Capital Structure

The assets of a company can be financed either by increasing the

owners’ claims or the creditors’ claims. The owners claim increase
when the firm raises funds by issuing ordinary shares or by retaining
earnings; the creditors’ claims increase by borrowing. The various
means of financing represent the financial structure of an enterprise.
The term capital structure is used
to represent the proportionate relationship between debt and equity.
Equity includes paid-up share capital, share premium and reserve and
surplus (retained earnings). The company will have to plan its capital
structure initially at the time of its promotion. Subsequently,
whenever funds have to be raised finance investment, a capital
structure decision is involved. Capital structure refers to the mix of
sources from where the long-term funds required in the business may
be raised. A demand for raising funds generates a new capital
structure a decision has to be made to the quantity and forms of
financing. This decision will involve an analysis of the existing
capital structure and the factors, which will govern the decision at
present. The company’s policies to retain or distribute earnings affect
the owner’s claim. Shareholder’s equity position is strengthened by
retention of earning. The debt equity mix has implications for the
shareholder’s earnings and risk, which in turn will affect the cost of
capital and the market value of the firm.
 Patterns of the Capital Structure

In case of new company, the capital structure may be of any the

following patterns:
 Capital Structure with equity shares only.
 Capital Structure with equity and preference.
 Capital Structure with equity and debentures.
 Capital Structure with equity, preference shares and
debentures.
Debt is the liability on which interest has to
be paid irrespective of the company profits. While equity
consists of shareholder or owner’s funds on which payment
of dividend depends upon the company’s profit. A high
proportion of the debt content in the capital structure
increases the risk and may lead to financial insolvency in
adverse time. However, raising fund through debt is cheaper
as compared to financing through shares. This because
figure-3 interest on debt is allowed as an expense for taxes
purpose. Dividend is considered to be an appropriation of
profits; hence payment on dividend does not result in any tax
benefit to the company. This means if company, is in 50% tax
bracket, pays interest at 12% on its debentures, the effective
cost to it comes only 6% while if the amount is raised by 12%
Preference Shares, the cost of raising the amount would be
12%. Thus raising the funds by borrowing is cheaper
resulting in higher availability of profit for shareholders. This
increases the earning per share of the company, which is the
basic objective of the finance manager.

Optimum Capital Structure

 A firm should try to maintain an optimum capital structure
with a view of to maintain financial stability. The optimum
capital structure is obtained when the market value per equity
share is the maximum. It may be defined as that relationship
of debt and equity securities which maximizes the value of a
company’s share in the stock exchange. In case a company
borrows and this borrowing helps in increasing the value of
company’s share in the stock exchange, it can be said that the
borrowing has helped the company in moving towards its
optimum capital structure. In case, the borrowing results in
fall in market value of the company’s equity shares, it can be
said that the borrowing has moved the company from its
optimum capital structure.

The objective of the firm should therefore be to select the

financing or debt equity mix, which will lead to maximum
value of the firm.

Consideration

The following consideration will greatly help a finance

manager in achieving his goal of optimum capital structure:
 We should take advantage of favourable financial leverage.
 We should take advantage of the leverage offered by the
corporate taxes.
 We should avoid a perceived high risk capital structure.

Sources of Funds
Security Financing- This includes financing through shares including
both equity and preference shares and debentures.
Internal Financing- This includes financing through depreciation
funds and retained earnings.
Loan Financing- This includes both short term and long-term loans.

Equity Shares versus Debentures

A company may prefer financing through debenture as compared to

equity shares on account of following reasons:
 Interest on debenture is allowed as an expense for tax purpose.
 Debenture holders have generally no say in the management of
the company.
 Underwriters may have little hesitation in accepting the
company’s proposal since debentures are adequately backed by
the company’s assets.
Moreover, the company may find it beneficial to pay short-term loan
by raising funds through debentures at a time when interest rates on
such loans are higher as compared to the interest rate payable on the
debentures. However, the company cannot go on unlimited extent of
financing through financing through debentures. It has to strike a
balance between risk and saving effected by raising funds through
debentures. The ultimate objective is to maintain unlimited Capital
Structure.

Major Consideration in Capital Structure Planning

There are three major considerations, i.e. risk, cost of capital and
control, which help the finance manager in determining the proportion
in which he can raise funds from various sources.
Although, three factors, i.e. risk, cost and control determines the
capital structure of a particular business undertaking at a given point
of time. The finance manager attempts to design the Capital Structure
in such a manner that his risk and costs are the least and the control of
the existing management is diluted to the least extent.
Risk
Risk is of two kinds, i.e. financial risk and business risk. Here we are
concerned primarily with the financial risk. Financial risk is also of
two types:

 Risk of Cash Insolvency: As a firm raises more debt, its risk of

cash insolvency increases. This is due to two reasons. Firstly,
higher proportion of debt in the Capital Structure increases the
commitments of the company with regard to fixed charges. This
means that a company stands committed to pay a higher amount
of interest irrespective of the fact whether it has cash or not.
Secondly, the possibility that the supplier of funds may
withdraw the funds at any given point of time. Thus the long-
term creditors may have to be paid back in instalments even if
sufficient cash to do so does not exist. This risk is not there in
the case of equity share.
 Risk of Bariation in the the Expected Earning to Equity
Share-holders: In case a firm has higher debt contenting
Capital Structure, the risk of variation in expected earnings
available to equity shareholder will be higher. This is because of
trading of equity. It is seen that financial leverage works both
ways, i.e. it enhances the shareholders returns by a higher or
 lower than rate of interest. Thus, there will be lower probability
that equity shareholder will enjoy a stable dividend if the debt
content is higher in the Capital Structure. In other words, the
relative dispersion of expected earning available to equity
shareholder will be greater of the Capital Structure of a firm
higher debt content.
Cost of Capital- Cost is an important consideration in capital
structure decision. It is obvious that a business should be at least
capable of earning enough revenue to meet its cost of capital and
finance its growth. Hence, along with a risk as a factor; the finance
manager has to consider the cost aspect carefully while determining
the Capital Structure.
Control- Along with cost and risk factor, the control aspect is also an
important consideration in planning the Capital Structure. When a
company issues further equity share it automatically dilutes the
controlling interest of the present owners. Similarly, preference
shareholders can have voting rights and thereby affect the
composition of the Board of Directors in case dividend on such share
is not paid for two consecutive years.
Trading on Equity- A company may raise funds either by the issue
of shares or by borrowings. Borrowings carry a fixed rate of interest
and this interest is payable irrespective of fact where there is profit or
not. Preference shareholders are also entitled to a fixed rate of
dividends but payment of dividends is subject to the profitability of
the company. In case of return on the total capital employed i.e.
shareholder’s funds plus long term borrowings, is more than the rate
of interest on borrowed funds or the rate of dividends on preference
shares, it is said that company is trading on equity.
Important Considerations in Determining Capital
Structure
The determination of capital structure involves additional
considerations in addition to the concerns about EPS, value and cash
flow. A firm may have enough debt servicing ability but it may not
have assets to offer as collateral. Some of the most important
considerations are discussed below:
1. Assets- The form of assets held by a company are important
determinants of its capital structure. Tangible fixed assets serve
as collateral to debt. In the event of financial distress, the
lenders can access these assets and liquidate them to realize
funds lent by them. Companies with higher tangible fixed assets
will have less expected costs of financial distress and hence,
higher debt ratios. Companies have intangible assets in the form
of human capital, relations with stakeholders, brands, reputation
etc., and their values start eroding as the firm faces financial
difficulties and its financial risk increases.
2. Growth Opportunities- The nature of growth opportunities has
an important influence on a firm’s financial leverage. Firm’s
with high market-to-book value ratios have high growth
opportunities. A substantial part of the value for these
companies comes from organizational or intangible assets.
These firms have a lot of investment opportunities. High growth
firms would prefer to take debts with lower maturities to keep
interest rates down and to retain the financial flexibility since
their performance can change unexpectedly any time. Mature
firms have tangible assets and stable profits. They have low
costs of financial distress. Hence, these firms would raise debt
with longer maturities as the interest rates will not be high for
them and they have a lesser need of financial flexibility since
their fortunes are not expected to shift suddenly.
3. Debt and Non-Debt Tax Shields- Debt, due to interest
deductibility, reduces the tax liability and increases the firm’s
after-tax free cash flows. In the absence of personal taxes, the
interest tax shields increase the value of the firm. Generally,
investors pay taxes on interest income but not on equity income.
Hence, personal taxes reduce the tax advantage of debt over
equity. The tax advantage of debt implies that firms will employ
more debt to reduce tax liabilities and increase value. Firms also
have non-debt tax shields available to them. For example, firms
can use depreciation; carry forward losses etc. to shield taxes.
This implies that those firms that have larger non-debt tax
shields would employ low debt, as they may not have sufficient
taxable profit available to have the benefit of interest
deductibility.
4. Financial Flexibility and Operating Strategy- A cash flow
analysis might indicate that a firm could carry high level of debt
without much threat of insolvency. But in practice, the firm
may still make conservative use of debt since the future is
uncertain and it is difficult to be able to consider all possible
scenarios of adversity. It is, therefore, prudent to maintain
financial flexibility that enables the firm to adjust to any
change in the future events or forecasting error.
Financial
flexibility is a serious consideration in setting up the capital
structure policy. Financial flexibility means a company’s ability
to adapt its capital structure to the needs of the changing
conditions. The financial plan of the company should be
flexible enough to change the composition of the capital
structure as warranted by the company’s operating strategy and
needs.
5. Loan Covenants- Restrictive covenants are commonly
included in the long-term loan agreements and debentures.
Covenants in loan agreements may include restrictions to
 distribute cash dividends, to incur capital expenditure, to raise
additional external finances or to maintain working capital at a
particular level. Loan covenants may look quite reasonable
from the lender’s point of view as they are meant to protect
their interests, but they reduce the flexibility of the borrowing
company to operate freely and it may become burdensome if
conditions change. Violation of covenants can have serious
adverse consequences.
6. Financial Slack- The financial flexibility of a firm depends on
the financial slack it maintains. The financial slack includes
unused debt capacity, excess liquid assets, unutilised lines of
credit and access to various untapped sources of funds. The
financial flexibility depends a lot on the company’s debt
capacity and unused debt capacity. The higher is the debt
capacity of a firm and the higher is the unused debt capacity,
the higher will the degree of flexibility enjoyed by the firm. A
company should not borrow to the limit of its capacity, but keep
available some unused capacity to raise funds in the future to
meet some sudden demand for finances.
7. Sustainability and Feasibility- The financing policy of a firm
should be sustainable and feasible in the long run. The
sustainability model growth helps to analyse the sustainability
and the feasibility of the long-term financial plans in achieving
growth. Given the firm’s financing and payout policies and
operating efficiency, this model implies that its assets and sales
will grow in tandem with growth equity (internal). Thus, the
sustainable growth depends on return on equity (ROE) and
retention ratio:
Sustainable growth = ROE * (1-payout)
The sustainable growth model indicates the growth rate that the
firm should target. In fact, the model also indicates the trade-
offs between the financing and operating policies. The firm
must realise that growth does not ensure value creation. The
 firm should also examine the impact of alternative financial
policy on the value of the firm.
8. Control- In designing the capital structure, sometimes the
existing management is governed by its desire to continue
control over the company. This is particularly so in the case of
the firms promoted by entrepreneurs. The existing management
team not only wants control and ownership but also to manage
the company, without any outside interference.
9. Capacity of Raising Funds- The size of a company may
influence its capital structure and availability of funds from
different sources. A small company finds great difficulties in
raising long-term loans. A large company has relative flexibility
in designing its capital structure. It can obtain loans on easy
terms and sell ordinary shares, preference shares and debentures
to the public. The size of the firm has an influence on the
amount and the cost of funds, but it does not determine the
pattern of financing.
10. Issue Costs- Issue or floatation costs are incurred when the
funds are externally raised. Generally, the cost of floating a debt
is less than the cost of floating an equity issue. This may
encourage company’s to use debt than issue equity shares.
Large firms require large amounts of funds, and they may plan
large issues of securities to economise on the issue costs. The
company should raise only that much of funds, which it can
employ profitably.
 CURRENT YEAR (2007-2008)
INTERPRETATION:

