Final project report

On
“A STUDY OF Capital Structure”

I.K. GUJRAL PUNJAB TECHNICAL UNIVERSITY KAPURTHALA

In partial fulfillment of the requirement for the award of degree of

Master of Business Administration (MBA)

Submitted by: Submitted to:

Anurag Jamwal Ms. Aayushi
2235273 Assistant Professor

CHANDIGHAR SCHOOL OF BUSINESS

DEPARTMENT OF MANAGEMENT
2022-2024

1
2
 STUDENT DECLARATION

ANURAG JAMWAL student of MBA — Semester 3 (2022-2024) hereby

Declare that I have completed this project on WIPROTECH LTD

On CAPITAL STRUCTURE. The information submitted is true & original to
the best of my knowledge. The conclusions and recommandations written in
this project are based on
The data collected by me while on internship

Siqnature

3
 FACULTY DECLARATION
I here by declar that student Mr. Anurag jamwal of MBA (II)
Has undergone his summer training under my preodic
Guidance on the project titled “CAPITAL STRUCTURE’.

Furher I hereby that the student was predocially in touch with me during his/her training period and the work done by
student is genuine & original.

_______________________
Signature of supervisor
CHAPTER PARTICULARS PAGENO:
NO:
01 Introduction 1-3
1.1Backgroundofthe study 2
1.2 Statement oftheProblem 3
1.3 Relevance & Scopeof the Study 3
1.4ObjectivesoftheStudy 3
02 Reviewof Literature 4-12
3.1BriefTheoreticalConstructrelatedtothe Problem 4-6
3.2OverviewofEarlier Studies 7-9

3.3UniquenessofResearch Study 10-12

03 MethodologyofStudy 13-18
4.1Research ApproachandDesign 14

4.2SourcesofOnline Data 15

4.3Sampling Design 16
4.4DataAnalysisTool 17
4.5Report Structure 17
4.6Limitations of theStudy 18

04 DataAnalysis,InterpretationAnd Inference 19-38

05 FindingsOfTheStudy 39-41
06 Conclusion 42-43
07 Questionaries 44-45
08 Bibliography 45-49
 CHAPTER- 1
INTRODUCTION

1
BACKGROUNDOFTHESTUDY

Finance is regarded as the lifeblood of an enterprise. This is because in the modern money
oriented economy. Finance is one of the bank foundations for all kinds of economic
activities. It is the master key, which provides access to all sources for being employed in
manufacturing and merchandising activities. It is rightly being said that business needs
money to make more money. However, it is also true that money be gets more money, only
when it is properly managed. Hence, efficient management of every business enterprises is
closely linked with efficient management of its finances.

Financeis a system that involves the exchange of funds between the borrowers and the
lenders and investors. It operates at various levels from firms to global to national levels.
Thus, there are many complexities involved in it related to markets, institutions, etc.

A firm communicates financial information to the users through financial statement and reports.
The financial statements contain summarized information of the firm’s financial affairs. The
amount of information contained in a co-operative financial statement is voluminous spanning
the co-operatives internal operations, its relationship with the outside world and its relationship
with its members. To be useful this information must be organized into an understandable,
coherent and sufficiently limited set of data. Analysis and interpretation of financial statements
can be beneficial in this respect because it highlights a firm’s strengths and weakness. Financial
statements provide certain basic information that focus on the entity as a whole and meet the
common needs of external users.
Financial statement analysis is a common technique that allows small business owners to review
their company’s operational performance. Small business owners will need to create financial
statementsfromtheircompany’sbusinessrepresentanaggregatetotalof thecompany’sbusiness
information during a certain time period. It is a process of evaluating the relationship between
component parts of a financial statement, to obtain a better understanding of a firm’s positionand
performance.

2
STATEMENTOFTHEPROBLEM
Capital structure is the proportion of debt and equity financing of a firm. It indicates how the
company operation of a business is financed. Ratio analysis is a tool for financial statement
analysis which helps the management to measure the financial position and capital structure of
thecompany(Federalbank).Thestudycanbecomprisesthat“AStudyonCapitalStructureof Federal
bank”.

RELEVANCE&SCOPEOFTHESTUDY

The study provides a reliable indication of a company’s financial position, operating results and
changes in financial position. The study helps in measuring the financial performance of the
company. The study in analyzing the trend of various ratios.

OBJECTIVESOFTHE STUDY
 ToanalyzethecapitalstructureofFEDERALBANKLTD.
 Tocalculate ratiosandto performtrendanalysis.
 Tomeasuretheefficiencyofthe operation.

3
 CHAPTER- 2
REVIEW OF LITERATURE

4
BRIEFTHEORETICALFRAMEWORKCONSTRUCTRELATED TO THE
PROBLEM

A mix of a company’s long- term debt, specific short- term debt, common equity and preferred
equity. The capital structure is how a firm finances its overall operations and growth by using
different sources of funds.

