Lecture #1

8TT6-60.1: Material and Human

Resource Management
By
Dr. Rajesh Kumar Bathija,
Principal, SDIT, Dausa
 Contents
• Syllabus
• Capital structure
• Optimal Capital Structure
• Capital and Financial Structure
• Capital cost
• Factors affecting capital structure
• Features of optimal capital structure

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 Material management
• ACCORDING TO N. K. NAPIR:-

• Material management is the integrated

functioning of purchasing and allied
activities so as to achieve the
maximum co-ordination and optimum
expenditure in the area of materials.

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 Material management

• According to Thomas F. Wallace and John

R. Dougherty :-
• Material management is a scientific
technique, concerned with planning
,organizing and control of flow of materials,
from their initial purchase to destination.
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 Objectives of Material Management

• To reduce cost of material

• Ensure a good support with suppliers
(vendors)
• Effective and efficient handling of materials
at all stages and in all sections.

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 Objectives of Material Management

• Maintaining continuous supply

• New material & products

• Standardization

• Product improvement

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 Aims of Material
Management :-

To get
•The
right
quality
•Right
quantity
of
supplies
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 Basic Principles of material
Management :-
• Effective management and supervision; it deals on
material functions of ;planning, organizing, staffing,
controlling, report and budgeting.
• Sound purchasing method
• Effective purchase system
• Should be simple
• Simple inventory control program.

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 Functions of Material
Management :-
• Material planning & budgeting
• Purchasing
• Inventor control
• Cost reduction
• Value analysis
• Receiving & inspection
• Stocking & distribution

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 PROCEDURE

• Good material managers adopt the

following procedures:
• Taking inventory regularly and
systematically .

• Requisitioning at indenting according to

actual needs .
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• Receiving and inspecting incoming
items

• Storing and protecting items

• Issuing items for use

• Proper use of items.

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• Identification of need

• Establishment of standards and specification,

character, quality with full description
• Preparation of requisitionor indents
in the predesigned
• Selection of the right source that is supplier .

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 What is Capital Structure?

• Capital structure refers to the amount

of debt and/or equity employed by a firm to fund its
operations and finance its assets. A firm’s capital
structure is typically expressed as a debt-to-equity or
debt-to-capital ratio.
• Debt and equity capital are used to fund a business’s
operations, capital expenditures, acquisitions, and other
investments. There are tradeoffs firms have to make
when they decide whether to use debt or equity to
finance operations, and managers will balance the two
to find the optimal capital structure.

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 Capital Structure

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 Few definitions of capital structure
given by some financial experts:
• “Capital structure of a company refers to the make-up
of its capitalization and it includes all long-term capital
resources viz., loans, reserves, shares and bonds.”—
Gerstenberg.
• “Capital structure is the combination of debt and equity
securities that comprise a firm’s financing of its
assets.”—John J. Hampton.
• “Capital structure refers to the mix of long-term
sources of funds, such as, debentures, long-term debts,
preference share capital and equity share capital
including reserves and surplus.”—I. M. Pandey.

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 Capitalization means and defined
as:
• 1.Accounting: Recording of a cost as a fixed
asset (written off as depreciation over
several accounting periods) instead of
an expense (charged off against earnings in
one accounting period).
• 2.Corporate: Conversion of the retained
earnings of a firm into capital through a new
issue of stock.

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 Capitalization means and defined
as:
• 3.Finance: Structure and amount of long-
term equity and debt capitals of a firm
expressed as percentage of the total (equity
and debt) capital.
• 4.Leasing: Conversion of an operating
lease into a capital lease by classifying the
leased asset as a purchased asset, and showing
the lease obligations as loan on the books of
the lessee firm.
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 Capital Structure, Financial Structure
and Assets Structure:
• The term capital structure should not be confused with
Financial structure and Assets structure. While
financial structure consists of short-term debt, long-
term debt and share holders’ fund i.e., the entire left
hand side of the company’s Balance Sheet. But capital
structure consists of long-term debt and shareholders’
fund.
• So, it may be concluded that the capital structure of a
firm is a part of its financial structure. Some experts of
financial management include short-term debt in the
composition of capital structure. In that case, there is
no difference between the two terms—capital structure
and financial structure.
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 Capital Structure, Financial
Structure and Assets Structure:
• So, capital structure is different from financial
structure. It is a part of financial structure.
Capital structure refers to the proportion of
long-term debt and equity in the total capital of
a company. On the other hand, financial
structure refers to the net worth or owners’
equity and all liabilities (long-term as well as
short-term).

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 OPTIMUM CAPITAL STRUCTURE

• The optimum capital structure may be defined

as “ Capital Structure or combination of debt
and equity that leads to the maximum value of
the firm. Optimal capital structure maximizes
the value of the firm and hence the wealth of
its owners and minimizes the company’s cost
of capital.