COMPOSITION OF CAPITAL STRUCTURE

Loan Fund = 48%

Reserves = 51%

Share Capital = 1%

1 0.01
0.48
0 0.51
0
1 2

The above graph clearly depicts that the proportion of debt in the
financing mix of Hindalco is much more as compared to share capital.
The debt content is 48% whereas the proportion of share capital and
reserves and surplus is 1% and 51% respectively.
Capital Structure of Hindalco for Four Years (2004-
05 to 2007-08)

Particulars 2007-08 2006-07 2005-06 2004-05

Share 1226 1043 986 928
Capital
Reserves 171737 123105 95017 75644
Loan 83286 73592 49034 38000
Funds

180000

160000

140000

120000

100000

80000
Share Capital
60000
Reserves
40000
Loan Fund
20000

0
Years
2007-08
2006-07
2005-06
2004-05
 Framework of Capital Structure
The FRICT Analysis
A financial structure may be evaluated from various perspective from
owner’s point of view, return; risk and value are important
consideration. From the strategic point of view, flexibility is an
important concern and flexibility assumes great significance. A sound
capital structure will be achieved by balancing all these consideration.
 Flexibility: The capital structure should be determined within
the debt capacity of the company and this capacity should be
flexible. It should be possible for a company to adapt its Capital
Structure within a minimum cost and delay if warranted by a
changed situation.
 Risk: Risk depends on the variability in the firm’s operation. It
may be caused by macroeconomic factor and industry and
firm’s specific factor. The excessive use of debt magnifies the
variability of shareholder’s earning’s and threatens the solvency
of the company.
 Income- The Capital Structure of the company should be most
advantageous to the owner’s of the firm. It should create value;
subject to other consideration. It should generate maximum
return to the shareholder’s with minimum additional cost.
 Control- The capital structure should involve the minimum risk
of loss of control of the company. The owner of closely held
companies is particularly concerned about dilution of control.
 Timing- The capital structure should be feasible to implement
given the current and future condition of the capital market. The
sequencing of source of financing is important. The current
decision influences the future option of raising capital.
The FRICT Analysis provides the general framework for
evaluating firm’s Capital Structure.
 Capital Structure Decision Process

Capital Budgeting
Decision

Need to Raise Funds

Capital Structure
Decision

Existing Capital Desired Debt- Equity Pay out Policy

Structure Mix

Effects on Return Effects on Risk

Effects on Cost of
Capital
Optimum Capital
Structure
Value of the Firm
 Theories of Capital Structure

The objective of a firm should be directed towards the maximisation

of the value of the firm, the Capital Structure, or leverage decision
should be examined from the point of view of its impact on the value
of the firm. If the values of the firm can be affected by Capital
Structure or financing decision, a firm would like to have a Capital
Structure, which maximize the market value of the firm.
There are broadly four approaches in this regard. These are:
 Net Income Approach.
 Net Operating Income Approach.
 Traditional Theory.
 Modigliani- Miller Approach.
These approaches analysis relationship
between the leverage, cost of capital and the values of the firm
in different way. However, the following assumptions are made
to understand these relationships.
1. There are only two source of funds i.e. debt and equity.
2. The total assets of firm are given. The degree of leverage
can be changed by selling debt to repurchase shares or
selling shares to retire debt.
3. There are no retained earnings.
4. The operating profit of firm is given and expected to
grow.
5. The business risk is assumed to be constant and is not
affected by the financing mix decision.
6. There are no corporate taxes.
7. The investors have the same probability distribution of
expected earnings.
 Features of an Appropriate Capital Structure

1. Return- The capital structure of the company should be most

advantageous subject to other considerations it should generate
maximum returns to the shareholders without adding cost to
them.
2. Risk- The use of excessive debt threatens the solvency of the
company. To the point debt does not add significant risk it
should be used otherwise its use should be avoided.
3. Flexibility- The capital structure should be possible for a
company to adapt its capital structure with a minimum cost and
delay if warranted by a changed situation. It should also be
possible for the company to provide funds whenever needed to
finance its profitable activities.
4. Capacity- The capital structure should be determined within the
debt capacity of the company, and this capacity should not be
exceeded. The debt capacity of a company depends on its ability
to generate future cash flows. It should have enough cash to pay
creditor’s fixed charges and principle sum.
5. Control- The capital structure should involve minimum risk of
loss of control of the company. The owner’s of closely-held
companies are particularly concerned about dilution of control.
Approaches to establish appropriate Capital
Structure

The following are the 3 most common approaches to decide about ea

firm’s capital structure:
1. EBIT-EPS approaches- The EBIT-EPS analysis is an
important tool in the hands of the financial manager to get an
insight into the firm’s capital structure management. He can
consider the possible fluctuations in the EBIT and examine their
impact on EPS under different financial plans. If the probability
of earning a rate of return on the firm’s assets less than the cost
of debt is insignificant, a large amount of debt can be used by
the firm to increase the earnings per share. This may have a
favourable effect on the market value per share. On the other
hand, if the probability of earning a rate of return on the firm’s
less than the cost of debt is very high, the firm should refrain
from employing debt capital. It may, thus, be concluded that the
greater level of EBIT & lower the probability of downward
fluctuation, the more beneficial is to employ debt in the capital
structure. However, it should be realised that the EBIT-EPS is a
first step in deciding about a firm’s capital structure.
2. Cost of Capital and Valuation Approach- The cost of a source
of finance is the minimum return expected by its suppliers. The
expected return depends on the degree of risk assumed by
investors. A high degree of risk is assumed by the shareholders
than the debt-holders. In case of debt-holders, the rate of interest
is fixed and the company is legally bound to pay interest
whether it makes profits or not. The loan of debt-holders is
returned within a prescribed period, while shareholders will
have to share the residue only when the company is wound up.
This leads one to conclude that debt is a cheaper source of funds
 than equity. The preference share capital is also cheaper than
equity capital, but not as cheap as debt.
3. Cash Flow Approach- One of a feature of a sound capital
structure is conservatism. Conservatism does not mean
employing no debt or small amount of debt. Conservatism is
created by the use of debt or preference capital in the capital
structure and the firm’s ability to generate cash to meet these
fixed charges. The fixed charges of a company include payment
of interest, preference dividends, and the principal, and they
depend on both the amount of loan securities and the terms of
payment. The amount of fixed charges will be high if employs a
large amount of debt or preference capital with short-term
maturity. The company expecting larger & stable cash inflows
in the future can employ a large amount of debt in their capital
structure.
One important ratio which should be examined at the
time of planning the capital structure is the ratio of net cash
inflows to fixed charges (debt- servicing ratio). It indicates the
number of times the fixed financial obligations are covered by
the net cash inflows generated by the company. The greater the
coverage, the greater is the amount of debt a company can use.

Elements of Capital Structure

Following are the important elements of the company’s capital
structure that need proper securities and analysis:
1. Capital Mix:
Firms have to decide about the debt and equity
capital. Debt capital can be mobilized from a variety of sources.
How heavily does the company depend on debt? What is the
mix of debt instrument? Given the company’s risk, is the
reliance on the level and instrument of debt reasonable? Does
the firm’s debt policy allow its flexibility to undertake strategic
instruments in adverse financial condition? The firms and
analyst use debt-equity ratios, debt service coverage ratio and
the fund flow statement to analyses the capital mix.