ClarifyingCapitalstructureandRelatedTerminology

The equity part of the debt- equity relationship is the easiest to define. In a company’s capital
structure, equity consists of a company’s common and preferred stock plus retained earnings,
which are summed up in the shareholder’s equityaccount on a balance sheet. This invested
capital and debt, generally of the long term variety, comprises company’s capitalization i.e, a
permanent type of funding to support a company’s growth and related assets.

A discussion of debt is less straightforward. Investment literature often equates a company’s

debts with its liabilities. Investors should understand that there is a difference between
operational and debt liabilities- it is the later tat forms the debt component of a company’s
capitalizationbut that’s not the end of the debt story.

Among financial analysts and investment researchservices, there is no universal as to what

constitutes a debt liability. For many analysis, the debt component in a company’s capitalization
is simply a balance sheet’s long- term debt. This definition is too simplistic. Investors should
stick to a stricter interpretation of debt where the debt component of a company’s capitalization
should consists of the following: short term borrowings, the current portion of long- term debt,
long- term debt, two thirds of the principal amount of operating leases and redeemable preferred
stock. Using a comprehensive total debt figure is a prudent analytical tool for stock investors.

5
Its worth noting here that both international and U.S financial accounting standards boards are
proposing rule changes that would treat operating leases and pension “projected- benefits” as
balance sheet obligations that have all the earmarks of debt.

Financial terms, debt is a good example of the proverbial two- edged sword. Astute use of
leverage(debt)increasetheamount of financial resources availableto a companyforgrowth and
expansion. The assumption is that management can earn more on borrowed funds than it pays in
interest expense and fees on these funds. However, as successful as this formula may seem, it
does require that a company maintain a solid record complying with its borrowing committee.

Fig2.5CapitalStructure

ObjectivesofCapitalStructure
 Todetermineiftheproportion ofdebttoequityenablesanentitytocreate wealthwithout unduly
jeopardizing the firm.
 Evaluatethekeystructuralfeaturesofacompany’sexistingandnewfinancialobligations and
their potential effect on the company’s financial flexibility, cash flows and credit quality
or rating.

6
  Understand how to assess various types of debt instruments in terms of advantages and
disadvantages to the issuer and the investor, when the instrument should be used and
when it may be inappropriate, focusing on bank debt, hybrids, bonds/ notes and asset
securitization.
 Identify the key drivers of company and sector performance and the potential impact on
profitability, cash flow, access to capital etc, in order to assess a company’s ability to
meet its existing obligations and determine the appropriate funding structure.
 Consider the degree to which the level of indebtedness might affect liquidity and the
potential impact on business strategy and ability to finance future growth.
 Describetheadvantagesanddisadvantagesoffinancialleverage.
 Compute the financial leverage index, debt to capital ratio, debt to equity ratio and other
techniques for analyzing capital structure. Relate capital structure composition to owner
and creditor investment objectives.
 Capital structure composition consists of long- term liabilities, preferred stock. Common
stock and retained earnings. Sufficient equity must exist to provide financial stability.
 Debt can be used as leverage to increase returns to shareholders, but it can also reduce
returns on shareholders investments.

TheoriesofCapitalstructure

1. Trade-offTheory

Trade- off theory allows the bankruptcy cost to exist. It states that there is an advantage to
financingwithdebtandthatthereisacost offinancingwithdebt.Themarginalbenefitoffurther increase
in debt declines as debt increases, while the marginal cost increases,so that a firm thatis
optimizing its overall value will focus on this trade- off when choosing how much debt and
equity to use for financing. Empirically, this theory may explain differences in D/E ratios
between industries, but it doesn’t explain differences within the same industry.

7
 2. PeckingOrder Theory

Pecking order theory tries to capture the costs of asymmetric information. It states thatcompanies
prioritize their sources of financing according to the law of least effort, or of least resistance,
preferring to raise equity as a financing means “of last resort”. Hence: internal financing is used
first; when that is depleted, then debt is issued; and when it is no longersensibleto issueany
moredebt, equity is issued. This theory maintain that businessesadhereto a hierarchy of financing
sources and prefer internal financing when available and debt is preferred over equity if external
ownership into the company. Thus, the form of debt a firm chooses canact as a signal of its need
for external finance. The pecking order theory is popularized by Myers (1984) when he argues
that equity is a less preferred means to raise capital because when managers issue new equity,
investors believe that managers think that the firm is overvalued and managers are taking
advantages of this over- valuation. As a result, investors will place a lower value to the new
equity issuance.

