Capital Structure
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Capital Structure Theories Presented by: Nidhi Agarwal Rinku Chauhan Vaibhav Janvalkar Darshan Joshi Akshit Karia
01 07 17 18 21
Capital Structure “Capital Structure of a company refers to the composition or make-up of its capitalization and it includes all long-term capital resources, viz. loans, reserves, shares and bonds”. ----Gestenberg
CAPITAL STRUCTURE THEORIES 2. Net
Income Approach 3. Traditional Approach 5. Net
Operating Income Approach 6. Modigliani And Miller Approach
CAPITAL STRUCTURE THEORIES Income Approach 1.Cost of debt is less than cost of equity 3. Traditional Approach 2. Net
3.There are no taxes 5. Net Operating Income Approach 5.The risk perception 6. Modigliani And Miller Approach of investors is not changed by the use of debt
CAPITAL STRUCTURE THEORIES Income Approach 1.Cost of debt remain less constant but 3. Traditional Approach after certain limit it start increasing. 2.Similarly cost of 5. Net Operating Income Approach equity also remain 6. Modigliani And Miller Approach less constant and increase after certain limit 3.Total cost of capital decrease up to certain point, then 2. Net
CAPITAL STRUCTURE THEORIES Income Approach 1.Cost of Capital and cost of debt remain 3. Traditional Approach constant. 2. Net
3.Cost of Operating Income Approach increase 6. Modigliani And Miller Approach increase leverage. 5. Net
equity with in
CAPITAL STRUCTURE THEORIES Income Approach 1.There is a perfect market. 3. Traditional Approach 2. Net
3.Investors act rationally. 5. Net Operating Income Approach 6. Modigliani And Miller Approach 5.Rational investors and manager 7.Homogeneous expectation
TVS MOTORS COMPANY
TVS Motors Company
TVS Motor Company is the third largest two-wheeler manufacturer in India and one among the top ten in the world, with annual turnover of more than USD 1 billion in 2007-2008, and is the flagship company of the USD 4 billion TVS Group. TVS has always stood for innovative, easy to handle, environment friendly products, backed by reliable customer service. Mission- “We are committed to being a highly profitable, socially responsible, and leading manufacturer of high value for money, environmentally friendly”. There network spans 48 countries all over the world.
TVS Motors Particulars
2007-08 (in crores)
2008-09(in crores)
OPERATING INCOME
45.31
121.08
INTEREST ON DEBT( I)
11.47
64.61
EQUITY EARNING
33.84
56.47
COST OF EQUITY (Ke)
4.13%
4.21%
MARKET VALUE OF EQUITY
819.37
1341.33
COST OF DEBT (Kd)
1.72%
7.13%
MARKET VALUE OF DEBT
666.34
905.98
VALUE OF FIRM
1485.71
2247.31
COST OF CAPITAL (Ko)
3.05%
5.39%
WACC 2007-08
WACC= weke + wdkd
We = E/(D+E) Wd = D/(D+E) = 1/(1.84) x 0.413 + 0.84/(1.84) x 0.172 = 0.2284 +0.078 = 3.051%
WACC 2008-09
WACC= weke + wdkd
We = E/(D+E) Wd = D/(D+E) = 1/(2.11) x 4.21 + 1.11/(2.11) x 7.13 =1.995 +3.750 = 5.75%
Theory V/S Observation
Ke remains constant
Ke has increased with the increase in the market value of the firm hence we can infer that there are many different factors which affects the market value of the firm say as confidence of the share holder.
Kd remains constant
Kd has drastically increased with the increase in the Market value of the debt. It is only due to company has raised debt from external sources for its operations.
Theory V/S Observation
With the increase in D/E ratio the wacc will decline, while the value of the firm increases whereas MPS decreases.
With the increase in D/E ratio the WACC has also increased with the increase in the value of the firm while the decrease in MPS this is because negative attitude of share holder towards the company.
Cont…
As per the annual report company has raised its debt fund and invested in purchasing assets for the co. may b for the future prospects but at the same time due to the high leverage and risk, shareholders are expecting higher returns which the co. is not able to meet currently. Hence, giving the adverse effect to MPS.
As per the annual report published the DPS declared is same for both the years of Rs.0.70 per share. This clarifies that the co. is trying to preserve the funds or to invest the profit earned into the vital areas.
