit margin and increasing company prefer more
debt.


Fixed asset are increasing and it will help the company to raise debt from market. If tangible
assets are increasing company is able to raise secure debt. That‟s why company is able to
maintain high debt Ratio.

6. Cash Flow:-

Free Cash Flow
NOPAT 4,958.00 6,615.80 7,366.70 7,190.30 8,098.90

Add: DEP 2,047.70 2,075.40 2,138.50 2,364.50 2,650.10

Less: Change in WC 0 5,572.10 2,462.50 2,617.80 -388.20

Less: Capital Expenditure 0 4,686.60 2,763.80 8,985.00 4,310.80

Free Cash flow 7005.7 -1567.5 4278.9 -2048 6826.4

Equity ratio 0.2854734 0.24697034 0.2326864 0.192592 0.1790845

Debt ratio 0.7145266 0.75302966 0.7673136 0.807408 0.8209155
WACC 14.88 45.05 5.78 5.24 5.19

According to this table when ever company has a negative free cash flow, debt ratio is
increase. That‟s why company prefer more debt finance.

10. Taxes:-

In NTPC case sales is growing and here tax is also growing. And more debt shield more
income from Taxes. That‟s why company prefer more debt financing company.


In NTPC depreciation is growing. But here this factor is not effective to influence capital
structure.

12. Risk:-

Bankruptcy cost is in this case is negligible because NTPC is govt organisation.

13. Cost of Debt and Cost of Equity:-

Equity ratio 0.2854734 0.24697034 0.2326864 0.192592 0.1790845

Debt ratio 0.7145266 0.75302966 0.7673136 0.807408 0.8209155

Cost of Equity 35.55 164.03 9.04 13.38 13.81

Cost of Debt 9.7131034 8.17665098 7.2900193 5.0249076 4.9260523

WACC 14.88 45.05 5.78 5.24 5.19

The company from its initial stage highly debt financing company. From 2006 cost of debt is
decreasing that‟s why company prefer more debt financing. If we look the trend of cost of
debt, is decreasing. So company prefer more debt finance and more volatility in market return
increase the cost of equity, which is higher than cost of debt.

Conclusion:-
NTPC is highly debt finance company because there are following reason:
 NTPC is developed company
 No need of too much investment
 When Cost of debt increasing company prefer equity financing.

Over All Capital Structure of Power Sector Company
As we seen that in power sector companies have no definite capital structure. As R-
Power is fully equity finance company and Tata power is highly debt finance company and
NTPC is mixed equity-debt finance company. NTPC is more debt finance company.

So here is not definite capital structure and capital structure is changed by several factors as
we seen in above cases.

Tata Motors Limited is India's largest automobile company, with consolidated
revenues of Rs. 92,519 crores (USD 20 billion) in 2009-10. It is the leader in commercial
vehicles in each segment, and among the top three in passenger vehicles with winning
products in the compact, midsize car and utility vehicle segments. The company is the
world's fourth largest truck manufacturer, and the world's second largest bus manufacturer.

The company's 24,000 employees are guided by the vision to be "best in the manner
in which we operate, best in the products we deliver, and best in our value system and
ethics."

Established in 1945, Tata Motors' presence indeed cuts across the length and breadth
of India. Over 5.9 million Tata vehicles ply on Indian roads, since the first rolled out in 1954.
The company's manufacturing base in India is spread across Jamshedpur (Jharkhand), Pune
(Maharashtra), Lucknow (Uttar Pradesh), Pantnagar (Uttarakhand) and Dharwad (Karnataka).
Following a strategic alliance with Fiat in 2005, it has set up an industrial joint venture with
Fiat Group Automobiles at Ranjangaon (Maharashtra) to produce both Fiat and Tata cars and
Fiat powertrains. The company is establishing a new plant at Sanand (Gujarat). The
company's dealership, sales, services and spare parts network comprises over 3500 touch
points; Tata Motors also distributes and markets Fiat branded cars in India.

Tata Motors, the first company from India's engineering sector to be listed in the New
York Stock Exchange (September 2004), has also emerged as an international automobile
company. Through subsidiaries and associate companies, Tata Motors has operations in the
UK, South Korea, Thailand and Spain. Among them is Jaguar Land Rover, a business
comprising the two iconic British brands that was acquired in 2008. In 2004, it acquired the
Daewoo Commercial Vehicles Company, South Korea's second largest truck maker

Tata Motors is also expanding its international footprint, established through exports
since 1961. The company's commercial and passenger vehicles are already being marketed in
several countries in Europe, Africa, the Middle East, South East Asia, South Asia and South
America. It has franchisee/joint venture assembly operations in Kenya, Bangladesh, Ukraine,
Russia, Senegal and South Africa.