2. Maturity and Priority:

The maturity of securities used in the
capital mix may differ. Equity is the most permanent capital.
Within debt, commercial paper has the shortest maturity and
public debt longest. Similarly, the priorities of securities also
differ. Capitalised debt like lease or hire purchase finance is
quite safe from the lender’s point of view and the value of assets
backing the debt provides the protection to the lender
collateralized or secured debts are relatively safe and have
priority over unsecured debt in the event of solvency.

3. Terms and conditions:

Firms have choices with regard to the
basis of interest’s payments. They may obtain loans either at
fixed or floating rates of interest. In case of equity the firm may
like to return income either in the form of large dividend of
large capital gain. What is the firm’s preference with regard to
 the basis of payment of interest and dividend? How do the
firm’s interest and dividend payment match with its earnings
and operating cash flows? The firm’s choice of the basis of
payments indicates the management’s assessment about the
future interest rates and the firm’s earnings. Does the firm have
protection against interest rates fluctuations? The financial
manager can protect the firm against interest rates fluctuations
through the interest rates derivatives. There are some other
important terms and conditions that the firm should consider.
Most loan agreements include what the firm can do and what it
cannot do. They may also state the scheme of payments, pre-
payments, renegotiations etc.

4. Currency:
Accessing capital internationally helps company to
raise large amount of funds and globalize its operation fast. The
exchange rates fluctuations can create risk for the firm in
servicing it foreign debt and equity. The financial manager will
have to ensure a system of risk hedging. Does the firm borrow
from the overseas markets? At what terms and condition?

5. Financial Innovation:
Firms may raise capital either through
the issue of simple securities or through the issue of innovative
securities. Financial innovations are intended to make the
security issue attractive to investors and reduce cost of capital.

6. Financial Market Segment:

There are several segments of
financial markets from where the firm can tap capital. For
example, a firm can tap the private or the public debt market for
raising long-term debt. The firm can raise short-term debt either
from banks or by issuing commercial papers or certificate
deposits in the money market and by public deposits in the
money market and by public deposits also.

Capital Structure Planning and Policy

For the real growth of the company the financial manager of the
company should plan an optimum capital for the company. The
optimum capital structure is one that maximize the market value of
the firm. In practice the determination of the optimum capital
structure is a formidable task and the manager has to perform this task
properly, so that the ultimate objective of the firm can be achieved.
There are significant variations among industries and companies
within an industry in terms of capital structure. Since a number of
factors influence the capital structure decision of a company, the
judgment of the person making the capital structure decisions play a
crucial part. A totally theoretical model can’t adequately handle all
those factors, which affects the capital structure decision in practice.
These factors are highly psychological, complex and qualitative and
do not always follow accepted theory, since capital markets are not
perfect and decision has to be taken under imperfect knowledge and
risk.
An appropriate capital structure or target capital structure can be
developed only when all those factors, which are relevant to the
company’s capital structure decision, are properly analyzed and
balanced. The capital structure should be planed generally keeping in
view the interest of the equity shareholders and financial requirements
of the company. The equity shareholders being the owner of the
company and the providers of risk capital (equity), would be
concerned about the ways of financing a company’s operations.
However, the interest of other groups, such as employee, customers,
creditors, society and government, should be given reasonable
consideration when the company lays down its objective in terms of
the shareholders wealth maximization, it is generally compatible with
the interest of other groups. Thus, while developing an appropriate
capital structure for a company the finance manager should inter alia
aim at maximizing the long-term market price per share.
Theoretically, there may be precise point or range within which the
market value per shares is maximum. In practice, for most companies
within an industry there may be a range within which there would not
be great differences in the market value per share. One way to get an
idea of this range is to observe the capital structure patterns of
companies vis-a-vis their market prices of share. The management of
companies may fix its capital structure near the top of this range in
order to make maximum use of favourable leverage, subject to other
requirements such as flexibility, solvency, control and norms set by
the financial institutions- The Security Exchange Board of India
(SEBI) and Stock Exchange.

Guidelines for Capital Structure Planning

The following are the guidelines of capital structure planning:

1) Avail or Tax advantage of Debt-
Interest on debt finance is a
tax-deductible expense. Hence, finance scholars and
practitioners agree that debt financing gives rise to tax shelter
which enhances the value of the firm. What is the impact of this
tax shelter on the value of the firm? In this 1963 paper
Modigilani and Miller argued that the present value of the
interest tax shield is-
tcD
where, tc = corporate tax rate on a unit of marginal earnings.
D = Debt financing.

2) Preserve Flexibility-
The tax advantage of debt should not
persuade one to believe that a company should exploit its debt
capacity fully. By doing so, it loses flexibility. And loss of
flexibility can erode shareholder value. Flexibility implies that
the firm maintains reserve borrowing power to enable it to raise
debt capital to respond to unforeseen changes in government
policies, recessionary conditions in the market place, disruption
in supplies, decline in production caused by power shortage or
labour market, intensification in competition, and, perhaps most
importantly, emergence of profitable investment opportunities.
Flexibility is a powerful defence against financial distress and
its consequences which may include bankruptcy.

3) Ensure that the Total Risk Exposure is Reasonable-

While
examining risk from the point of view of the investor, a
distinction is made between systematic risk (also referred to as
 the market risk or non-diversifiable risk) and unsystematic risk
(also referred to as the non-market risk or diversifiable risk).
Busines
s Risk refers to the variability of earnings before interest and
taxes. It is influenced by the following factors:
 Demand Variability- Other things being equal, the higher
the variability of demand for the products manufactured by
the firm, the higher is its business risk.
 Price Variability- A firm which is exposed to a higher
degree of volatility in the prices of its products is, in
general, characterized by a higher degree of business risk
in comparison with similar firms which are exposed to a
lesser degree of volatility in the prices of their products.
 Variability in Input Prices- When input prices are highly
variable, business risk tends to be high.

4) Subordinate Financial Policy to Corporate Strategy-

Financi
al Policy and Corporate Strategy are often not integrated well.
This may be because financial policy originates in the capital
market and corporate strategy in the product market.

5) Mitigate Potential agency Costs-

Due to separation of
ownership and control in modern corporations, agency problems
arise. Shareholders scattered and dispersed as they are not able to
organize themselves effectively. Since agency costs are borne by
shareholders and the management, the financial strategy of a firm
should seek to minimize these costs. One way to minimize agency
costs is to employ an external agent who specializes in low cost
monitoring. Such an agent may be a lending organization like a
commercial bank (or a term-lending institution).

Meaning of Financial Leverage

The use of fixed-charges sources of funds, such as debt and
preference capital along with owner’s equity in the capital structure
described as financial leverage gearing or trading on equity. The use
of the term trading on equity is derived from the fact that is the
owner’s equity that is used to raise debt; that is, the equity that is
traded upon.

Financial leverage is defined as the ability of a firm

to use fixed financial charges to magnify the effect of change in
E.B.I.T on the firm’s earning per share. The financial leverage occurs
when a firm’s Capital Structure contain obligation of fixed financial
charges. For instance, interest on debentures, dividend on
preference share etc., along with owner’s equity to enhance earning
of equity shareholder’s. The fixed financial charges do not vary with
the operating profit. They are fixed and are to be paid irrespective of
level of operating profit. The ordinary shareholders of firm are
entitled to residual income i.e. earning after fixed financial charges.

The financial leverage employed by a company is

intended to earn more on the fixed charges funds than their costs.
The surplus (or deficit) will increase (or decrease) the return on the
owner’s equity. The rate of return on the owner’s equity is levered
above or below the rate of return on the owner’s equity.

Favourable and Unfavourable Financial Leverage

Financial leverage may be favourable or unfavourable depending
upon whether the earning made by the use of fixed interest or
dividend bearing securities exceeds the explicit fixed cost, the firm
has to pay for the employment of such funds or not. The leverage
will be considered to be favourable so long the firm earns more on
assets purchased with the funds than the fixed cost of their use.
Unfavourable leverage occurs when the firm does not earn as the
funds cost.

Significance of Financial Leverage

Financial leverage helps in deciding the appropriate Capital

Structure. One of the objectives of planning an appropriate Capital
Structure is to maximize the return on equity shareholders funds or
maximize the earning per share.

Financial leverage is doubt-edged sword. On one hand, it increases

the earning per share and on the other hand it increases the financial
risks. High financial leverage means high fixed financial cost and high
financial risk i.e., as the debt content in Capital Structure increases,
the financial leverage increases and at the same time the financial
risk also increases i.e., risk of insolvency increases. The finance
manager is required to trade-off between risk and return for
determining the appropriate amount of debt.