HERO HONDA
HERO HONDA COMPANY
Hero Honda is a world leader because of its excellent manpower, proven management, extensive dealer network, efficient supply chain and world-class products with cutting edge technology. During the 80s, Hero Honda became the first company in India to prove that it was possible to drive a vehicle without polluting the roads. Over 20 million Hero Honda two wheelers tread Indian roads today. Hero Honda’s mission is to strive for synergy between technology, systems and human resources, to produce products and services that meet the quality, performance and price aspirations of its customers. At the same time maintain the highest standards of ethics and social responsibilities.
Hero Honda Particulars
2007-08 (in crores)
2008-09(in crores)
1201.96
1367.77
13.76
13.47
EQUITY EARNING
1188.22
1354.3
COST OF EQUITY (Ke)
34.73%
32.41%
MARKET VALUE OF EQUITY
3421.25
4178.65
COST OF DEBT (Kd)
8.33%
10.20%
MARKET VALUE OF DEBT
165.18
132.05
VALUE OF FIRM
3586.43
4310.70
COST OF CAPITAL (Ko)
33.51%
31.73%
OPERATING INCOME INTEREST ON DEBT( I)
WACC 2007-08
WACC= weke + wdkd
We = E/(D+E) Wd = D/(D+E) = 1/(1.07)x34.73%+0.07/(1.07) x 8.33% = 33%
WACC 2008-09
WACC= weke + wdkd
We = E/(D+E) Wd = D/(D+E) = 1/(1.04)x32.41%+1.04/(1.04)x10.20% = 31.55%
Theory V/S Observation
Ke remains constant
Ke has decreased with the increase in the market value of the firm hence we can infer that there are many different factors which affects the market value of the firm say as confidence of the share holder.
Kd remains constant
Kd has increased with the decrease in the Market value of the debt but there is a marginal reduction in the amount of interest so due to that Kd increases.
Theory v/s observation
With the increase in leverage, cost of capital decreases and vice- versa.
With the decrease in leverage, cost of capital is also decreasing.
Effects
of interest rates on hero honda.
Management
outlook towards operating margin.
CONCLUSION
Thank you
01 07 17 18 21
Capital Structure “Capital Structure of a company refers to the composition or make-up of its capitalization and it includes all long-term capital resources, viz. loans, reserves, shares and bonds”. ----Gestenberg
CAPITAL STRUCTURE THEORIES 2. Net
Income Approach 3. Traditional Approach 5. Net
Operating Income Approach 6. Modigliani And Miller Approach
CAPITAL STRUCTURE THEORIES Income Approach 1.Cost of debt is less than cost of equity 3. Traditional Approach 2. Net
3.There are no taxes 5. Net Operating Income Approach 5.The risk perception 6. Modigliani And Miller Approach of investors is not changed by the use of debt
CAPITAL STRUCTURE THEORIES Income Approach 1.Cost of debt remain less constant but 3. Traditional Approach after certain limit it start increasing. 2.Similarly cost of 5. Net Operating Income Approach equity also remain 6. Modigliani And Miller Approach less constant and increase after certain limit 3.Total cost of capital decrease up to certain point, then 2. Net
CAPITAL STRUCTURE THEORIES Income Approach 1.Cost of Capital and cost of debt remain 3. Traditional Approach constant. 2. Net
3.Cost of Operating Income Approach increase 6. Modigliani And Miller Approach increase leverage. 5. Net
equity with in
CAPITAL STRUCTURE THEORIES Income Approach 1.There is a perfect market. 3. Traditional Approach 2. Net
3.Investors act rationally. 5. Net Operating Income Approach 6. Modigliani And Miller Approach 5.Rational investors and manager 7.Homogeneous expectation
TVS MOTORS COMPANY
TVS Motors Company
TVS Motor Company is the third largest two-wheeler manufacturer in India and one among the top ten in the world, with annual turnover of more than USD 1 billion in 2007-2008, and is the flagship company of the USD 4 billion TVS Group. TVS has always stood for innovative, easy to handle, environment friendly products, backed by reliable customer service. Mission- “We are committed to being a highly profitable, socially responsible, and leading manufacturer of high value for money, environmentally friendly”. There network spans 48 countries all over the world.