Tata Motors is committed to improving the quality of life of communities by working
on four thrust areas – employability, education, health and environment. The activities touch
the lives of more than a million citizens. The company's support on education and
employability is focused on youth and women. They range from schools to technical
education institutes to actual facilitation of income generation. In health, our intervention is
in both preventive and curative health care. The goal of environment protection is achieved
through tree plantation, conserving water and creating new water bodies and, last but not the
least, by introducing appropriate technologies in our vehicles and operations for constantly
enhancing environment care. With the foundation of its rich heritage, Tata Motors today is
etching a refulgent future.

Capital structure of Tata Motor
Tata Motor is highly debt finance company as on 31-03-2010.

Year 2006 2007 2008 2009 2010

Equity 382.87 385.41 385.54 514.05 570.6

Debt 2936.84 4009.14 6280.52 13165.56 16625.91

Total 3319.71 4394.55 6666.06 13679.61 17196.51

Equity ratio 0.1153324 0.08770181 0.0578363 0.0375778 0.0331812

Debt ratio 0.8846676 0.91229819 0.9421637 0.9624222 0.9668188

Cost of Equity 24.39 23.19 12.26 28.84 27.84

Cost of Debt 11.925743 11.3677746 7.5082955 5.3542728 7.4958303

WACC 9.8 8.87 5.38 4.54 5.77

Growth in sales 20,088.63 26,664.25 28,767.91 25,660.67 35,373.29

Profit Margin:



EPS 39.94 49.65 52.63 19.48 39.26

DPS 13 15 15 6 15

Leverage ratios



source

Liquidity ratios

Current ratio 1.24 1.24 0.89 0.84 0.62


Quick ratio 0.96 0.91 0.66 0.58 0.43


Payout ratios

profit)
(cash profit)

ratio
Coverage ratios

total debt
ratio
(post tax)
Free Cash flow 1882.59 1394.54 3497.24 -517.23 3277.34

TAX 524.93 660.37 547.55 12.5 589.46

Non Debt Tax Shield

Depriciation 520.94 586.29 652.31 874.54 1,033.87

Factors affecting Capital Structure of Tata Motor
1. Size :-

Tata Motor is a big company and chances of failure of a big company is less. So company
can be high equity finance company and can be high debt finance company.

Tata Motor sales is showing increasing trend from 2006 to 2008 and in 2009 sales is
decreasing and in 2010 sales is increasing. Because of Revenue increasing and also profit is
increasing more income comes under tax. So company prefer more debt financing. Debt
financing is more risky but company save some amount by Tax shield. Tata Motor capital
structure is may be affecting by sales because whenever sales is increase, company prefer
more debt finance.

In automobile sector there are lots of opportunities. In last 5 year Indian Automobile sector is
booming and India become a auto hub after US and China.

4. Profit Margin:-
also increasing from 2006. Because of profit margin and increasing company prefer more
debt.


6. Cash Flow:-
Free Cash Flow
NOPAT 1,361.65 1,686.31 1,654.17 921.51 1,421.49

Add: DEP 520.94 586.29 652.31 874.54 1,033.87

Less: Change in WC 0 73.81 -3,245.79 -761.06 -5,333.62

Less: Capital Expenditure 0 804.25 2,055.03 3,074.34 4,511.64

Free Cash flow 1882.59 1394.54 3497.24 -517.23 3277.34

Equity ratio 0.1153324 0.08770181 0.0578363 0.0375778 0.0331812
Debt ratio 0.8846676 0.91229819 0.9421637 0.9624222 0.9668188
WACC 9.8 8.87 5.38 4.54 5.77

According to this table whatever company has a negative or positive free cash flow, debt ratio
is increase. So in this case free cash flow does not affect the capital structure of company.

14. Taxes:-

In Tata Motor case sales is growing and here tax is also growing. And more debt shield more


In Tata Motor depreciation is growing. But here this factor is not effective to influence capital
structure.

16. Risk:-

Bankruptcy cost is in this case is negligible because Tata Motor is a big name in market and
Tata Motor is a part of Tata Group, which is top most corporate organization in INDIA.