Particulars 2007-08 2006-07 2005-06 2004-05

Net Sales and 192010 183130 113965 95231
operating income
Total 157999 142980 87914 72467
Expenditure
Operating 34011 40150 26051 22765
Profit
Other Income 4929 3701 2439 2700
Depreciation 5878 6380 5211 4633
EBIT 33062 37470 23279 20833
Interest Charges 2806 2424 2252 1700
PBT 30256 35046 21027 19133
Degree of 1.09 1.07 1.11 1.09
Financial
Leverage

Financial Leverage of Hindalco for the year 2004-05

to 2007-08
 Degree of Financial leverage
1.12

1.11

1.1

1.09 Degree of Financial leverage

1.08

1.07

1.06

1.05
Years 2007-08 2006-07 2005-06 2004-05

Leverage Ratio

S.N. 2007-08 2006-07 2005-06 2004-05

 1 Debt equity ratio 0.36 0.52Time 0.30Times 0.39Tim
Times s es
2 Total asset to debt 2.70 2.54Time 5.24Times 3.86Tim
ratio Times s es
3 Propriety ratio 1.03 0.76Time 0.64Times 0.67Tim
Times s es
4 Equity ratio 13.88 1.68Time 1.64Times 1.64Tim
Times s es
5 Interest coverage 1.55 17.74Tim 12.63Time 14.93Ti
ratio Times es s mes
Data used
Rs in million 2007-08 2006-07 2005-06 2004-05
Long term debt 62054.23 64102.03 28480.47 29523.38
Equity(shareholder’ 174358.15 124180.37 96062.52 76665.78
fund)
Fixed asset 89292.06 84831.34 76157.17 69265.10
Current asset 78516.69 77783.40 73027.74 44764.25
Total asset 167808.75 162614.74 149184.91 114029.35
EBDIT 38940.45 42998.15 28445.20 25373.96
Debt interest 2806.30 2423.88 2251.68 1699.56
Capital employed 270881.83 209093.00 157370.00 125869.00
Net worth 174358 124149.00 96003.00 76572.00

Formula used

Debt equity ratio Long term debt/ Equity

Total asset to debt ratio Total asset/ Long term asset
Propriety ratio Shareholder’s fund/ Total asset
Equity ratio Capital employed/ Net worth
Interest coverage ratio EBDIT/Debt Interest
Relationship between financial leverage & required rate of
return
Relationship between financial leverage and firm’s required rate of
return to equity shareholders with corporate tax is given:
Re = Ro + D/E (1-T) (Ro-b)
Where,
Re = Required rate of return to equity shareholders
Ro = Required rate of return for all equity firm.
D = Debt amount in capital structure.
E = Equity amount in capital structure.
T = Corporate tax rate.
Rb = Required rate of return to lenders.
TWACC = Total weighted average cost of capital.
 Re

TWACC

Rb
bb

EXPLANATION
The above graph clearly depicts that with higher debt content ‘Re’ i.e.
required rate of return by shareholder is going up while TWACC is
getting lower.

Determination of whether Hindalco is Trading on

Equity
Trading on Equity
A company may raise funds either by issue of shares or by
debentures. Debentures carry a fixed rate of interest and this interest
has to be paid irrespective of profits. Of course, preference share are
also entitled to a fixed rate of dividend depends upon the profitability
of the company. In case, the rate of return on the total capital
employed is more than the rate of interest on debentures or rate of
dividend on preference shares, it is said that company is trading on
equity.

Rate of Return on Equity Shareholders Fund

= PAT/ Equity Shareholders Fund
= 28609/ 174358
= 16%

General Rate of Return= (PAT+ Interest) / Total Capital

Employed
= 31415 / 270881
= 12%
The general rate of return is 12% while the return on equity
shareholder’s fund is 16%. Thus, we can say that Hindalco is trading
on equity.

EPS and ROE calculations

EPS is calculated by dividing profit after taxes, PAT (also called net
income, NI) by the number of shares outstanding. PAT is found in 2
steps. First, the interest on debt, INT, is deducted from the earnings
before interest and taxes, EBIT, to obtain the profit before taxes, PBT.
Then, taxes are computed on and subtracted from PBT to arrive at the
figure of PAT. The formula for calculating EPS is-
Earning per share= Profit after tax/ No. of shares
EPS= PAT/ N= (EBIT-INT) (1-T)/N
Where, T is the corporate tax rate and N is the number of
ordinary shares outstanding. If the firm does not employ any debt,
then the formula simply would be-
EPS= EBIT (1-T)/N
ROE is obtained by dividing PAT by equity (S) or net worth (NW).
Thus, the formula for calculating ROE is as follows-
Returns on Pay= Profit after tax/ Net worth (book value of equity)
ROE= (EBIT-INT) (1-T)/S
S is considered as book value of equity capital in above
equation.

Combining Degree of Operating Leverage

Degree of Operating Leverage= The degree of operating leverage

(DOL) was defined as the percentage change in the earnings before
interest and taxes relative to a given percentage change in sales. Thus:
 DOL= % change in EBIT/ % change in sales

Degree of Financial Leverage= The degree of financial leverage

(DFL) is defined as the percentage change in EPS due to a given
percentage change in EBIT:
DFL= % change in EPS/ % change in EBIT

Combining Effect of Operating and Financial

Leverage

Operating and financial leverage together cause wide fluctuations in

EPS for a given change in sales. If a company employs a high level of
operating and financial leverage, even a small change in the level of
sales will have effect on EPS.
The degree of operating and financial
leverages can be combined to see the effect of total leverages on EPS
associated with a given change in sales. The degree of combined
leverage (DCL) is given by the following equation-
= % change in EBIT/ % change in sales* % change in EPS / %
change in EBIT= % change in EPS/ % change in sales

Financial Leverage and the Shareholder’s Risk

It has is seen that financial leverage magnifies the shareholder’s

earnings. It has also been observed that the variability of RBIT causes
EPS to fluctuate within wider ranges with debt in the capital structure.
That is, with more debt, EPS rises and falls faster than the rise and fall
of EBIT. Thus, financial leverage not only magnifies EPS but also
increases its variability.
The variability of EBIT and EPS
distinguish between two types of risk- operating risk and financial
risk.

 Operating Risk- Operating risk can be defined as the

variability of EBIT (or return on assets). The environment-
internal and external- in which a firm operates determines
the variability of EBIT. So long as the environment is given
to the firm, operating risk is an unavoidable risk. A firm is
better placed to face such risk if it can predict it with a fair
degree of accuracy.
The variability of EBIT has two components:
 Variability of sales
 Variability of expense

Variability of sales- The variability of sales revenue is in fact, a

major determinant of operating risk. Sales of a company may
fluctuate because of three reasons. First, the changes in general
economic conditions may affect the level of business activity.
Second, certain events affect sales of companies belonging to a
particular industry. For example, the general economic
conditions may be hit by recession. Other factors may include
the availability of raw materials, technological changes, actions
of competitors, industrial relations, shifts in consumer
preferences and so on. Third, sales may also be affected by the
factors, which are internal to the company. The change in
management, the product-market decisions of the company and
 its investment policy, or strike in the company have a great
influence on the company’s sales.

Variability of Expenses- Given the variability of sales, the

variability of EBIT is further affected by the composition of
fixed and variable expenses. Higher the proportion of fixed
expenses relative to variable expenses, higher the degree of
operating leverage. High operating leverage leads to faster
increase in EBIT when sales are rising. In bad times when sales
are falling, high operating leverage becomes a nuisance; EBIT
declines at a greater rate than fall in sales. Operating leverage
causes wide fluctuations in EBIT with varying sales. Operating
expenses may also vary on account of changes in input prices,
and may also contribute to the variability of EBIT.

 Financial Risk- For a given degree of variability of EBIT,

the variability of EPS (and ROE) increases with more
financial leverage. The variability of EPS caused by the use
of financial leverage is called financial risk. Firms exposed
to same degree of operating risk can differ with respect to
financial risk when they finance their assets differently.
Financial risk is thus an avoidable risk if the firm decides
not to use any debt in its capital structure.

Cash Flow Analysis

The cash flow approach establishes the debt capacity by examining

the probability of default.
The cash flow approach to assessing debt capacity involves the
following steps-
1. Specify the tolerance limit on the probability of default. This
reflects the risk attitude of management. Is it willing to accept a
0 per cent, 5 per cent, 10 per cent or probability of default on
its debt commitment?
2. Estimate the probability distribution of cash flows, taking into
account the projected performance of the firm.
3. Calculate the fixed charges by way of interest payment &
principle repayment associated with various levels of debt.
4. Estimate the debt capacity of the firm as the highest level of
debt which is acceptable, given the tolerance limit, the
probability distribution, and the fixed charges defined.

Components of Cash Flows

The cash flows should be analysed over a long period of time, which
can cover the various adverse phases, for determining the firm’s debt
policy. The cash flow analysis involves preparing proforma cash flow
statements showing the firm’s financial conditions under adverse
conditions such as a recession. The expected cash flows can be
categorized into three groups:

 Operating cash flows.

 Non-operating cash flows.
 Financial flows.

1. Operating cash flows- Operating cash flows relate to the

operations of the firm and can be determined from the projected
profit and loss statements. The behaviour of sales volume,
output price and input price over the period of analysis should
be examined and predicted.
2. Non-operating cash flows- Non-operating cash flows generally
include capital expenditures and working capital changes.
During a recessionary period, the firm may have to specially
spend on advertising etc. for the promotion of the product. Such
expenditures should be included in the non-operating cash
flows.
3. Financial flows- Financial flows include interest, dividends,
lease rentals, repayments of debt etc. They are further divided
into: Contractual obligations and policy obligations.
Contractual obligations include those financial obligations,
like interest, lease rentals and principal payments that are
matters of contract, and should not be defaulted. Policy
obligations consist of those financial obligations, like
dividends, that are at the discretion of the board of directors.
Policy obligations are also called discretionary obligations.

Utility of Cash Flow Analysis

 The cash flow analysis has the following advantage:
 It focuses on the liquidity and solvency of the firm over a
long period of time, even encompassing adverse
circumstances. Thus, it evaluates the firm’s ability to meet
fixed obligations.
 It is more comprehensive and goes beyond the analysis of
profit and loss statement and also considers changes in the
balance sheet items.
 It identifies discretionary cash flows. The firm can thus
prepare an action plan to face adverse situations.
 It provides a list of potential financial flows, which can
be utilised under emergency.
 It is a long–term dynamic analysis and does not remain
confined to a single period analysis.

