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FINANCIAL MANAGEMENT ASSIGNMENT

HERO HONDA MOTORS LTD

1. Is the financing policy of Hero Honda Motors satisfactory? How is the unlevered capital structure of the firm justified?
The financing policy of Hero Honda Motors Ltd. shows that its capital structure is mainly composed of equity and very less debt. This can be understood from a comparatively low debt-equity ratio of the company. In 2005-2006 it was 0.09, which clearly shows that the amount of debt is only around 9% of equity share capital. This is a satisfactory policy, as company has lesser liabilities from outside and more of the finances from inside sources only. Debt Equity Ratio = Total Liabilities/Total Equity The most common disadvantage to the use of debt is the financial distress that debt can exert on a company. Companies that have a high debt-to-equity ratio in their capital structure may see an increased risk in potential bankruptcy.

No Debt financing Policy is justified Company is constantly growing(net sales and other income profits increasing each year)

expansion and development of the company can be done through the extra funds generated by holding back the dividends if agreed by equity shareholders. Higher debt ratios lead to greater risk and higher required interest rates (to compensate for the additional risk)

Deciding which to use or emphasize, depends on the long-term goals of the business and the amount of control managers wish to maintain.

2. What are the factors that are favoring a zero debt capital for the company? Is it always beneficial to have a low debt in the capital structure?
A Zero debt company is one which has not borrowed any money from banks, financial institutions or others for long or medium term requirements or for working capital. Since there's no debt, the company will have no commitment for repayment or servicing of interest The financing mix of Hero Honda has decreased from 2001 to 2006, which shows the company is doing quietly very well, whereas the debt equity ratio of competitive company Bajaj auto limited has shown increase in the successive years.

A company's reasonable, proportional use of debt and equity to support its assets is a key indicator of balance sheet strength. A healthy capital structure that reflects a low level of debt and a corresponding high level of equity is a very positive sign of investment quality.

The factors that are supporting zero debt capital of the company are:
Sufficient amount of equity share capital. High profit earning, and an increasing rate every year provide more money to the company. And the company has very less liability in the form of debt; hence whole profit can be easily employed back in the company.

3. Is investment policy driving the growth of the firm? What are the key issues that the investment policy of the company is trying to address?
Yes, we can say that investment policy is driving the growth of Hero Honda; as we observed from the case that finance managers use different combinations of various polices to meet the financial requirements of the company at least cost and risk and for the long term benefit of the company like expansion , increasing the plant capacity in case of to meet the market demand and sustain its market share and leadership in the automobile sector of India The key issues that the investment polices of the company addresses are: Meeting the current growing market demand in short term. Increasing the plant capacity for expansion. Establishment of new plants in the country keeping in mind the long term demand in future. To improve its efficiency and to cut down the cost, by investing for augmenting its welding capacity. Investment in new and latest technology will enable, the company to cater to future market demand and consolidate its market.

4. Are you satisfied with the working capital management of the company? Give reasons.
I am satisfied with the management of the working capital of the company. Following can be the reasons:

Negative Cash Cycle Payments before Due Date Increase in the Current Ratio

Tight monitoring and control of Working Capital

5. Is the dividend policy of the firm appropriate? What factors determine the existing dividend policy of the firm? Yes, the dividend policy of the firm is appropriate as there is an increasing trend in the price of the shares of Hero Honda Motors Ltd. which shows that the trust of the investors and the profit of the company are gradually increasing. The company has performed well increasing the shareholders value.

The decisions relating to the Dividend of the Shares is justified as the company is rolling out 1000% dividend per share for the third year in succession.Also the dividend per share on the companys share is 20 .
The company is following a liberal dividend policy.