ANOVERVIEWOFEARLIERSTUDIES

The concept of optimal capital structure is expressed by Myers (1984) and Myersand Majluf
(1984) based on the notion of asymmetric information. The existence of informationasymmetries
between the firm and likely finance providers causes the relative costs of finance to vary among
different sources of finance. For example, an internal source of finance where the funds provider
is the firm will have more information about the firm than new equity holders,
thusthesenewequityholderswillexpectahigherrateofreturnontheirinvestments.Thismeans it will
cost the firm more to issue fresh equity shares than to use internal funds. Similarly, this argument
could be provided between internal finance and new debt-holders. The conclusion drawn from
the asymmetric information theories is that there is a certain pecking order or hierarchy of firm
preferences with respect to the financing of their investments (Myers and Majluf, 1984). This
pecking order‖ theory suggests that firms will initially rely on internally
generatedfunds,i.e,undistributedearnings,wherethereisnoexistenceofinformation
8
asymmetry; they will then turn to debt if additional funds are needed, and finally they will issue
equity to cover any remaining capital requirements. The order of preferences reflects the relative
costs of various financing options. Clearly, firms would prefer internal sources to costly external
finance (Myers and Majluf, 1984). Thus, according to the pecking order hypothesis, firms thatare
profitable and therefore generate high earnings are expected to use less debt capital thanthose
that do not generate high earnings.

Capital structureof the firm can also be explained in terms ofthe tax benefits associated with the
use of debt. Green, Murinde and Suppakitjarak (2002) observe that tax policy has an important
effect on the capital structure decisions of firms. Corporate taxes allow firms to deduct
interestondebtincomputingtaxableprofits.Thissuggeststhattaxadvantagesderivedfromdebtwould
leadfirmstobecompletelyfinancedthroughdebt.Thisbenefitiscreated,astheinterest
paymentsassociatedwith debtaretaxdeductible, whilepaymentsassociatedwith equity,suchas
dividends, are not taxdeductible. Therefore, this tax effect encourages debt use by the firm, as
more debt increases the after tax proceeds to the owners (Modigliani and Miller, 1963; Miller,
1977). It isimportant to note that whilethere is corporate tax advantage resulting from the
deductibility of interest payment on debt, investors receive these interest payments as income.
The interest income received by the investors is also taxable ontheir personal account, and the
personal income tax effect is negative. Miller (1977) and Myers (2001) argue that as the supply
ofdebtfromallcorporationsexpands,investorswithhigherandhighertaxbracketshavetobeenticedtoho
ldcorporatedebtandtoreceivemoreoftheirincomeinthe form of interest rather than capital gains.
Interest rates rise as more and more debt is issued, so corporations face rising costs of debt
relative to their costs of equity. The tax benefits arising from the issue of more corporate debt
may be offset by a high tax on interest income. It is the trade-off that ultimately determines the
net effect of taxes on debt usage (Miller, 1977; Myers, 2001).

Bankruptcy costs are the costs incurred when the perceived probability that the firm will default
on financing is greater than zero. The potential costs of bankruptcy may be both direct and
indirect. Examples of direct bankruptcy costs are the legal and administrative costs in the
bankruptcyprocess.HaugenandSenbet(1978)arguethatbankruptcycostsmustbetrivialor

9
nonexistent if one assumes that capital market prices are competitively determined by rational
investors. Examples of indirect bankruptcy costs are the loss in profits incurred by the firm as a
result of the unwillingness of stakeholders to do business with them. Customer dependency on a
firm‘s goods and services and the high probability ofbankruptcy affect the solvency of firms
(Titman, 1984). If a business is perceived to be close to bankruptcy, customers may be less
willing to buy its goods and services because of the risk that the firm may not be able to meet its
warranty obligations. Also, employees might be less inclined to work for the business or
suppliers less likely to extend trade credit.

These behaviors by the stakeholders effectively reduce the value of the firm. Therefore, firmsthat
have high distress cost would have incentives to decrease outside financing so as to lower these
costs. Warner (1977) maintains that such bankruptcy costs increase with debt, thusreducing the
value of the firm. According to Modigliani and Miller (1963), it is optimal for afirm to
befinanced by debt in orderto benefit from thetaxdeductibility ofdebt. Thevalueofthe firm can be
increased by the use of debt since interest payments can be deducted from taxable corporate
income. But increasing debt results in an increased probability of bankruptcy. Hence, the optimal
capital structure represents a level of leverage that balances bankruptcy costs and benefits of debt
finance. The greater the probability of bankruptcy a firm faces as the result of increases in the
cost of debt, the less debt they use in the issuance of new capital (Pettit and Singer, 1985).

The use of debt in the capital structure of the firm also leads to agency costs. Agency costs arise
as a result of the relationships between shareholders and managers, and those between debt-
holders and shareholders (Jensen and Meckling,1976). The relationships can be characterized as
principal-agent relationships. While the firm‘s management is the agent, both the debt holders
and the shareholders are the principals. The agent may choose not to maximize the principals‘
wealth. The conflict between shareholders and managers arises because managers hold less than
100%oftheresidualclaim(HarrisandRaviv,1990).Consequently,theydonotcapturetheentire gain
from their profit-enhancing activities but they do bear the entire cost of these activities.
Separation of ownership and control may result in managers exerting insufficient
work,indulginginperquisites,andchoosinginputsandoutputsthatsuittheirownpreferences.

10
Managers may invest in projects that reduce the value of the firm but enhance their control over
its resources. For example, although it may be optimal for the investors to liquidate the firm,
managers may choose to continue operations to enhance their position. Harris and Raviv (1990)
confirm that managers have an incentive to continue a firm‘s current operations even if
shareholders prefer liquidation.