Financial Difficulties: How to recognize and

avoid
Here are a few guidelines to help you manage your cash flow
effectively:
 Collect money from debtors as quickly as possible.
 Centralize payments and streaming procedure for different
functional areas such as accounts payable and payroll, by
 using (for example) BACS payment methods. This is quicker,
more secure and cheaper than cheques.
 Develop close partnership with customers and suppliers to
negotiate mutually beneficial payment policies.
 Consolidate banking relationship by choosing banks that can
offer customized cash management services. You will get
advice from banking experts and save on bank charges.
 Develop accurate cash flow forecasting techniques and
models that are linked to budgets and strategic plans.
 Conduct regular reviews of the cash situation to ensure that
the cash balances are approximately the same as in the
budget, and analyze any significant variations from budget.
 Ensure appropriate use of current technology: for example
telephone and internet banking, as these are quicker and
cheaper.
 Ensure that investing, borrowing, payment and other financial
transactions are properly authorized so as to avoid any
improper use of the organization’s cash.
If the organization has too much liquidity in the
long term, it may well be invested in fairly low return areas,
such as bank deposit accounts. Long term surplus cash should
be invested in making the organization grow. You might,
perhaps, be able to fund additional resources to help you raise
fund.
T
EC
O
R
P
 Preface

Summer Training is an integral part of our academic curriculum.

During the training, a student gets an opportunity to understand and
learn various activities undergoing in the corporate sector. It gives
an insight of business activities.
This project report is the outcome of the summer training that I have
undergone at HINDALCO INDUSTRIES LIMITED for the partial
fulfillment of PGDM Course.
The topic allotted to me by the company is “Capital Structure of
Hindalco”.
The project emphasizes on the financing mix of the company.
I have tried my best to make a good report. However, no one can
claim perfection in it’s entirely. So I apologize for the discrepancy, if
any, crept in.
Preparation of project requires perseverance, initiatives, proper
guidance and direction. So it’s mandatory to take the aid of various
departments.
Actually, a project is the summarized form of seven activities. They
are:
 Planning
 Resource Collection
 Organizing
 Joint Efforts
 Efficiency
 Communication
 Transparency
 Acknowledgement
In an organization, be it an industry, a school or society, no outcomes
can be achieved by one man working in isolation. It’s always a group
working and achieving the outcome in totality. It is the outcome of all
the guidance and support that I received from this organization.
I would like to thank Mr. S.K. Das, G.M. (Training) for having
arrangement of my training in this organization. I would also like to
thank Dr. D. C .Kabra, Vice President (Finance & Accounts) & Mr.
Gopal Purohit, G.M. (Finance & Accounts), for giving me a chance
to work with this organisation and for extending words of
encouragement and wisdom.
I wish to express my profound sense of gratitude to professor Sudhir
Saran Sir, Director General, SMS Lucknow for having arranging
summer training in this prestigious organisation. I would also like to
express my sincere gratitude to my project guide Mrs. Vandana
Srivastava & Mr. Babar Ali Khan (Faculty member-SMS) for the help
and encouragement they have extended. Their help has gone a long
way in successful completion of this project.
I also like to extend my sincere gratitude to my project supervisor Mr.
Vimal Raheja, Deputy Manager (F&A) for helping me during my
tenure in Hindalco.
I am thankful to whole Hindalco family for their kind cooperation.
Hope their valuable guidance & their guidelines will prove as a
“LIGHT” in the path of my future life.
Above all I am thankful to ALLAH who acquainted me with the
required intelligence to carry out this project.

Mirza Aatif Baig

 Objective of Study

 The objective of the study involves understanding of different

aspects of capital structure.
 To study the different aspects related to capital structure of
Hindalco industries Limited which contributes most to make
Hindalco one of the lowest cost producers in profit involving
organisation in the world.
 To have deep study about the financial leverage of the
organisation.
 To study various approaches to establish target capital structure.

Primary Objective

 The primary objective of the study is to have detailed overview

of appropriate capital structure of the company including deep
insight over the various ratios associated with the Capital
Structure of the organization.
 To know about the combination of debt and equity and what
cost the organization has to pay for that.

Secondary Objective

 The main aim is to review the financial control of the company

and the various aspects related to financial activities.
 To get a practical experience of the job environment of the
organization.
 Research Methodology

 Research methodology used here is purely descriptive. The

research methodology is highly flexible, unstructured and
qualitative.

Sampling Plan
There has been no sampling plan as such as the study involves
understanding the various process and analysing them. The
study involves the detailed analysis of secondary data
collected from various sources and therefore no sample size
And plan has been considered.

Data Source
Data has been collected through literature survey and expert
opinion. Literature survey includes the collection of data from various
sources like hand books, study material etc.

Secondary Sources
From the company induction booklet and website.

 Company’s annual report.

Data Analysis
Different tools like MS-Word and MS-Excel used for the
analysis
Of data.
 Financial

Maximise Share
Value

Finance Manager

Fund Financing Investment Dividend

Decisio Decision Decision Decision

Retur Risk
n

Trade
Off

INTER-RELATIONSHIP BETWEEN MARKET VALUE,FINANCIAL

DECISIONS AND RISK-RETURN TRADE-OFF
 APPENDIX

Financial Highlights –Q4 & FY08

 EBIDTA
Q4 FY 08 % FY 08 %
Change Change
Net Sales 5010 6% 19201 5%
&
Operating
Revenue
EBIDTA 941 -20% 3894 -11%
Pre-tax 690 -28% 3026 -14%
profit
Net Profit 1077 49% 2861 12%
Basic 8.78 19% 24.51 -3%
EPS per
share

BALANCE SHEET AS AT 31st March, 2008

(Rs. in Millions)
Particulars As at 31st As at 31st March,
March,2008 2007
SOURCES OF
FUNDS
SHAREHOLDER’S
FUNDS
Share Capital 1226.48 1043.25
Share Capital Suspense 4.06
Share Warrants 1390.96
Reserves and Surplus 171736.65 123137.12
174,358.15 124,180.37
LOAN FUNDS
Secured Loans 62054.23 64102.03
Unsecured Loans 21231.61 9490.33
83,285.84 73,592.36
DEFERRED TAX 13236.74 11258.01
LIABILITY (NET)
270,880.73 209,030.74
TOTAL
APPLICATION OF
FUNDS
FIXED ASSETS
Gross Block 126084.59 112526.55
Less: Depreciation 46368.07 40563.25
Less: Impairment 1623.15 1896.21
78,093.37 70,067.09
Capital Work-in- 11198.69 14764.25
Progress
89,292.06 84,831.34
INVESTMENTS 141,079.86 86,753.17

CURRENT
ASSETS, LOANS
AND ADVANCE
Inventories 50979.06 43153.14

Sundry Debtors 15650.22 15045.02

Cash and Bank Balances 1469.77 6654.96

Other Current Assets 623.04 1188.08

Loans and Advances 9794.60 11742.20

78,516.69 77,783.40
Less:
CURRENT
LIABILITIES AND
PROVISIONS
Current Liabilities 28947.79 27527.44

Provisions 9060.09 12841.41

38,007.88 40,368.85

NET CURRENT 40,508.81 37,414.55

ASSETS
MISCELLANEOU
S EXPENDITURE
(to the extent not
written off or
adjusted)
TOT 270,880.73 209,030.74
AL

PROFIT & LOSS ACCOUNT FOR THE YEAR

ENDED 31st MARCH, 2008
(Rs. in Millions)
Particulars For the year For the year
ended 31st ended 31st
March,2008 March,2007
INCOME
Gross Sales and 210219.31 199200.86
Operating Revenues
Less: Excise Duty 18209.04 16070.98
Net Sales and Operating 192,010.27 183,129.88
Revenues
Other Income 4929.37 3700.69
196,939.64 186,830.57
EXPENDITURE
(Increase)/ Decrease in (1370.26) (4425.17)
Stocks
Trade Purchases 925.18 230.19
Manufacturing and 158444.27 147175.00
Other Expenses
Interest and Finance 2806.30 2423.88
Charges
Depreciation 5878.09 5528.02
Impairment - 852.40
166,683.58 151,784.32
PROFIT BEFORE 30256.06 35046.25
TAX
Provision for Current 6063.56 9841.00
Tax
Provision for Deferred 875.79 (551.00)
Tax

Provision for Fringe 114.00 113.00

Benefit Tax
Tax adjustment for (5406.68) -
earlier years (Net)
NET PROFIT 28,609.39 25,643.25
Balance brought forward 1000.00 550.00
from Previous year
Balance Brought (15.62) -
forward from
Amalgamating Company
Transfer from Debenture 1721.70 1450.00
Redemption Reserve
BALANCE 31,315.47 27,643.25
AVAILABLE FOR
APPROPRIATIONS
APPROPRIATIONS
Debenture Redemption 50.00 186.82
Reserve
Dividend on Preference 0.24 -
Shares
Dividend Tax on 0.04 -
Preference Shares
Interim Dividend on - 1773.44
Equity Shares
Tax on Interim Dividend - 248.72
Proposed Dividend on 2268.93 -
Equity Shares
Tax on Proposed 385.60 -
Dividend
Transfer to General 25610.66 24434.27
Reserve
Balance Carried to 3000.00 1000.00
Balance Sheet
TOTA 31,315.47 27,643.25
L
Basic EPS (in Rs.) 24.51 25.52

CASH FLOW STATEMENT FOR THE YEAR

ENDED 31st MARCH, 2008
(Rs. In Millions)
Particulars Year ended Year ended
st st
March 31 , 2008 March 31 ,2007
A.CASH FLOW
FROM
OPERATING
ACTIVITIES
Net profit before Tax 30256.06 35046.25
Adjustment for:
Interest and Finance 2806.30 2423.88
Charges
Depreciation 5878.09 5528.02
Impairment - 852.40
Unrealized Foreign 120.60 (198.37)
Exchange Gain/Loss
(Net)
Employee Stock Option 21.29 -
Provisions/ Provisions (566.53) (33.76)
written-back (Net)
Miscellaneous 36.16 40.04
expenditure written off
Provision/ (write 122.18 (3.78)
back)for diminution in
carrying cost of
Investments (Net)
Investing Activities (Net) (5002.60) (3488.20)