TVS Motors Particulars
2007-08 (in crores)
2008-09(in crores)
OPERATING INCOME
45.31
121.08
INTEREST ON DEBT( I)
11.47
64.61
EQUITY EARNING
33.84
56.47
COST OF EQUITY (Ke)
4.13%
4.21%
MARKET VALUE OF EQUITY
819.37
1341.33
COST OF DEBT (Kd)
1.72%
7.13%
MARKET VALUE OF DEBT
666.34
905.98
VALUE OF FIRM
1485.71
2247.31
COST OF CAPITAL (Ko)
3.05%
5.39%
WACC 2007-08
WACC= weke + wdkd
We = E/(D+E) Wd = D/(D+E) = 1/(1.84) x 0.413 + 0.84/(1.84) x 0.172 = 0.2284 +0.078 = 3.051%
WACC 2008-09
WACC= weke + wdkd
We = E/(D+E) Wd = D/(D+E) = 1/(2.11) x 4.21 + 1.11/(2.11) x 7.13 =1.995 +3.750 = 5.75%
Theory V/S Observation
Ke remains constant
Ke has increased with the increase in the market value of the firm hence we can infer that there are many different factors which affects the market value of the firm say as confidence of the share holder.
Kd remains constant
Kd has drastically increased with the increase in the Market value of the debt. It is only due to company has raised debt from external sources for its operations.
Theory V/S Observation
With the increase in D/E ratio the wacc will decline, while the value of the firm increases whereas MPS decreases.
With the increase in D/E ratio the WACC has also increased with the increase in the value of the firm while the decrease in MPS this is because negative attitude of share holder towards the company.
Cont…
As per the annual report company has raised its debt fund and invested in purchasing assets for the co. may b for the future prospects but at the same time due to the high leverage and risk, shareholders are expecting higher returns which the co. is not able to meet currently. Hence, giving the adverse effect to MPS.
As per the annual report published the DPS declared is same for both the years of Rs.0.70 per share. This clarifies that the co. is trying to preserve the funds or to invest the profit earned into the vital areas.
HERO HONDA
HERO HONDA COMPANY
Hero Honda is a world leader because of its excellent manpower, proven management, extensive dealer network, efficient supply chain and world-class products with cutting edge technology. During the 80s, Hero Honda became the first company in India to prove that it was possible to drive a vehicle without polluting the roads. Over 20 million Hero Honda two wheelers tread Indian roads today. Hero Honda’s mission is to strive for synergy between technology, systems and human resources, to produce products and services that meet the quality, performance and price aspirations of its customers. At the same time maintain the highest standards of ethics and social responsibilities.
Hero Honda Particulars
2007-08 (in crores)
2008-09(in crores)
1201.96
1367.77
13.76
13.47
EQUITY EARNING
1188.22
1354.3
COST OF EQUITY (Ke)
34.73%
32.41%
MARKET VALUE OF EQUITY
3421.25
4178.65
COST OF DEBT (Kd)
8.33%
10.20%
MARKET VALUE OF DEBT
165.18
132.05
VALUE OF FIRM
3586.43
4310.70
COST OF CAPITAL (Ko)
33.51%
31.73%
OPERATING INCOME INTEREST ON DEBT( I)
WACC 2007-08
WACC= weke + wdkd
We = E/(D+E) Wd = D/(D+E) = 1/(1.07)x34.73%+0.07/(1.07) x 8.33% = 33%
WACC 2008-09
WACC= weke + wdkd
We = E/(D+E) Wd = D/(D+E) = 1/(1.04)x32.41%+1.04/(1.04)x10.20% = 31.55%
Theory V/S Observation
Ke remains constant
Ke has decreased with the increase in the market value of the firm hence we can infer that there are many different factors which affects the market value of the firm say as confidence of the share holder.
Kd remains constant
Kd has increased with the decrease in the Market value of the debt but there is a marginal reduction in the amount of interest so due to that Kd increases.
Theory v/s observation
With the increase in leverage, cost of capital decreases and vice- versa.
With the decrease in leverage, cost of capital is also decreasing.
Effects
of interest rates on hero honda.
Management
outlook towards operating margin.
CONCLUSION
Thank you
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