On the other hand, the conflict between debt-holders (creditors) and shareholders is due to moral
hazard. Agency theory suggests that information asymmetry and moral hazard will be greater for
smaller firms (Chittenden et al., 1996). Conflicts between shareholders and creditors may arise
because theyhavedifferent claims on the firm. Equity contracts do not requirefirms to pay fixed
returns to investorsbut offer a residual claim on a firm‘s cash flow. However, debt contracts
typically offer holders a fixed claim over a borrowing firm‘s cash flow. When a firm finances a
project through debt, the creditors charge an interest rate that they believe is adequate
compensation for the risk they bear. Because their claim is fixed, creditors are concerned about
the extent to which firms invest in excessively risky projects. For example, after raising funds
from debt-holders, the firm may shift investment from a lower-risk to a higher-risk project.

According to Jensen and Meckling (1976), the conflict between debt-holders and equity-holders
arises because debt contract gives equity-holders an incentive to invest sub optimally. More
specifically, in the event of an investment yielding large returns, equity-holders receive the
majority of the benefits. However, in the case of the investment failing, because of limited
liability, debt-holders bear the majority of the consequences. In other words, if the project is
successful,thecreditorswillbepaidafixedamountandthefirm‘sshareholderswillbenefitfrom its
improved profitability. If the project fails, the firm will default on its debt, and shareholders will
invoke their limited liability status. In addition to the asset substitution problem between
shareholders and creditors, shareholders may choose not to invest in profitable projects (under
invest) if they believe they would have to share the returns with creditors.

The agency costs of debt can be resolved by the entire structure of the financial claim. Barnea et
al. (1980) argue that the agency problems associated with information asymmetry, managerial
(stockholder)riskincentivesandforgonegrowthopportunitiescanberesolvedbymeansofthe
11
maturity structure and call provision of the debt. For example, shortening the maturity structure
of the debt and the ability to call the bond before the expiration date can help reduce the agency
costs of underinvestment and risk-shifting. Barnea et al. (1980) also demonstrate that both
features of the corporate debt serve as identical purposes in solving agency problems.

3.3.UNIQUENESSOFTHESTUDY

The Capital Structure or financial leverage decision should be examined from the point of its
impact on the value of the firm. If capital structure decision can affect a firm‘s value, then it
would like to have a capital structure, which maximizes its market value. However, there exist
conflicting theories on the relationship between capital structure and the value of a firm. The
traditionalists believe that capital structure affects the firm‘s value while Modigliani and Miller
(MM), under the assumptions of perfect capital markets and no taxes, argue that capital markets
and no taxes, argue that capital structure decision is irrelevant. MM reverses their position when
they consider taxes. Tax savings resulting from interest paid on debt create value for the firm.
However, the tax advantage of debt is reduced by personal taxes and financial distress.

12
 CHAPTER- 3
METHODOLOGY OF THE STUDY

13
RESEARCHAPPROACHANDDESIGN

Secondary data will be used to measure the debt ratio and the determinants of capital structure.
Capitalstructure,whichisdefinedastotaldebttototalassets atbookvalue.Inthis
study,ourdependentvariablecapitalstructurewillbemeasuredbytotaldebtover total
assetsratio.Weusethismeasurebecauseitprovidesinformationtoafirm’s policy for both short-term
and long term debt. In addition to the records of the bank, data were also collected from banking
bulletin, websites, newspapers, annual report, money control and various journals.

Capital structure is the major part of the firm‘s financial decision which affects the value of the
firm and it leads to change EBIT and market value of the shares. There is a relations hip among
thecapital structure, cost of capital and valueofthefirm. Theaim ofeffectivecapital structureis to
maximize the value of the firm and to reduce the cost of capital.

There are two major theories explaining the relations hip between capital structure, cost ofcapital
and value of the firm.

A. TraditionalApproach

It is the mix of Net Income approach and Net Operating Income approach. Hence, it is alsocalled
as inter mediate approach. According to the traditional approach, mix of debt and equity capital
can increase the value of the firm by reducing overall cost of capital up to certain level of debt.
Traditional approach states that the Ko decreases only within the responsible limit of financial
leverage and when reaching the minimum level, it starts increasing with financial leverage.
Assumptions:-
Capital structure theories are based on certain assumption to analysis in a single and convenient
manner:
 Thereareonly twosources of fundsused byafirm; debt and shares.
 Thefirm pays100%of itsearning asdividend.

14
  Thetotal assets aregiven and do not change.
 Thetotal financerema ins constant.
 Theoperatingprofits(EBIT) arenotexpectedtogrow.
 Thebusiness risk remains constant.
 Thefirm has aperpetual life.
 Theinvestors behaverationally.

B. NetIncome(NI) Approach

Net income approach suggested by the Durand. According to this approach, the capital structure
decision is relevant to the valuation of the firm. In other words, a change in the capital structure
leads to a corresponding change in the overall cost of capital as well as the total value of thefirm.