Operating profit before 33,671.55 40,166.48

working capital changes
Changes in Working
Capital:
Change in Inventories (7727.26) (2202.26)
Change in Trade and 269.09 (4563.55)
other Receivables
Change in Trade 1761.95 5580.37
Payables
Cash generation from 27,975.33 38,981.04
Operation
Payment under VRS (3.23) (11.72)
Payment of Direct Taxes (6573.66) (5603.73)
Net Cash Generated/ 21,398.44 33,365.59
(used)- Operating
Activities
B.CASH FLOW
FROM
INVESTMENT
ACTIVITIES
Purchase of Fixed Assets (9090.14) (13536.41)
Sale of Fixed Assets 212.54 63.96
Purchase/Sale of shares (31362.52) (21.00)
of Subsidiaries (Net)
Purchase/Sale of (21244.11) (46072.94)
Investments (Net)

Loans/Repayment of 1662.55 (851.31)

Advances & Loans from
Subsidiaries (Net)
Interest Received 1328.37 1689.09
Dividend Received 4868.34 2365.37
Net Cash Generated/ (53,624.97) (56,363.24)
(used)- Investing
Activities
C.CASH FLOW
FROM FINANCING
ACTIVITIES
Proceeds from issue of 24237.13 5528.68
shares and warrants (net
of expenses)
Proceeds/Repayment of (568.29) 34846.45
Long Term Borrowings
(Net)
Proceeds/Repayment of 10208.38 (10194.82)
Short Term Borrowings
(Net)
Interest and Finance (6678.38) (5795.22)
Charges
Dividend paid (including - (4494.66)
Dividend Tax)
Net Cash Generated/ 27,198.84 19,890.43
(used)- Financing
Activities
Net (5,027.69) (3,107.22)
Increase/(Decrease)i
n Cash and Cash
Equivalents
Add: Operating Cash and 6412.11 9519.33
Cash Equivalents
Cash acquired on 9.41 -
Amalgamation
Closing Cash and Cash 1,393.83 6,412.11
Equivalent

COMPETITORS

National Aluminium Company Ltd (NALCO)

Public sector company which is Asia’s largest integrated aluminium
manufacturer, with activities that include bauxite mining, alumina
refining, aluminium smelting & casting, power generation, rail & port
operations; based in Bhubaneswar (Orissa).

Vedanta Resource plc

Leading integrated metals & mining group located in London, UK,
but whose operators are mainly in India; has interests in aluminium
(BALCO, MALCO), copper (Sterlite, Konkola, CMT) & zinc
(Hindustan Zinc Ltd).

Bharat Aluminium Company Ltd (BALCO)

Integrated aluminium producers whose activities include mining,
smelting, refining & fabrication; based in New Delhi; a part of
Vedanta Resources; has an alumina production capacity of 200,000
tpa 7 smelting capacity of 100,000 tpa.

Jindal Aluminium Ltd

Largest manufacturer of aluminium extruded profiles in India having
6 extrusion presses under one roof; manufactures bars, rods & tubes,
structure, architectural, moulding, transport, industrial & general
products; located in Bangalore.

Apar Industries Ltd

Manufacturers of transformer oil & specialty oils, overhead power
transmission & distribution aluminium conductors & specialty
polymer; corporate office is in Mumbai; products include industrial &
automotive oils, nitrile rubber, lattices.
Century Extrusions Ltd (CEL)
Manufacturers of aluminium extrusions based in Kolkata; has an
installed capacity of 7,500 MT; product categories: architectural
applications, transport, electrical, electronics & communications,
industrial applications.

Alufluoride Ltd
Manufacturers of aluminium fluoride based in Vishakhapatnam,
Andhra Pradesh; has an installed capacity of 5,000 tones.

Bhoruka Aluminium Ltd

ISO certified manufacturer of aluminium extrusions; part of the
Bhoruka group; supplies its products to the industrial, transportation,
building & construction, electrical & electronics, solar and interior
sectors.

Karshni Aluminium Co Pvt Ltd

ISO certified manufacturer of industrial and domestic aluminium
ladders, aluminium doors and windows, curtain walls and structural
glazings; based in Ghaziabad, Uttar Pradesh; has-in-house powder
coating & anodising facilities.

HINDALCO VS COMPETITORS:
Particular Market Sales Net Total
capitalization Turnover Profit Assets
(Rs. cr.)
NALCO 22434.86 4988.43 1624.8 7695.22
9
Hindalco 16294.54 19201 2320.2 25764.4
1
Madras 1295.44 493.7 45.86 395.81
Aluminium
Century Extr 55.6 98.56 2.8 26.91
Man 12.79 42.72 1.65 25.91
Aluminium

MARKET CAPITALIZATION

NALCO
Hindalco
Madras Aluminiu
Century Extr
Man Aluminium
 28000

24500

21000

17500

14000 Sales Turnover

Net Profit
10500 Total Assets

7000

3500

0
NALCO Hindalco Madras Century Extr Man
Aluminiu Aluminium

BEST PRACTICES AT HINDALCO

1. Integrated Management System-

Purpose- To increase value and improve operational
performance.

2. World Class Manufacturing (WMC)-

Aim- To achieve Zero Defects, Zero breakdowns, Zero
Accidents, Zero Customer Complaints, Zero pollution,
Zero Losses & Zero Abnormalities.
3. Community Development Initiatives-.
 Social welfare and women empowerment.
 Economic self reliance & watersheds development.
 Education and capacity building.
 Health & Family welfare.
 Infrastructural Development.

ACCOLADES – 2007-08

1. Chairman’s WCM Silver Award 2007 for Business

Excellence in Manufacturing.
2. Green tech Safety Gold Award 2008 for outstanding
achievement in Safety Management in Coal Based Power
Sector.
3. Green tech Environment Excellence Silver Award 2007
for outstanding achievements in Environment
Management.
4. QC Award- QC Team “ Vayadoot “ and “ Navodaya “ of
Renusagar achieved par Excellence Award in Case
Presentation at National Level Convention NCQC- 2007
Kolkata.
 5. CII Human Resource Excellence Award 2007 for “Strong
Commitment “. This award is presented for significant
achievement in the field of HR and follows the CII EXIM
BANK Model for Business Excellence.
6. IMC Ramakrishna Bajaj National Quality Award 2007 to
HINDALCO for “PERFORMANCE EXCELLENCE 07”.
This award is being presented by Indian Merchant
Chamber every year for outstanding performance in the
field of Quality in the categories- Manufacturing, Services,
Small Business, Education and Overseas.
7. Coal Best Practices Award- 1st Prize.
Hindalco Renusagar bagged First Price in Coal Best
Practices.
8. National Energy Conservation Award in Aluminium
Sector- Government of India, Ministry of Power.

KEY BUSINESS OF THE GROUP

Indian Roots
Company Product/Services
Grasim Viscose stable fibre, Rayon grade

Pulp, cement, chemicals, sponge iron,

Textiles.

Hindalco Aluminium, copper

: Hindustan Aluminium - Aluminium foil

Company Ltd.

: Bihar Caustic & chemicals - Caustic Soda

 Ltd.

: Aditya Birla Nuvo - Garments, Viscose filament yarn,

Carbon black & Textiles.

: Idea Cellular Ltd. – Cellular Telecommunication

: Aditya Birla Insulator Ltd. – Insulators

: Birla Sun Life Insurance - Insurance

: Birla Sun Life Asset - Mutual Funds

Management Co.Ltd

: Birla Global Finance Ltd. – Asset based finance, Corporate

Finance & banking, Capital market,

Treasury.

Our International Presence

Country Company Product/Services

Thailand Thai Rayon - Viscose Stable Fibre (VSF)

Indo Thai Synthesis - Spun and Fancy Yarns

Thai Acrylic Fibre - Acrylic Fibre

Thai Carbon Black - Carbon Black

Aditya Birla Chemicals - Sodium phosphate,

(Thailand) Ltd. Speciality phosphate,

Sodium sulphite, caustic

Soda, chlorine, allyl chloride

 Bisulphite etc.

