FINANCIAL MANAGEMENT

C.I.A.-1.2
TOPIC: CONSTRUCTION OF
CAPITAL STRUCTURE FOR A
BUSINESS IDEA

SUBMITTED BY: Abhishek Anand REGISTER NO.:2020202 COURSE/SECTION:3BBA-B SUBMITTED

TO:Prof. Rameesha Kalra DATE OF SUBMISSION:20th August 2021
 INDEX
S.NO. PARTICULARS PAGE NUMBER
1. Introduction to the business idea 3
2. Expected Capital Requirements 4
3. EBIT-EPS Analysis 5
4. Capital Structure of business idea 6
5. Factors considered while developing capital structure 7
6. About an existing company in the same industry 8
7. Comparing capital structure with an existing company of the industry 8
8. References 9
 INTRODUCTION TO THE BUSINESS IDEA

BUSINESS NAME: Alpha A Projects Ltd.

INDUSTRY: Engineering and construction Industry

The engineering and construction sector has reached a critical juncture. The major changes
are prompting firms to adjust to disturbances, to revisit what is feasible and to take action in
the new vision for the industries future. The cities are intelligent, modular, developing
markets, government restrictions. It is a field dedicated to the design, design, construction
and administration of infrastructures such as highways, tunnels, bridges, airports, railway
systems, buildings, dams, utilities, etc.

INTRODUCTION TO THE BUSINESS

Alpha A Projects Ltd is a profit-making, innovation, construction, technology, engineering
and manufacturing company located in Ahmedabad, India.
At Alpha A, we draw on our distinguishing E&C expertise and experiences and our digital
and forward-looking initiatives. And with our knowledge in critical risk, taxation, auditing
and assurance, we assist you to go into the future of the industry with courage and
confidence. By making the proper infrastructural and digital investments, we can help you
take advantage of this opportunity stand apart from your business — and your vision.
THE MAIN OBJECTIVE: Our objective is to guide you replenish and reconfigure your value
chain via the creation of new partnerships and alliances that will lead to bigger impacts and
demands on existing and emerging markets. We are a solutions community which combines
human brilliance, expertise and technological innovation to achieve sustainable results and
foster interest.
EXPECTED CAPITAL REQUIREMENTS
To decide the capital structure and funding, we first need to calculate the expected capital
needed for its expansion.
Particulars Amount
Advertising and promotion 400000
Insuarance of employees 200000
Office expenses 100000
Software 50000
Salaries 150000
Benefits 30000
In/Out State travels 200000
Raw material 300000
Direct cost 170000
Utilities 125000
Supplies 375000
Lease property 600000
Office electronic and furnitures 100000
Machineries 200000
Total 3000000

EBIT-EPS ANALYSIS

It holds capital surplus worth Rs. 20,00,000 and requires additional funds of Rs. 30,00,000
for its expansion. Current estimates of Earnings Before Interest and Taxes (EBIT) from the
new project are Rs. 15,00,000 p.a. assuming corporate tax rate to be 25%. The management
has come up with four different financial plans but one of them is the best. Therefore, we
have to analyse and decide the final plan that has to be implemented. Following are the four
different financial plans:
I) All Equity Shares @ RS.10 per share
II) Rs. 10,00,000 through Equity Shares, Rs. 10,00,000 through 10% Preference
Shares and the remaining balance through 7% Long-Term Borrowings.
III) Rs. 25,00,000 through Equity Shares and the remaining balance through Long
Term Borrowings at 8% interest.
IV) Rs. 20,00,000 through Equity Shares and the remaining balance through 13%
Preference Shares.
 Particulars I II III IV
EBIT 1500000 1500000 1500000 1500000
-INTEREST - 70000 40000 -
EBT 1500000 1430000 1460000 1500000
-TAX@25% 375000 357500 365000 375000
EAT 1135000 1072500 1095000 1135000
-PREF.DIV. - 107250 - 147550
EAESH 1135000 965250 1095000 987450
NO.OF 300000 100000 250000 200000
SHARES
EPS 3.783 9.653 4.38 4.937
On comparing the financial plans above the Financial Plan II is preferable as the Earning Per
Share (EPS) value is the highest i.e., 9.653 in the Financial Plan II.

