Analysis of capital structure

If we talk about the capital structure of the company from the

last 15 years they have kept equity capital to Rs. 5 crore
neither they have tried to acquire new equity shares nor have
they tried to buy back their equity shares.
This is because company is earning large amount of profits
from past years due to which company is building its reserves
and using it in case of any need and moreover existing equity
shareholders are benefited by this as their control is not being
diluted as if there is going to be increase in the number of
equity shareholders so the control of equity shares will be
diluted and even there will be decrease in the earning per share
per.
Company does not believe in net operating approach of capital
structure which says that cost of debt is less than cost of equity
so if we will go for more and more debt it will decrease overall
cost of capital and will lead to increase in the overall value of
firm
Company believes in Modigliani and miller approach which says
that value of the firm depends on its earnings and not on its
capital structure and benefit which we get from the less cost of
debt is offset by higher cost of equity due to increase in the
financial risk of the equity share holders
According to the miller approach
Value of levered firm=value of unlevered firm
Levered firms are those firms which use both equity and debt
Unlevered firms are those firms which uses only equity
AstraZeneca is an unlevered firm

Capital budgeting decisions:Decisions regarding the Investment in the long term assets are
known as capital budgeting decisions
These decisions involves a lot of risk and capital so such
decisions are being taken by top level management and lot of
planning is done before taking this decisions
Company is using payback period method along with NPV
technique in order to evaluate among two alternatives
a) Payback period method is used to calculate the number
of years in which the cash inflows will be able to cover the
Initial Investment
Payback period=Initial investment/cash
inflows
The project that is having less payback period is selected,
as payback period is having certain limitations like it does
not consider the discounting factor.
b) NPV method-company is using NPV method along with
payback period in order to know the most profitable
alternative, benefit of NPV method is that it considers the
discounting factor
NPV=net present value of cash inflows-net present value
of cash outflows
Among two alternatives the alternative that is having
positive and maximum NPV is chosen
And weighted average cost of capital is being taken as
discounting factor and cost of equity is being calculated
by CAPM model under CAPM model cost of equity is being
calculated as under
Ke =Rf+beta(Rm- Rf)
Where Ke stands for cost of equity
Rf stands for Risk free rate
Rm stands for market rate