Thai Peroxide - Hydrogen peroxide, per acetic

Acid, calcium peroxide

Philippines’ Indo Phil Textile Mills – Yarns

Indo Phil Cotton Mills – Yarns

Indo Phil Acrylic Mfg. Corp – Yarns

Pan Century Surfactants Inc. - Surfactants

Indonesia PT Indo Bharat Rayon - Viscose staple fibre (VSF)

PT Elegant Textile Industry - Yarns

PT Indo Liberty Textiles - Yarns

PT Indo Raya Kimie - Carbon disulphide

Egypt Alexandria Carbon Black - Carbon Black

Company S.A.E

Alexandria Fiber Company - Acrylic Fibre

S.A.E

China Liaoning Birla Carbon Co. Ltd – Carbon Black

Canada AV Cell Inc. – Softwood/Hardwood

 Pulp (for VSF Manufacture)

AV Nackawie Inc. – Dissolving Pulp (for

VSF Manufacture)

Australia Aditya Birla Minerals Ltd - Copper

Laos Birla Lao Pulp and Plantations – Pulp wood plantations

Company Ltd. / pulp plant

AQUISITION PROCESS COMPLETED

Hindalco, the Aditya Birla Group’s flagship company announced the

completion of its acquisition of NOVELIS. The transaction makes
Hindalco the world’s largest aluminium rolling company and one of
the biggest producers of primary aluminium in Asia, as well as
being India’s leading copper producer.
On 10 February 2007, Hindalco entered into an agreement with
Novelis to acquire the company in all- cash transaction, which values
Novelis at approximately US$ 6.0 billion, including debt. Under the
terms of the agreement, Novelis shareholders will receive US$ 44.93
in cash for each outstanding common share. Novelis shareholders
approved the transaction by an overwhelming majority (99.8 per
cent) in a special meeting on 10 May 2007.
“We look upon the aluminium business as a core business that has
economic growth potential in revenues and earnings. Our vision is
to be a premium metals major, global in size and reach with a
passion for excellence. The acquisition of Novelis is a step in this
direction”, said Mr. Kumar Mangalam Birla, Chairman, Hindalco.
“The combination of Hindalco and Novelis establishes an
integrated producer with low- cost alumina and aluminium facilities
combined with high-end rolling capabilities and a global footprint.
The complementary assets and expertise of the team provides a
strong platform for growth and success.” Added Mr. Birla.
Welcoming the men and women of Novelis into Hindalco and the
Aditya Birla Group, Mr. D. Bhattacharya, managing director of
Hindalco and director of Aditya Birla Management Corporation said,
“Novelis makes a perfect fit for Hindalco. There are enormous
geographical market and product synergies. Novelis is the global
leader in the value-added high-end aluminium rolled products and
aluminium can recycling. Hindalco is consistently increasing its
share of value-added products, which today stand at nearly 60 per
cent. The Novelis acquisition gives it an instant leg-up with its
technology sophisticated rolled aluminium products capability,
apart from a scale and a global footprint”.
“We are very pleased to complete this transaction with Hindalco,”
said Novelis Chief Operating Officer, Ms. Martha Brooks. “The
arrangement has created significant value for Novelis shareholders
while at the same time providing new opportunities for the future of
the combined company. With the support of Hindalco and the
Aditya Birla Group, we will be able to accelerate the Novelis
business strategy, leveraging our world-class assets for the
production of premium aluminium products”.
 Novelis stock has ceased trading on the New York Stock Exchange.
De-listing on the New York Stock Exchange and the Toronto Stock
Exchange is expected to occur shortly.

INTEGRATED OPERATIONS AT HINDALCO

Bauxite Mines

Co-Generation Aluminium Caustic Soda From

Refinery JV

Renusagar Power Aluminium Smelter Aluminium Fluoride

Plant From J.V

Semi Fabrication
Plant

Redraw Rod Mills Rolling Mills Extrusion Presses

 Economic Value Added
Introduction
Investors are currently demanding shareholder value more strongly
than ever. Investors world over have increased the pressure on
companies to maximize shareholder value. Even in India the
shareholder value-approach has gained grounds. This is due to the
ownership of Indian stocks by FII and foreign investors, Indian
companies being listed on foreign exchanges, issuance of bonds in
foreign countries etc. Investors round the world emphasize and
demand focus on shareholder value-issuance.
Background
EVA is defined to be operating profit subtracted with capital
charges. EVA is thus one variation of residential income with
adjustment as to how one calculation income and capital. One of
the earliest to mention the residual income concept was Alfred
Marshall in 1890. He defined the economic profit as total net gains
less the interest on invested capital at the current rate. The EVA
concept is often called economic profit (EP). In order to avoid
problems caused by the trade marketing. On the other hand, the name
“EVA” is so popular and well known that often all residual income
concepts are often called EVA.
Put simply, EVA is net operating profit minus an appropriate
charge for the opportunity cost of all capital invested in an
enterprises. As such, it is an estimate of “ economic profit, or the
amount by which earnings exceeds or fall short of the required
minimum rate of return that shareholder and lenders could get by
investing in other securities of comparable risk.
The capital charges are the most distinctive and important aspect of
EVA. Under conventional accounting, most companies appear
profitable but many in fact are not. According to Peter Drucker “Until
a business returns a profit that is greater than its cost of capital, it
operates at a loss. Never mind that it pays taxes as if it had a genuine
profit. The enterprise still returns less to the economy than it divorce
in resources. Until than it does not create wealth; it destroys it.” EVA
corrects this error by explicitly recognizing that when managers
employ capital they must pay for it, just as if it were a wage.

Characteristics

EVA is the after tax cash flow generated by a business minus cost
of capital. It has deployed to generate cash flow. It represents real
profit verses paper profit and underlines shareholders value. It is
increasingly becoming the main target of leading companies
strategies. After all, shareholders are the players who provide the firm
with its capital; they invest to gain a return on that capital.
EVA measures whether the operating profit is enough compared to
the total cost of capital employed. It is defined as “Net operating
profit after tax (NOPAT) subtracted with a capital cost or cost of
capital.”

EVA= NOPAT – CAPITAL COST

EVA= NOPAT – CAPITAL COST* CAPITAL EMPLOYED
Or equivalently, if rate of return is defined as NOPAT/ CAPITAL,
this turns into a perhaps more revealing formula:
EVA = (Rate of Return – Cost of Capital)* capital
Where,
Rate of return = NOPAT / CAPITAL
Capital = Total Balance Sheet minus non interest bearing debt in
the beginning of the year
Cost of Capital =Cost of Equity* Proportion of equity from
capital
+
Cost of Debt* Proportion of debt from capital *
(1- Tax Rate)
Cost of capital or weighted average cost of capital is average cost of
both equity capital and interest- bearing debt. Cost of equity is
defined with capital asset pricing model. The estimation of cost of
debt is naturally more straight forward, since its cost is explicit. Cost
of debt also includes the tax shield due to tax allowance on interest
expenses.
If ROI is defined as above (after taxes) then EVA can be represented
as:
EVA = (ROI - WACC)*Capital Employed
The idea behind EVA is that shareholder must earn a return that
compensates the risk taken. In other words, equity capital has to earn
at least same return as similarly risky investments at equity markets.
If that is not the case, then there is not real profit made and actually
the company operates at a loss from view point of shareholders. On
the other hand if EVA is zero, this should be treated as sufficient
achievement because the shareholders have earned a return that
compensates the risk. This approach-using average risk-adjusted
market return as diversified long-term investments on stocks market.
The average long-term stock market returns that the public companies
generates from their operations.
EVA is based on the common accounting based items like interest
bearing debt, equity capital and net operating profit. It differs from the
traditional measures mainly by including the cost of equity.
Mathematically it gives exactly the same result in valuation as
discounted cash flow pr net present value which is long since widely
acknowledged as theoretically best analysis tools from the
shareholders perspective. These both measures include the
opportunity cost of equity, they take into account the time value of
money and they do not suffer from any kind of accounting distortion/
however NPV and DCF do not suit in performance evaluation
because they are based exclusively on cash flow. EVA in turn suits
particularly well in performance measuring. Yet, it should be
emphasized that the equivalence with EVA and NPV / DCF holds
only in special circumstances (in valuation) and thus this equivalences
does not have anything to do with performance measurement.
 Merits of EVA

 Measurement of Value Added Performance

EVA concept will help organization in evaluating and
measuring the performance both qualitative and quantitative. It
shows financial performance with a new pair of glasses or offers
new approach especially for the companies where equity is
viewed as free source of funds and performance is measured by
some earning figure.

 Basis of Decision Making

It will help organization to alight its management system to the
EVA process. The EVA based management system can provide
the basis on which the companies can take decisions related to
 the choice of strategy, investment activity related to research &
development, human development, capital allocation mergers
and acquisition, diversting business and goal setting.

 Device to Design and Implement Incentive Plan

It can form a basis and implement incentive plan/ bonus. This
plan will ensure that the only way in which manager can earn
higher bonus is by creating more values for shareholder. An
EVA-based incentive system will encourage managers to
operate in such a way as to maximise the EVA, not just of the
operation they oversee, but of the company as a whole. Thus, it
is to make every employee of an organization an entrepreneur
who seeks not to perform his or her function well, but to do so
in a way that enhances the EVA of the company.

Conclusion

EVA is a basis of measurement of performance of a company, in

terms of the value they have added to the society. However, we
have to bear in mind that the success of any given company is
measured ultimately as creation of shareholder value. EVA
helps in quantitative assessing of different strategies but that is
all. Wealth does not arise from EVA alone. EVA only measures
change of wealth. It is also as short-term as all other periodic
performance measures. Therefore, all companies should rely on
other performance measures as well for assess in the
achievement of their strategic goals.
 Ratio Analysis

It is widely used tool of financial analysis. The term ratio refers to the
relationship expressed in mathematical terms between two individual
figures or group of figures connected with each other in some logical
manner and are selected from financial statements of the concern. A
financial ratio helps to express the relationship between two
accounting figures in such a way that users can draw conclusion about
the performance, strengths and weaknesses of a firm.
Ratio to be used for capital structure analysis:
 Earnings per share.
 Dividend per share.
 P/E ratio.
 Dividend pay-out ratio.
 Debt-equity ratio.
 Interest coverage ratio.
  Return on investment.

Per share data (As on 31st March)

2007-08 2006-07 2005-06 2004-05 2003-04
Net earnings (Rs. mn.) 28,609 25,643 16,556 13,294 8,389
Cash earnings (Rs. mn.) 34,487 32,024 21,767 17,927 11,563
EPS (Rs.) 24.51 25.52 16.79 134.48 8.53
CEPS (Rs.) 29.55 31.87 22.07 18.18 11.76
Dividend per share (Rs.) 1.85@ 1.70 2.20 2.00 1.65
Dividend pay out (%) 9.3@ 7.9 14.9 16.0 20.5
Book value per share (Rs.) 142.09 118.97 97.40 82.54 74.16
Price to earning 6.7 5.1 10.9 9.0 13.4
Price to cash earning 5.6 4.1 8.3 6.7 9.7
Price to book value 1.2 1.1 1.9 1.6 1.7
 Earning per share
EPS shows the profitability of the firm on a per share basis, it does
not reflect how much is paid as dividend and how much is retained in
the business.