Equity ratio 0.1153324 0.08770181 0.0578363 0.0375778 0.0331812

Debt ratio 0.8846676 0.91229819 0.9421637 0.9624222 0.9668188

Cost of Equity 24.39 23.19 12.26 28.84 27.84

Cost of Debt 11.925743 11.3677746 7.5082955 5.3542728 7.4958303

WACC 9.8 8.87 5.38 4.54 5.77

. From 2006 cost of debt is decreasing that‟s why company prefer more debt financing. If we
look the trend of cost of debt, is decreasing. So company prefer more debt finance and more
volatility in market return increase the cost of equity, which is higher than cost of debt. In this
type of condition company prefer more debt rather than equity.

Conclusion:-
Tata Motor is highly debt finance company because there are following reason:

 Tata motor is developed company
 Growing profit affect the capital structure.
 When Cost of debt increasing company prefer equity financing. But in this case cost of debt
is decreasing so company prefer debt financing.

Hindustan Unilever Limited (HUL) is India's largest Fast Moving Consumer Goods
Company, touching the lives of two out of three Indians with over 20 distinct categories in
Home & Personal Care Products and Foods & Beverages. The company‟s Turnover is Rs.
17,523 crores (for the financial year 2009 - 2010)

HUL is a subsidiary of Unilever, one of the world‟s leading suppliers of fast moving
consumer goods with strong local roots in more than 100 countries across the globe with
annual sales of about €40 billion in 2009 Unilever has about 52% shareholding in HUL.

Hindustan Unilever was recently rated among the top four companies globally in the
list of “Global Top Companies for Leaders” by a study sponsored by Hewitt Associates, in
partnership with Fortune magazine and the RBL Group. The company was ranked number
one in the Asia-Pacific region and in India.

The mission that inspires HUL's more than 15,000 employees, including over 1,400
managers, is to help people feel good, look good and get more out of life with brands and
services that are good for them and good for others. It is a mission HUL shares with its
parent company, Unilever, which holds about 52 % of the equity.

HUL's brands touch the lives of two out of three Indians. They endow the company
with turnover of Rs.17,523 crores (for the 12 month period – April 1, 2009 to March 31,
2010).

The mission that inspires HUL's more than 15,000 employees, including over 1,400
managers, is to help people feel good, look good and get more out of life with brands and
services that are good for them and good for others. It is a mission HUL shares with its
parent company, Unilever, which holds about 52 % of the equity.

Capital structure of HUL
HUL is fully equity finance company as on 31-03-2010.

Year 2006 2007 2008 2009 2010

Equity 220.12 220.68 217.75 217.99 218.17

Debt 56.94 72.6 88.53 421.95 0

Total 277.06 293.28 306.28 639.94 218.17

Equity ratio 0.7944849 0.75245499 0.7109508 0.3406413 1

Debt ratio 0.2055151 0.24754501 0.2890492 0.6593587 0

Cost of Equity 10.06 10.63 7.96 5.46 7.57

Cost of Debt 33.702143 14.7796143 28.803795 6.000711 0

WACC 12.59 9.48 11.17 4.51 7.57

Growth in sales 11,193.88 12,244.02 13,880.56 20,504.28 17,769.12

Profit Margin:



EPS 6.4 8.41 8.12 11.47 10.09

DPS 5 6 9 7.5 6.5

Leverage ratios


Total debt/equity 0.02 0.02 0.06 0.2 -

Owners fund as % of total 97.58 97.4 94.2 83 100
source


Liquidity ratios

Current ratio 0.7 0.74 0.69 1.01 0.83


Quick ratio 0.32 0.33 0.24 0.51 0.45


Payout ratios

profit)
(cash profit)
Earning retention ratio 1.94 -0.12 -39.13 18.5 21.25

Cash earnings retention 10.59 7.83 -28.52 24.77 27.59
ratio
Coverage ratios

Adjusted cash flow time 0.04 0.04 0.04 0.16 -
total debt
ratio
(post tax)
Free Cash flow 1409.51 1519.56 1991.85 635.81 2775.1

TAX 294 321.8 417.14 572.94 648.36

Non Debt Tax Shield

Depriciation 124.45 130.16 138.36 195.3 184.03

Factors affecting Capital Structure of HUL
1. Size :-

HUL is a big company and chances of failure of a big company is less. So company can be
high equity finance company and can be high debt finance company.


HUL sales are showing increasing trend from 2006 to 2009 and in 2010 sales is decreasing.
Because of Revenue increasing and also profit is increasing so more income comes under tax.
So company prefer more debt financing. Debt financing is more risky but company save
some amount by Tax shield.


In FMCG sector there are opportunities. Indian FMCG sector is growing at steady rate. This
sector is well developed in Indian market. But here growth rate is very low. There is not
required heavy investment in next 5 year.