According to this approach, use more debt finance to reduce the overall cost of capital and
increase the value of firm.

Netincomeapproach isbased onthe followingthreeimportantassumptions :

 Therearenocorporatetaxes.
 Thecost debtis lessthanthecost of equity.
 Theuseof debtdoes not changetherisk perceptionofthe investor.

Where,

V = S+B
V=Value offir m
S=Marketvalueofequity B
= Market value of debt

Marketvalue oftheequity canbeascertained bythefollowing formula:

15
S =NI/ Ke
Where,
NI=Earningsavailabletoequityshareholder
Ke=Costofequity/equitycapitalizationrate

C. NetOperatingIncome(NOI) Approach

Another modern theory of capital structure, suggested by Durand. This is just the opposite to the
Net Income approach. According to this approach, Capital Structure decision is irrelevant to the
valuation of the firm. The market value of the firm is not at all affected by the capital structure
changes.

Accordingtothisapproach,thechangeincapitalstructurewillnotleadto anychangeinthetotal value of

the firm and market price of shares as well as the overall cost of capital.

NIapproach isbased on thefollowingimportant assumptions;

 Theoverallcostofcapitalremains constant.
 Therearenocorporatetaxes.
 Themarketcapitalizes thevalue ofthe firm asa whole.

Valueofthefirm(V)canbecalculated with thehelp ofthe followingformula

V=EBIT /K0

D. ModiglianiandMiller Approach

Modigliani and Miller approach states that the financing decision of a firm does not affect the
market value of a firm in a perfect capital market. In other words MM approach maintains that
the average cost of capital does not change with change in the debt weighted equity mix or
capital structures of the firm.

ModiglianiandMillerapproachisbased onthe followingimportant assumptions:

 Thereisa perfectcapitalmarket.
16
  Therearenoretainedearnings.
 Therearenocorporate taxes.
 Theinvestorsactrationally.
 Thedividendpayoutratiois 100%.
 Thebusiness consists ofthesame levelof business risk.

SOURCEOFONLINE DATA

The data source was secondary to this subject. The performance of the banks was taken from the
bank’swebsites,annualreports,Moneycontrol,Equitymaster,Economictimes,variousjournals and
research papers on financial performance.

SAMPLINGDATA

Secondarydata sources;

 Company records
 Annual report
 Internet

DATAANALYSISTOOLS
 Trendpercentageanalysis
 Ratioanalysis

17
LIMITATIONSOFTHESTUDY

 Thisprojectreportdatacollectedfromsecondarysourcesonly.
 Thedatacollectedonlyaperiodof5yearsandthisisnotenoughformakinga detailed
analysis.
 Thereisalackofavailabilityprimarydata.
 There was no opportunity to interact with the employees and record data
directlyfrom them.

18
 CHAPTER-5
DATA ANALYSIS INTERPRETATION&INFERENCE

19
RATIOANALYSIS
Ratio analysisis a quantitative method of gaining insight into a company's liquidity, operational
efficiency, and profitability by studying its financial statements such as the balance sheet and
income statement. Ratio analysis is a cornerstone of fundamental equity analysis. It includes,

EPS(EarningPerShare)

Earnings per share(EPS) is calculated as a company's profit divided bythe outstanding shares of
its common stock. The resulting number serves as an indicator of a company's profitability. It is
common for a company to report EPS that is adjusted for extraordinary items and potential share
dilution. The higher a company's EPS, the more profitable it is considered.

𝑬𝑷𝑺= 𝑵𝒆𝒕𝑷𝒓𝒐𝒇𝒊𝒕
𝑵𝒐.𝒐𝒇𝒆𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒔

Years EarningPer Share(%)

2016 2.77

2017 4.83

2018 4.62

2019 6.28

2020 7.76

Table5.1.1EPS

20
 9
8
7
6
5
4
3
2 EPS
1
0
20162017201820192020

Fig5.1.1EPS

Interpretation
In the sense of earnings per share of the Federal bank, it shows a gradual growth in the 2
consecutive years then it show a slight decline in the year 2018. After it is increased. That seems
there is no risk for investors.

NetProfitRatio

The net profit of a company, organization or any individual or entity that does business, is its
profit after operating expenses and all other charges including depreciation, interest, and taxes
have been deducted from total revenue.

Years Net Profit(%)

2016 6.14

2017 9.57

2018 9.01

2019 10.89

2020 11.67

Table5.1.2NetProfitRatio

21
 14
12
10
8
6

NetProfitRatio

4
2
0

2016 2017 2018 2019 2020

Fig5.1.2NetProfitRatio
Interpretation
Inthefigureshowsthenetprofitratiooffederalbank.In2020thenetprfitratiois11.67%and ith is the
highest rate.

CapitalAdequacyRatio
Capital Adequacy is a major indicator of the financial health of a bank. It indicates whether the
bank has enough capital to absorb unexpected losses. It reflects the overall financial position of
the banks and also the ability of the management to meet the need for additional capital and also
to maintain depositor’s confidence and preventing the bank from going bankrupt.