CAPITAL STRUCTURE
PARTICULARS AMOUNT PROPORTION
EQUITY SHARE 500000 10%
CAPITAL
PREFRENCE SHARE 1000000 20%
CAPITAL
LONG TERM 1500000 30%
BORROWINGS
CAPITAL SURPLUS 2000000 40%
TOTAL 5000000 100%

IMPORTANT FACTORS TO TAKE INTO ACCOUNT WHEN DEVELOPING THE

CAPITAL STRUCTURE
One of the major reasons for raising 30% of capital through long-term debt is to help the
company deal with any unanticipated economic difficulties that may arise as a result of the
COVID-19 outbreak. This also allows firms to take advantage of any future benefits.
• Interest must be paid on all debts, regardless of income. Equity, on the other hand, is
money, and shareholder payments are based on earnings. High capital debt is risky,
and it might be a problem if you're in a bad situation. Debt, on the other hand, is less
expensive than the shares issued. Certain tax deductions apply to debt interest, but not
to dividends paid to shareholders.As a result, we maintained an equal balance between
debt and equity in order to maximise the benefits of both debt and equity for the firm,
and we opted to retain our debt equity ratio at 1.
 • In the aforementioned capital structure, preference capital is chosen over equity
capital since preference capital has its own advantages over equity in that it bears less
risk and pays preference shareholders a set dividend rate.
• It applies to bank and other institution loans when the business needs to raise funds
for a short period of time, and to shareholdings and debentures when the firm needs to
raise cash for a long period of time. We selected shares and debentures as a source of
funding because our firm is a long-term endeavour.
• Because generating funds through debt is less expensive and easier than raising funds
through stock and preference shares, the company raises a large portion of its capital
through debt, or long-term borrowings. The company receives tax benefits, which
saves them a lot of money.
• We've issued additional debentures with this goal in mind because they may be
redeemed quickly at the firm's discretion and so provide us greater flexibility.
• Long-term borrowings are the greatest choice for the company to produce money
because many consumers and institutional investors will not be interested in investing
in a developing corporation.
• Since the Indian market has been bullish for more than a year and now may be the
best moment to raise money through the Indian Stock Exchange, a modest amount,
i.e., 10% of the capital, will be raised through equity shares capital.

INTRODUCTION TO LARSEN AND TOUBRO LIMITED AN EXISTING

COMPANY IN THE SAME INDUSTRY

Larsen & Toubro LTD.

Larsen & Toubro is an Indian corporation that is focused on procurement, engineering (EPC)
and high-tech production and services projects.
The company is renowned for its important infrastructural, industrial and social
achievements. The media called it "the twenty-first century Indian builder." L&T has both a
worldwide and numerous international supply networks. In addition to India, there are eight
nations in the company's production network.
 CAPITAL STRUCTURE OF Alpha A Projects LTD.
PARTICULARS AMOUNT PROPORTION
EQUITY SHARE 500000 10%
CAPITAL
PREFRENCE SHARE 1000000 20%
CAPITAL
LONG TERM 1500000 30%
BORROWINGS
CAPITAL SURPLUS 2000000 40%
TOTAL 5000000 100%
CAPITAL STRUCTURE OF Larsen and Toubro LTD.
PARTICULARS AMOUNT PROPORTION
EQUITY SHARE 28100000000 0.18%
CAPITAL
PREFRENCE SHARE 11240000000 0.71%
CAPITAL
LONG TERM 8099600000000 51.39%
BORROWINGS
CAPITAL SURPLUS 7520400000000 47.72%
TOTAL 15760500000000 100%

INFERENCES-
I) In comparison to preference shareholders, debenture equity shareholders Holders
have the most votes in a corporation. The management of both firms, as well as
the managers of both companies, desire to retain their full voting rights. As a
result, the funds received by both businesses include relatively little equity share
capital.
II) As a corollary, when sales are high, rentability is high, and the company's ability
to satisfy established bonds is the most effective way to collect cash. L&T is able
to satisfy specified obligations due to its well-established business with rising
market share and significant turnover.
III) L&T Limited is a well-established leader in its category and so it is easy to secure
long-term loans from financial institutions and the majority of the money gained
are through Long-term Borrowings. The Alpha A Projects Limited is likewise a
developing enterprise and investors are not prepared to engage in the company;
thus, stock is not the ideal alternative to raise significant sums of money. The bulk
of the funds can therefore be raised by long-term borrowing.
IV) It was highlighted that debt borrowing funds are less expensive than share capital
for a company, as shareholders foresee a further revenue reduction in its highly
 lucrative age. Together with L&T Limited and Alpha A, the collection of debt
money is more profitable.
V) Since the COVID-19 outbreak struck the country, L&T required funds instead of
share capital for a limited period to pay off the working capital borrowed from
banks and other financial institutions.

REFERENCES –
Learn Accounting: Notes, Procedures, Problems and Solutions. 2021. Top 17 Factors
Determining the Capital Structure. [online] Available at:
https://www.accountingnotes.net/financial-management/capital-structure/top-17-factors-
determining-the-capital-structure/7956

L&T India | Larsen & Toubro. (n.d.). Larsen & Toubro Limited. Retrieved August 20, 2021,
from https://www.larsentoubro.com/
https://investors.larsentoubro.com/Financials.aspx