8. Profit Margin:-
also increasing from 2006-09. Because of profit margin and increasing company prefer more
debt.


10. Cash Flow:-
Free Cash Flow
NOPAT 1,285.06 1,509.52 1,675.85 2,346.32 2,102.69

Add: DEP 124.45 130.16 138.36 195.3 184.03

Less: Change in WC 0 32.54 -384.03 1,693.16 -1,188.61

Less: Capital Expenditure 0 87.58 206.39 212.65 700.23

Free Cash flow 1409.51 1519.56 1991.85 635.81 2775.1

Equity ratio 0.7944849 0.75245499 0.7109508 0.3406413 1

Debt ratio 0.2055151 0.24754501 0.2890492 0.6593587 0

WACC 12.59 9.48 11.17 4.51 7.57

According to this table company has a positive free cash flow from 2006-09, debt ratio is
increase. In 2009 suddenly free cash flow is less than 2009, debt is also increase and in 2010
free cash flow is four time higher than 2009, in this time company is fully equity finance
company.
In this company free cash flow is not effective. Because capital structure is not affected by
free cash flow in this company.

18. Taxes:-

In HUL case sales is growing and here tax is also growing. And more debt shield more


In HUL depreciation is growing. But here this factor can be effective to influence capital
structure. Because depreciation is reached almost 80% of equity and depreciation has a
negative relation with leverage.

20. Risk:-

Bankruptcy cost is in this case is negligible because HUL is blue chip company. It has a good
image and goodwill in market.


Equity ratio 0.7944849 0.75245499 0.7109508 0.3406413 1

Debt ratio 0.2055151 0.24754501 0.2890492 0.6593587 0

Cost of Equity 10.06 10.63 7.96 5.46 7.57

Cost of Debt 33.702143 14.7796143 28.803795 6.000711 0

WACC 12.59 9.48 11.17 4.51 7.57

In HUL case cost of equity or debt increasing or decreasing, debt ratio is ever increasing. In
2010 suddenly company become fully equity finance company. So in this determining the
appropriate capital structure is difficult.

Conclusion:-
HUL is more equity finance company because there are following reason:

 HUL is developed company
 Sales revenue is increasing
 Company have a sufficient amount of Free cash flow
 In company like HUL determination of factor affecting capital structure, is difficult.

N. R. Narayana Murthy
(Chairman of the Board and Chief Mentor, Infosys Technologies)

Infosys Technologies Ltd. (NASDAQ: INFY) was started in 1981 by seven people
with US$ 250. Today, we are a global leader in the "next generation" of IT and consulting
with revenues of US$ 5.4 billion (LTM Sep-10).

Infosys defines, designs and delivers technology-enabled business solutions that help
Global 2000 companies win in a Flat World. Infosys also provides a complete range of
services by leveraging our domain and business expertise and strategic alliances with leading
technology providers.

Our offerings span business and technology consulting, application services, systems
integration, product engineering, custom software development, maintenance, re-engineering,
independent testing and validation services, IT infrastructure services and business process
outsourcing.

Infosys pioneered the Global Delivery Model (GDM), which emerged as a disruptive force in
the industry leading to the rise of offshore outsourcing. The GDM is based on the principle of
taking work to the location where the best talent is available, where it makes the best
economic sense, with the least amount of acceptable risk.

Infosys has a global footprint with 63 offices and development centers in India, China,
Australia, the Czech Republic, Poland, the UK, Canada and Japan. Infosys and its
subsidiaries have 122,468 employees as on September 30, 2010.

Infosys takes pride in building strategic long-term client relationships. Over 97% of our
revenues come from existing customers (FY 10).

Locations

Corporate headquarters : Bangalore, India
US headquarters : Fremont, CA
Worldwide offices : Atlanta, Bangalore, Beijing, Bellevue, Berkeley Heights, Bhubaneswar,
Brussels, Charlotte, Chennai, Detroit, Frankfurt, Fremont, Hong Kong, Hyderabad, Lake
Forest, Lisle, London, Mangalore, Mauritius, Melbourne, Milano, Mohali, Mumbai, Mysore,
New Delhi, Paris, Phoenix, Plano, Pune, Quincy, Reston, Shanghai, Sharjah, Stockholm,
Stuttgart, Sydney, Thiruvananthapuram, Tokyo, Toronto, Utrecht, Zurich.

Employees 49,422

Capital structure of INFOSYS
INFOSYS is fully equity finance company as on 31-03-2010.