𝑇𝑖𝑒𝑟(𝑖)𝐶𝑎𝑝𝑖𝑡𝑎𝑙+𝑇𝑖𝑒𝑟(𝑖𝑖)𝐶𝑎𝑝𝑖𝑡𝑎𝑙
𝐶𝐴𝑅= ∗100
𝑅𝑖𝑠𝑘𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑𝐶𝑎𝑝𝑖𝑡𝑎𝑙

Years CapitalAdequacyRatio(%)

2016 13.93

2017 12.39

2018 14.70

22
 2019 13.98

2020 14.35

Table5.1.3CAR

15
14.5
14
13.5
13
12.5
12 CAR
11.5
11

20162017201820192020

Fig5.1.3CAR

Interpretation

Fig5.3showsthecapitaladequacyratiooffederalbank. In2016itis13.93%thenin2017it declines.

In 2018 the highest growth rate.

ReturnOn Equity
TheROEratioiscalculatedbydividingthenetincomeofthecompanybytotal shareholderequityand is
expressed as a percentage. The ratio can be calculated accurately ifboth the net income and
equity are positive in value.

𝑁𝑒𝑡𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐸= ∗100
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′𝑠𝐸𝑞𝑢𝑖𝑡𝑦

22
 Years ReturnonEquity(%)

2016 5.87

2017 9.29

2018 7.20

2019 9.37

2020 10.63

Table5.1.4Returnon Equity

ROE

5.87
10.63 2016
2017
2018
9.29 2019
2020

9.37

7.2

Fig5.1.4Returnon Equity

Interpretation
Thereturnonequityoffederalbankshowsthegradualgrowthineachyear.In2020ROEis 10.63%and
that is the highest rate.

24
CosttoIncomeRatio
Cost-to-incomeratioiscalculatedbydividingtheoperatingexpensesbythe operatingincomegenerated
i.e.net interest incomeplus the otherincome.Cost-to-income ratiois important for determining the
profitability of a bank.

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔𝐶𝑜𝑠𝑡
𝐶𝑜𝑠𝑡𝑡𝑜𝐼𝑛𝑐𝑜𝑚𝑒= ∗100
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒

Years Costto Income(%)

2016 32.99

2017 33.85

2018 35.40

2019 33.54

2020 33.26

Table5.1.5Costto Income

35.5
35
34.5
34
33.5
33
32.5 CosttoIncome
32
31.5

20162017201820192020

Fig5.1.5 Costto Income

25
Interpretation

Fromthe abovetable,it is foundthat in 2018 hasthehighest costof incomerate 35.40%.

ReturnonAssets Ratio

The return on assets shows the percentage of how profitable a company's assets arein generating
revenue.

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐴= ∗100
𝑇𝑜𝑡𝑎𝑙𝐴𝑠𝑠𝑒𝑡

Years ReturnonAsset(%)

2016 0.52

2017 0.72

2018 0.68

2019 0.78

2020 0.85

Table5.1.6ROA

ROA
2016
0.85% 0.52%
0.72% 2017
2018
0.78%
2019
0.68%
2020

Fig5.1.6Returnon Asset
26
Interpretation

Fig5.6showsthereturnonassetofthefederalbank.In2016therateofreturnonassetis0.52% and at last in

2020 it is increased with 0.85%.

ReturnOnCapitalEmployedRatio

Return on capital employed is an accounting ratio used in finance, valuation, and accounting.
Itisausefulmeasureforcomparingtherelativeprofitabilityofcompaniesaftertakingintoaccount the
amount of capital used.

𝐸𝐵𝐼𝑇
𝑅𝑂𝐶𝐸= ∗100
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑

Years ReturnonCapitalEmployed(%)

2016 1.59

2017 1.71

2018 1.68

2019 1.77

2020 1.80

Table5.1.7 ROCE

27
 2
1.8
1.6
1.4
1.2
1

ROCE
0.8
0.6
0.4
0.2
0

2016 2017 2018 2019 2020

Fig5.1.7ROCE

Interpretation

Fig5.7showsthereturnoncapitalemployedofthefederalbank.In2017,thereisagradual growth and in

2018 it will declined then it will moved upward.

CreditDeposit Ratio

Credit-Deposit ratio is expressed as percentage of loan issued by banks from the deposits
received from customers. It reflects the capacity of banks to lend. Higher the ratio, more credit
the bank generates from its deposits. Credit Deposit ratio is influenced by certain factors like
credit-deposit growth, cash reserves and investments of the banks. Banks sanction credit after
fulfilling the requirements of cash reserves and statutory liquidity out of its deposits. A higher
ratio reveals more reliance on deposits for lending and vice-versa.

