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Capital structure analysis of Hero Honda, for the year

2005 to 2010.

Name – suvin shetty

Reg no-09pg048 sec- A

Submitted to-

Pr
of- Dr Janaki Ramudu
Capital structure analysis-

Capital structure-In finance, capital structure refers to the way


a corporation finances its assets through some combination of

• equity

• debt

• hybrid securities

capital structure is most likely used for referring a


companys debt equity ratio . A high debt/equity ratio
generally means that a company has been aggressive in
financing its growth with debt.
Levered company-

A company that uses borrowed money to help finance its assets.


Leveraged companies often have more volatile earnings than firms that rely
solely on equity financing. Mostly companies having huge capital
investment will for levered company. The cost of capital is less compared to
unlevered company as they don’t have to share the profit with the
shareholders .shareholders expect a high return as a risk premium.

Eg-Manufacturing companies raises money for buying machineries.

Unlevered company-

A company that takes money from public to raise their capital .unlevered
company cost of capital is high and in this case profit has to be shared and
the return will be volatile to the lenders i.e. the shareholders .whereas in
levered company the rate of interest will be fixed as decided with the
lender. Generally a unlevered company has less of capital investment .
For eg-most of the IT sector companies are unlevered as this business
does not involve purchase of machinery it is service oriented industry.

Debt equity ratio-

A measure of a company's financial leverage calculated by dividing its total


liabilities by stockholders' equity. It indicates what proportion of equity and
debt the company is using to finance its assets.

Cost of capital-

The cost of capital is the rate of return that capital could be


expected to earn in an alternative investment of equivalent risk..

Weighted average cost of capital-

Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate

Businesses often discount cash flows at WACC to determine the Net


Present Value (NPV) of a project, using the formula:

NPV = Present Value (PV) of the Cash Flows discounted at


WACC.
Analysis and interpretation-

(R.S in Cr)

year 2006 2007 2008 2009 2010


equity 39.94 39.94 39.94 39.94 39.94

Equity

The equity in al the 5 years has been the same .that means the company
hasn’t issued any fresh issue of stock in 5yrs.

Debt
year 2006 2007 2008 2009 2010
Total Debt 185.78 165.17 132.00 78.49 66.03

As we can easily see the company is trying to reduces it liability and one of
the intresting finding in hero Honda balance sheet all the debt are
unsecured no secured debt it shows that company has a good credit rating
and it enjoys good reputation amongst its debtor .here company has no
legal obligation to pay first to the debtors during time of liquidation.

Inspite of they reducing there debt and keeping there euity same from last
5 years hero handa is been doing considerable investment in assest which
can seen in the below graph.
year 2006 2007 2008 2009 2010
Total
2,195.11 2,635.23 3,118.24 3,879.24 3,531.05
assests

The investment in asset is not done through raising the capital it means it is
using its reserve for purchase of new assets or investment ,use of internal
resrerve reduces the burden of paying interest as against loan.
Capital structure of hero Honda motors-

The company has raised more of debt than equity issue it’s a
levered company.

Here we can see every year they have drastically tried to reduce
their debt thus trying to make it debt free. The reason for the
same is increase in net profit as sales of hero Honda has grown in
past years.
Sales turnover

2006 2007 2008 2009 2010

10,097 11,553 12,048 13,553 16,856


.4

Conclusion-

The company in past years have reduced their debt component


keeping the equity same .therefore decreasing the cost of capital
and utilizing its profits for expansion.