Year 2006 2007 2008 2009 2010

Equity 138 286 286 286 287

Debt 0.00 0 0 0 0

Total 138.00 286.00 286.00 286.00 287.00



Cost of Equity 13.33 13.93 9.15 14.41 14.48


WACC 13.33 13.93 9.15 14.41 14.48

Growth in sales 9,028.00 13,149.00 15,648.00 20,264.00 21,140.00

Profit Margin:



EPS 87.86 66.23 78.15 101.58 101.3

DPS 45 11.5 33.25 23.5 25

Leverage ratios


Total debt/equity - - - - -

Owners fund as % of total 100 100 100 100 100
source

Liquidity ratios

Current ratio 2.75 4.96 3.3 4.71 4.28


Quick ratio 2.73 4.91 3.28 4.67 4.2

Inventory turnover ratio - - - - -

Payout ratios

profit)
(cash profit)

ratio
Coverage ratios

Adjusted cash flow time - - - - -
total debt
Financial charges coverage 3,211.00 4,559.00 5,642.00 3,891.00 -
ratio
Fin. charges cov.ratio 2,831.00 4,253.00 5,017.00 3,257.50 -
(post tax)
Free Cash flow 2907 -174 3013 1612 7947

TAX 303 352 630 895 1,717.00

Non Debt Tax Shield

Depriciation 409 469 546 694 807

Factors affecting Capital Structure of INFOSYS
1. Size

INFOSYS is a big company and chances of failure of a big company is less. So company can
be high equity finance company and can be high debt finance company.


Infosys sales are showing increasing trend from 2006. Because of Revenue increasing and
also profit is increasing so more income comes under tax. But company is 100 % equity
finance company. In this case sales do not effective factor which affect the capital structure.


In IT sector there is lots of growth opportunities and it‟s a key sector of today‟s Indian
economy. IT sector will grow at high growth rate in near future. That‟s required investment.
In this point of view equity financing is a good decision.

4. Profit Margin:-

From 2006 company profit margin is increasing and despite a high tax rate company follows
100% equity finance capital structure. So in this case sales is not effective factor to affect
capital structure.


assets are increasing company is able to raise secure debt. But company is fully equity
finance company. So here it is not a effective factor.

6. Cash Flow:-

Free Cash Flow
NOPAT 2,498.00 3,737.00 4,465.00 6,191.00 5,755.00

Add: DEP 409 469 546 694 807

Less: Change in WC 0 3,328.00 1,379.00 3,795.00 822.00

Less: Capital Expenditure 0 1,052.00 619.00 1,478.00 -2,207.00

Free Cash flow 2907 -174 3013 1612 7947



WACC 13.33 13.93 9.15 14.41 14.48

According to this table company has a positive free cash flow from 2006. In company like
Infosys they have too much free cash flow, here debt financing is not a good choice for
company.

7. Taxes:-

In Infosys case sales is growing and here tax is also growing. But company is fully equity
finance company. Although Infosys have a more free cash flow and investment in IT sector is
quite low. So there is no need of debt financing to save some money. If they become levered
it will be costlier for Infosys.


Depreciation is growing. More Depreciation shield more income from tax. So these factors
help to maintain fully equity finance.

9. Risk:-

Bankruptcy cost is in this case is negligible. Because Infosys is a big name in market and
have a good image and goodwill in market.




Cost of Equity 13.33 13.93 9.15 14.41 14.48


WACC 13.33 13.93 9.15 14.41 14.48

In the case of Infosys cost of equity and debt does not affect capital structure.

Conclusion:-
Infosys is fully equity finance company because there are following reason:
 Infosys is developed company
 Sales revenue is increasing
 Company have a sufficient amount of Free cash flow
 Depreciation is increasing and it has a negative relation with leverage.

Findings

 Capital structure is differing from different-different company.

 There is no exact capital structure for company.

 There is no formula for calculating capital structure.

 Size of company matters in capital structure. Because blue-chip Company have no fear of
bankruptcy cost and they easily get debt finance.

 Future investment and growth opportunity matter in framing of capital structure.

 Interest rate or tax rate also matters in capital structure.

 Some factor will affect capital structure of one company, is not necessary that it can affect
the capital structure of other company.

 But there is no rule and regulation for framing a optimal capital structure.

 Optimal capital structure will depend upon company’s need and requirement and
condition of company and other factors also matters.

 In a same sector company, no company have a same kind of capital structure.

 Company financial condition will also matters in capital structure.

 Capital structure is also depending upon cost of funding. It means if cost of debt is cheaper
then cost of Equity, Company will prefer debt financing. But it is not necessary for company
that company have to prefer debt finance if cost of debt is available at cheaper rate. And
vise –e –versa in case of if cost of equity is cheaper than cost of debt.

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