𝐶𝑟𝑒𝑑𝑖𝑡𝐷𝑒𝑝𝑜𝑠𝑖𝑡𝑅𝑎𝑡𝑖𝑜= 𝑇𝑜𝑡𝑎𝑙 𝐴𝑑𝑣𝑎𝑛𝑐𝑒

∗100
𝑇𝑜𝑡𝑎𝑙𝐷𝑒𝑝𝑜𝑠𝑖𝑡

28
 Years CreditDeposit Ratio(%)

2016 72.92

2017 81.87

2018 78.84

2019 74.32

2020 72.92

Table5.1.8CreditDepositRatio

82

80

78

76

CreditDeposit
74

72

70

68

2016 2017 2018 2019 2020

Fig5.1.8CreditDepositRatio

Interpretation

Inabovefigure,itisclearthatin2019isthehighestwiththeaverageof81.94,in2020isthe second highest

with the average of 80.94.

29
CurrentRatio

The current ratio is a liquidity ratio that measures a company’s ability to pay short- term
obligations or those due within one year. It tells investors and analysts how a company can
maximize the current assets on its balance sheet to satisfy its current debt and other payables.

𝐶𝑢𝑟𝑟𝑒𝑛𝑡𝐴𝑠𝑠𝑒𝑡
𝐶𝑢𝑟𝑟𝑒𝑛𝑡𝑅𝑎𝑡𝑖𝑜=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡𝐿𝑖𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

30
 Years CurrentAsset CurrentLiabilities Ratio

2016 68692.56 1990.54 34.50

2017 86291.37 2472.66 34.89

2018 107075.51 2577.73 41.53

2019 127043.48 3331.28 38.13

2020 144265.38 3457.93 41.72

Table5.1.9CurrentRatio

45
40
35
30
25
20

CurrentRatio

15
10
5
0

2016 2017 2018 2019 2020

Fig5.1.9CurrentRatio
Interpretation

Theabovefigureshows thatthecurrentratio intheyear2016was34.50 andthe in increases

34.89and41.53(2017-2018). Furthermoveupwardsto 41.72in theyear 2020.

AbsoluteLiquidityRatio

The relationshio between the liquid assets and current liabilities is established by this ratio.

32
Absolute liquid assets take into account cash in hand, cash at bank and marketable securities or
temporary investments.

𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒𝐿𝑖𝑞𝑢𝑖𝑑𝐴𝑠𝑠𝑒𝑡𝑠
𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒𝐿𝑖𝑞𝑢𝑖𝑑𝑅𝑎𝑡𝑖𝑜=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Years Cashand Bank CurrentLiabilitities Ratio

2016 5419.81 1990.54 2.72

2017 7452.17 2472.66 3.01

2018 9203.41 2577.73 3.57

2019 10066.80 3331.28 3.02

2020 12574.58 3457.93 3.63

Table5.1.10 AbsoluteLiquidity Ratio

32
 4

3.5

2.5

2
AbsoluteLiquidityRatio
1.5

0.5

0
2016 2017 2018 2019 2020

Fiq5.1.10 AbsoluteLiquidity Ratio

Interpretation

Theacceptablenormforthisratiois1:2toattainliquidityposition.Infederalbankliquidityratio is very
high from 2016-2020. The bank can easily manage day to day cash management progression.

FixedAssetTurnover Ratio

The fixed asset turnover ratio (FAT) is, in general, used by analysts to measure operating
performance. This efficiency ratio compares net sales to fixed asset and measure a company’s
ability to generate net sales from its fixed asset investments, namely proprty, plant and
equipment.

𝑁𝑒𝑡𝑆𝑎𝑙𝑒𝑠
𝐹𝐴𝑇=
𝐹𝑖𝑥𝑒𝑑𝐴𝑠𝑠𝑒𝑡

33
 Years Net Sales FixedAsset Ratio

2016 7744.69 517.98 14.98

2017 8677.38 489.47 17.72

2018 9752.86 457.37 21.32

2019 11419.02 472.04 24.19

2020 13210.75 479.99 27.52

Table5.1.11Fixed Asset TurnoverRatio

30

25

20

15
FAT

10

0
2016 2017 2018 2019 2020

Fig5.1.11FixedAssetTurnover ratio

Interpretation

Fixed assets are used in the business for producing goods to be sold. The effective utilization of
fixedassetwillresultinincreasedproductionandreducedcost.Theeffectiveutilizationoffixed asset shows
a higher ratio in the year 2020.

34
WorkingCapitalTurnoverRatio

Working capital turnover is a ratio that measures how efficiently a company is using its working
capital to support a given level of sales. Also referred to as net sales to working capital, working
capital turnover shows the relationship between the funds used to finance a company’soperations
and the revenues a company generates as a result.

𝑁𝑒𝑡𝑆𝑎𝑙𝑒𝑠
𝑊𝐶𝑇𝑅=
𝑊𝑜𝑟𝑘𝑖𝑛𝑔𝐶𝑎𝑝𝑖𝑡𝑎𝑙

Years Net Sales Working Capital Ratio

2016 7744.69 15.72 492.66

2017 8677.38 14.92 581.59

2018 9752.86 9.29 1049.8

2019 11419.02 17.09 810.43

2020 13210.75 24.58 537.45

Table5.1.12Workingcapitalturnoverratio

1200

1000

800

600
WCTR

400

200

2016 2017 2018 2019 2020

Fig5.1.12Workingcapitalturnoverratio

35
Interpretation

Theabovefigureshowsthatthefluctuationintheworkingcapitalof federalbank.Intheyear 2018 shows

the highest working capital ratio.