EPS= Profit after tax / No. of shares

Significance
The EPS helps in determining the market price of the equity shares of
the company. A comparison of earning per share of the company with
another will also help in deciding whether the equity share capital is
being effectively used or not. Helps in estimating the company’s
capacity to pay dividend to its equity shareholder.

EPS of Hindalco

Particulars 2007-08 2006-07 2005-06 2004-05

Earnings per 24.51 25.52 16.79 13.48
share
 EPS
30

25

20
EPS
15

10

0
2007-08 2006-07 2005-06 2004-05

Interpretation
The EPS of Hindalco shows an upward trend since FY-04. There is a
considerable increase in EPS till FY-07 but there is a decrease in FY-
08 i.e. 24.51.
 Dividend Per Share

It indicates the amount of profit distributed to shareholders per share.

It is calculated as:

DPS = PAT / No. of Equity shares

DPS of Hindalco
Particulars 2007-08 2006-07 2005-06 2004-05
Dividend 1.85 1.70 2.20 2.00
per share
(computed)
 DPS
2.5

1.5 DPS

0.5

0
2007-08 2006-07 20005-06 2004-05

Interpretation
Over the years the DPS of Hindalco has been increasing from Rs.2.00
per share to Rs.2.20 per share till FY 2006.But it decreased in FY
2007 to 1.70 again showing increase in FY 2008 to Rs.1.85. This
dividend payment is quite low showing that retaining most of its
earnings for future investments in projects.

EPS AND DPS Of Hindalco Industries Ltd.

Price to Earning
This ratio indicates the number of times the earning per share is
covered by its market price.

P/E ratio = MP per share / EPS

Significance
P/E ratio helps the investor in deciding whether to buy or not to buy
the share of the company at a particular market price.

Price to Earning of Hindalco

Particulars 2007-08 2006-07 2005-06 2004-05
Price to 6.7 5.1 10.9 9.04
Earning

P/E
12

10

8
P/E
6

0
2007-08 2006-07 2005-06 2004-05

Interpretati
on
P/E ratio of Hindalco considerably increased in FY 2004, but it has
decreased to great extent in FY 2007 again showing an increased in
FY 2008 i.e. 6.7 Thus, the EPS is covered by its market price by 6.7
times.

Dividend Payout Ratio

The ratio indicates what proportion of EPS has been used for paying
dividend.

Payout ratio = DPS/ EPS

Significance
The payout ratios are indicators of the amount of earning that have
been ploughed back in the business. Lower payout, the higher the
amount earnings ploughed back in the business and vice-versa.

Pay-out ratio of Hindalco

Particulars 2007-08 2006-07 2005-06 2004-05
DPS(Rs) 1.85 1.70 2.20 2.00
EPS(Rs) 24.51 25.52 16.79 13.48
Pay-out 0.07 0.07 0.13 0.15
ratio

0
Years 2007-08 2006-07 2005-06 2004-05
Interpretation
The ratio has decreased to a large extent in 2007 as compared to
previous financial years maintaining the same in 2008 i.e. 0.07. It
indicates that company is ploughing back a large amount of its
earnings for future expansion of business.
 Debt – Equity Ratio

The relationship between borrowed funds and owners capital is a

popular measure of the financial solvency of a firm. That is shown by
debt equity ratio. It is a ratio of the outsiders fund to the owner’s fund.

Debt-Equity ratio = Total Debt / Net Worth

Particulars 2007-08 2006-07 2005-06 2004-05
Debt Equity 0.48 0.59 0.51 0.50
Ratio

0.6

0.5

0.4

0.3

0.2

0.1

0
Years 2007-08 2006-07 2005-06 2004-05
Interpretation
The debt equity ratio has shown a considerable increase till FY 2007
i.e. 0.59 but again resulted in a decrease i.e. 0.48 in the FY
2008.Thus, it is apparent that there is a scope for the company to raise
further loan capital.
 Interest- Coverage Ratio

The interest coverage ratio shows the number of times the interest
charged is covered by funds that are ordinarily available for the
payment. Since taxes are computed after interest, interest-coverage is
calculated in relation to before tax earning. Depreciation is a non-cash
item. Therefore, funds equals to depreciation are also available to pay
interest charges. We can thus calculate interest coverage ratio as
earning before depreciation, interest and taxes divide by interest.

ICR = EBIDTA / Interest

Particulars 2007-08 2006-07 2005-06 2004-05
Interest 13.88 18.09 12.65 14.98
Coverage
25
Ratio
20

15

10

0
Years 2007-08 2006-07 2005-06 2004-05
Interpretation
The interest coverage ratio is considered to be ideal if it is 5 to 6 times
of interest charge is covered by funds that are ordinarily available for
the payment. Interest coverage ratio of Hindalco is showing a
downward trend in 2007-08 as compared to other years showing a
negative effect.
 Return on Capital Employed

It is calculated by dividing EBIT by capital employed.

ROCE = EBIT / Capital Employed

Particulars 2007-08 2006-07 2005-06 2004-05
EBIT 33062 38323 23279 20833
Capital 270881 208999 157370 125869
Employed
ROCE 0.12 0.18 0.14 0.16
6

0
Years 2007-08 2006-07 2005-06 2004-05

Interpretation
The ROCE has increased in the FY 2007 i.e.18% but decreased in the
FY 2008.Now it stands at 12%

FINDINGS
SUGGESTIONS
&
CONCLUSIONS
 FINDINGS

 The rate of return on equity shareholder’s fund is more than

general rate of return. Hence, Hindalco is trading on equity.
 The earnings per share of Hindalco is showing a downward trend
in FY 2007-08 i.e. 24.51 as compared to FY 2006-07 i.e. 25.52
 The dividend per share is showing an upward trend in FY 2007-
08 i.e. 1.85 as compared to FY 2006-07 which was 1.70
 The dividend payout ratio of Hindalco is showing a similar in FY
2007-08 i.e. 0.07 equal to FY 2006-07 which was 0.07
 The share capital, reserves and loan funds of Hindalco has
increased in the FY 2007-08.
 The debt equity ratio of 0.48 in FY 2007-08 is less as compared
to FY 2006-07 which was 0.59. This shows that company is not
taking keen interest in the interest of the investors.
 The Net Profit has increased in the year 2007-08 i.e 28,609 Mn.
as compared in 2006-07 i.e 25,643 Mn.
 The market Capitalization has increased from 139,627 Mn. in the
year 2006-07 to 202,599 Mn. in the year 2007-08.
 SUGGESTIONS

 The management should try to maintain trade-off between risk

and return for determining the appropriate amount of debt in
capital structure.
 The company should take advantage of financial leverage very
carefully as it also increases the financial risk.
 The management should try to substitute long term funds used
to finance current assets with short term funds are generally
cheaper. This will positively improve efficiency.
 CONCLUSIONS

 Hindalco Industries Ltd. has an appropriate capital structure.

 Hindalco is taking the full advantage of financial leverage.
 The endeavor of company is to maximize earnings per share i.e.
achieving wealth maximization objective.
On the whole, it can be said that Hindalco enjoys a
sound financial position from the point of view of all concerned
parties – the corporate management, the leading institution etc. The
overall performance of the company is satisfactory and it will further
improve when the facilities at the disposal of the company are fully
utilized. The company has chalked out expansion in alumina and
aggressive growth plans in aluminium. However, the management
must remain cautious towards the financial position of the company.
The management should take all possible steps in the near future to
improve the financial position of the company.
 BIBLIOGRAPHY

 I.M.Pandey., Financial Management

 S.N.Maheshwari., Financial Management
 Prasanna Chandra., Financial Management
 Annual Reports of Hindalco Industries Limited (2007-
08)

Magazines and Journals

 Light Metal Age

 Aluminum International Today

Websites

 www.hindalco.com
 www.adityabirla.com
 www.wikipedia.com
 CAPITAL STRUCTURE OF

HINDALCO INDUSTRIES LIMITED

Project Report
Submitted To

SCHOOL OF MANAGEMENT SCIENCES

For The Award Of

Post Graduate Diploma in Management

Submitted By:

Mirza Aatif Baig

Roll No. : PG/08/20

SCHOOL OF MANAGEMENT SCIENCES
LUCKNOW

List of Tables

 Capital Structure of Hindalco for 4 years 2004-05 to 2007-08.

 Degree of Financial Leverage.
 Leverage Ratio.
 Financial Highlights- Q4 & FY 08.
 Market Capitalization, Sales Turnover, Net Profit of Hindalco
vs. competitors.
 Per share data as on 31 March 2003-04 to 2007-08.
 Earning per share, Dividend per share, Profit Earning ratio,
Dividend payout ratio, Debt-equity ratio, Interest coverage ratio,
Return on capital employed.
 List of Figures

 Composition of Capital Structure.

 Capital Structure of Hindalco for 4 years 2004-05 to 2007-
08
 Capital Structure Decision Process.
 Financial Leverage of Hindalco for the year 2004-05 to
2007-08
 Relationship between Required rate of return to equity
shareholders, Required rate of return to lenders, Total
weighted average cost of capital.
 Inter relationship between Market Value, Financial
Decisions and Risk Return Trade-off.
 Market Capitalization.
 Integrated operation at Hindalco.
 Earning Per Share.
 Dividend Per Share.
 EPS & DPS of Hindalco Industries Ltd.
 Profit Earning Ratio, Dividend payout Ratio, Debt-Equity
Ratio, Interest coverage ratio, Return on capital employed.