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The following considerations should be kept in mind while
maximizing the value of the firm in achieving the goal of
optimum capital structure

• (i) It is the return on investment is higher than the

fixed cost of funds, the company should prefer to raise
funds having affixed cost, such as debentures, loans
and preference share capital. It will increase earnings
per share and market value of the firm. Thus company
should make maximum possible use for leverage.
• (ii) When debt is used as a source of finance, the firm
saves a considerable amount in payment of tax as
interest is allowed as a deductible expense in
computation of tax. Hence the effective cost of debt is
reduced called tax leverage. A company should take
advantage of tax leverage.

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• (iii) The firm should avoid undue financial risk
attached with the use of increased debt
financing. If the shareholders perceive high
risk in using further debt-capital, it will reduce
the market price of shares.
• (iv) The capital structure should be flexible

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Capital Structure and Capitalization
• Capital Structure:  
Framework of
different types of financing employed by a firm
to acquire resources necessary for
its operations and growth. Commonly,
it comprises of stockholders' investments (equity
capital) and long-term loans (loan capital), but,
unlike financial structure, does not include short-
term loans (such as overdraft) and liabilities (such
as trade credit).
Also called capitalization structure.

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 Optimal capital structure

• The optimal capital structure of a firm is often

defined as the proportion of debt and equity
that results in the lowest weighted average
cost of capital (WACC) for the firm. This
technical definition is not always used in
practice, and firms often have a strategic or
philosophical view of what the ideal structure
should be.

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In order to optimize the structure, a firm can issue either more
debt or equity.  The new capital that’s acquired may be used to
invest in new assets or may be used to repurchase debt/equity
that’s currently outstanding, as a form of recapitalization.

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 Cost of capital

• The firm’s total cost of capital is a weighted average of the cost of

equity and the cost of debt, known as the weighted average cost of
capital (WACC).
• The formula is equal to:
• WACC  =  (E/V x Re)  +  ((D/V x Rd)  x  (1 – T))
• Where:
• E = market value of the firm’s equity (market cap)
D = market value of the firm’s debt
V = total value of capital (equity plus debt)
E/V = percentage of capital that is equity
D/V = percentage of capital that is debt
Re = cost of equity (required rate of return)
Rd = cost of debt (yield to maturity on existing debt)
T = tax rate

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 Capital structure by industry

• Capital structures can vary significantly by industry. 

Cyclical industries like mining are often not suitable for
debt, as their cash flow profiles can be unpredictable
and there is too much uncertainty about their ability to
repay the debt.
• Other industries, like banking and insurance, use huge
amounts of leverage and their business models require
large amounts of debt.
• Private companies may have a harder time using debt
over equity, particularly small businesses which are
required to have personal guarantees from their
owners.

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 Importance of Capital Structure

• Influences the risk and returns of investors.

• To raise funds for promotion.
• Raise of additional funds for new projects.

A capital structure decision is characterized as a

choice of that combination of debt and equity which
maximizes the market value of the firm.

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 Importance (continued…)

LEVERAGE: Higher amount of Leverage means higher

amount of return to stockholders but higher risk and interest
payments

COST OF CAPITAL: Each source of financing has a different

cost. Capital structure affects the cost of capital.

OPTIMAL CAPITAL STRUCTURE : is the one that maximizes the

firm’s cost of capital and maximizes firm value.
 Factors affecting Capital Structure
 MINIMIZATION OF RISK: Risk in capital structure is of two types
Business Risk: Relationship between the firm’s sales and earnings
before interest and taxes.
Financial Risk: Relationship between earnings before interest and
taxes and earnings per share.
A capital structure is called efficient if it keeps the total risk of the . .
firm at minimum level

 CONTROL:
The ultimate decisions are taken by equity share holders or the
management who controls the firm. A capital structure should be one
which reflects the management’s philosophy of control over the firm.

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  FLEXIBILITY: Ability of the firm to raise additional capital funds
whenever needed to finance investment opportunities. The capital
structure should be one which enables the firm to meet the
requirements of the changing situation.

 PROFITABILITY: Capital structure should be the most profitable

from point of view of share holders. Within the given constraints
capital structure should be opted to increase the returns available
to the equity holders.

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 Features of optimal Capital Structure

PROFITABILITY: should make maximum use of leverage

at minimum cost.

FLEXIBILITY: structure should be able to meet the

changing conditions.

CONTROL: should involve minimum dilution of control

of the company.

SOLVENCY: The use of excessive debt threatens the

solvency of the company.

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• Capitalization refers to the total amount of securities
issued by a company while capital structure refers to
the kinds of securities and the proportionate amounts
that make up capitalization. For raising long term
finances, a company can issue three types of securities
viz., Equity shares, Preference shares and debentures.
A decision about the proportion among these types of
securities refers to the capital structure of an
enterprise.
•       Financial structure refers to all the financial
resources marshaled by the firm, short as well as long
term, and all forms of debt as well as equity.

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