TRENDANALYSIS

Table5.2.1 showingtrend fornet profitfrom 2016-2020.

Years X Y XY 𝐗𝟐

(NetProfit)

2016 1 475.65 475.65 1

2017 2 830.79 1661.58 4

2018 3 878.85 2636.55 9

2019 4 1243.89 4975.56 16

2020 5 1542.78 7713.9 25

Total 15 4971.96 17463.24 55

Table5.2.1Trend Analysis(2016-2020)

1800
1600
1400
1200
1000
800
600 NetProfit
400
200
0

20162017201820192020

Fig5.2.1TrendAnalysis(2016-2010)

36
Table5.2.2showingestimatedsalesfor 2021-2025

Years Sales

2021 1758.6

2022 2013.33

2023 2268.07

2024 2522.80

2025 2777.54

Table5.2.2Estimatedsales21-25

37
 3000

2500

2000

1500

Sales21-25

1000

500

2021 2022 2023 2024 2025

Fig5.2.2EstimatedSales21-25

Interpretation

Onthebasisoflastfiveyearsprofitpositionwecanpredicttheprofittrendforthefutureyears. Here this

trend shows positive growth for the future period.

38
 CHAPTER- 5

FINDINGS OF THE STUDY

39
 The EPS of the company is one of the determinants during the selection of share,
how earn from that share? This answer will answer by the EPS information.
According to the analysis of EPS the lowest value and highest value IN 2018 and
2020.

 The net profit of the company which is the number represents how much money a
company has after all expenses are paid. From this analysis the years 2016 and2020
have the lowest and highest values of net profit.

 The minimum capital adequacy ratio that bank must maintain is 8%. In the case of
federal bank the capital adequacy ratio is more than the minimum level so there is
less risky.

 The normal ROE in the utility sector could be 10% or less. In 2020 the ROE ratio of
the bank is 10.63% others are less than 10%.

 Cost to income ratio is important for determining the profitability of a bank. The
federal bank is running more profitably.

 Around 10% a good ROCE varies between industries.But if the firm has a history of
achieving over 30%, this would represent a worsening level. In case of federal bank
moving an acceptable level.

 CD ratio for Indian banking industry stood at 78.1%. The CD ratio of federal bankare
less than 80%.

 InfederalbankLiquidityratioisveryhighandthebankcanmanagedaytodaycash
management.

40
 The net profitability of the bank follows an increasing trend. Here this trend shows
positive growth for the future period.

41
CHAPTER- 6
CONCLUSION

47
Banking sector in Indian has given a positive and encouraging responses to the financial sector
reforms. Entry of new private banks and shaken up Public sector banks to competition. The
financial sector reforms have brought India financial system closer to global standards. With the
India increasingly getting integrated with the global financial world, the Indian banking sector
has a still long way to go to catch up with their counter parts.

The study aims to evaluate the capital structure of Federal Bank by using analysis tools. The
capitalstructureistheparticularcombinationofdebtandequityusedbyacompanytofinanceits overall
operations and growth.

The project work titled capital structure of federal bank was an attempt to study capital structure
and to make some suggestions for the improvement and development and smooth functioning of
the organization. From the analysis, it is conducted that federal bank limited, has a satisfactory
financial performance. So that forecast may be made for future earnings ability to pay interest
and debt maturities and profitability of sound dividend policy.

44
 CHAPTER- 7

QUESTIONARIES

44
CHAPTER- 7
1. . How frequently do you estimate your company's cost of capital?
(a)Annually (b) Every investment (c) Infrequently (d) Other

2. How do you estimate before tax cost of debt?

(a) Marginal cost (b) Current average (c) Uncertain (d) Other

3 How do you estimate your company’s cost of equity?

(a)CAPM (b) Modified CAPM (c) Dividend Growth Model (d) Arbitrage Pricing

4 What weighting factors does your use in computing weighted average cost of capital

(a) Target debt/equity (b) Current book weights (c) Current market weights (d) Other

5 Is the cost of capital used for purposes other than project analysis in your company?

(a) Yes (b) No

6 Firm’s market value is directly related to its choice of capital structure

(a) Strongly agreed (b) Agreed (c) Undecided (d) Disagreed (e) Strongly disagreed

7 Which one of the following do you think most appropriate proxy (measure) for firm value?

(a) Total market value of debt plus equity (b) Price earnings ratio (c) Earnings value added
6

44
 CHAPTER- 8

BIBLIOGRAPHY

44
 Annualreports ofthebankin theyear 2016-2010.
 www.rbi.org.in
 www.economictimes.com
 www.indiatimes.com
 www.moneycontrol.com
 www.federalbank.co.in
 www.wikipedia.com

45