PROJECT PRESENTATION

ON
“ AN ANALYSIS OF CAPITAL STRUCTURE
FOR HINDUSTAN UNILEVER LIMITED.”
 RESEARCH METHEDOLOGY

RESEARCH DESIGN
The study aims at narration of existing facts and figures regarding
financial position of the company. So the research design adopted in the
study has been descriptive in nature.

TOOLS FOR ANALYSIS

1. Leverage analysis
2. Cost of capital analysis
3. Ratio analysis
4. Theories of capital structure
AREA OF STUDY
The study was carried out in the finance department of HIINDUSTAN
LIVER LIMITED.

TYPES OF DATA COLLECTED

 Secondary data
 OBJECTIVES
PRIMARY OBJECTIVES

The primary objective of the study is to analyze the capital structure of

Hindustan Unilever Limited.

SECONDARY OBJECTIVES

► To determine the optimal debt-equity mix for the company.

► To determine the firm’s combined effect of the leverages.
► To identify the value of the firm {overall cost of capital (KO)} by applying
various capital structure theories.
► To apply the related ratios in order to analyze the capital structure of the
company.
► To suggest suitable suggestions for framing effective capital structure to
meet the requirement of the company.
 REVIEW OF LIERATURE
INTRODUCTION
Finance is an important integral part of modern economic life. Financing
decision plays a vital role. It involves raising funds for the company.
It is concerned with the designing of capital structure. The financial decision
should be shaped in such a way it should support the company’s capital
structure. Capital structure should be examined from the viewpoint of its
impact on the value of the firm. The firm should select the financing – mix in
such a way that it maximizes the shareholder’s wealth. The combination of
debt and equity determines it .

MEANING

Capital structure refers to the way a corporation finances itself

through some combination of equity, debt, or hybrid securities.
 DEFINITION
“The permanent long-term financing of a company, including long-
term debt, common stock and preferred stock, and retained earnings. It
differs from financial structure, which includes short-term debt and
accounts payable .

FEATURES OF CAPITAL STRUCTURE

1. Return
2. Risk
3. Flexibility
4. Capacity (generate future cash flow)
5. Control (involve minimum risk of loss)
 CONCEPTS INVOLVED IN CAPITAL STRUCTURE

COST OF CAPITAL
The cost of capital of a firm is the minimum rate of return expected by
its investors. It is the weighted average cost of various sources of
finance used by a firm. A decision to invest in a particular project depends
upon the cost of capital of the firm. Generally higher the risk involved,
higher is the cost of capital.

LEVERAGE
Leverage refers to “an increased means of accomplishing some
purpose”. In financial management the term leverage is used to increase
the return to its owners i.e. Shareholders.
TYPES OF LEVERAGE

► Operating Leverage (employment of fixed cost assets)

► Financial Leverage (the use of fixed cost / return source of funds )
► Composite Leverage

THEORIES OF CAPITAL STRUCTURE

► Modigliani-Miller theroem
► Trade off theory
► Net Income Approach
► Net Operating Income Approach
 LIST OF TABLES
1.Financial Leverage
2.Operating Leverage
3.Combined Leverage
4.Cost Of Equity
.5.Cost Of Debt
6.Composite Cost of Capital
7.Debt – Equity Ratio
8.Capital Gearing Ratio
9.Interest Coverage
10.Ratio Of Fixed Assets To Funded Debt
11.Ratio Of Current Liability To Proprietor’s Fund
12.Proprietory Ratio
13.Fixed Assets Turnover Ratio
14.Ratio of Reserves To Equity Capital
15.Capital Structure
16.Price –Earnings Ratio/Earnings Yield Ratio
17.Return On Share Holder’s Investment Or Net Worth50
 MAJOR FINDINGS
► Debt equity ratio was in the decreasing trend, due to the repayment of debt.
Debt is more than equity in all the years and so the ratio is satisfactory to
the company.

► Fixed assets turnover ratio shows a fluctuating trend in the five years .The
higher turnover ratio indicates the more efficient management and better
.
utilization of available fixed assets

► The operating leverage has been increased from 2.79 to 3.74 in the five
years. This indicates that the company had effectively used its variable
operating cost.

► Ratio of reserves to equity capital shows a fluctuating trend in the five

years. The ratio indicates that a fair amount of earnings were retained for
future expansion.
► Capital gearing ratio shows an increasing trend in the 5 years except in
2003-2004 . This ratio indicates that the company is said to be in a low
gear.

► Interest coverage ratio has shown an increasing trend in the five years. This
indicates the better position of creditors and less risk of the company.

► Ratio of current liability to proprietor’s funds shows an increasing trend .

This ratio reveals that the company has used more long term funds.

► Financial leverage shows a decreasing trend except in 2003-2004. This

indicates that a low rate of financial leverage was due to low interest out
flow and consequently lowers borrowings.
 SUGGESTIONS

► The company has to maintain the same proportion of debt-equity ratio.

► Fixed assets turnover ratio shows a fluctuating trend in the five years. So
the company should maintain a higher turnover ratio for more efficient
management and better utilization of available fixed assets.

► The company has effectively used its variable operating cost. So it should
maintain the same level of usage in future which in turn will help the
company in increasing its operating efficiency and better growth.

► Ratio of reserves to equity capital shows a fluctuating trend. So the

company could maintain the higher ratio which will help the company to
maintain a fair amount of earnings for future expansion.

► In future the company can use equity capital for long-term obligations and
debt capital for the short-term obligations as equity capital is best suited for
long run and debt capital is best suited for day-today activities.
 CONCLUSION

Leverage analysis of the company states that both financial and operating
risk associated with the company is less and they are very efficient in using the
operating cost. Cost of capital analysis of the company states that the company
had taken steps to minimize their cost of capital and they were able to
minimize it. It shows how effectively they had used the capital. The financial
performance of the company is also good and they are maintaining it. Capital
structure decisions are dynamic for every year. Overall, the company’s capital
structure is optimum. The study suggests that the company can maintain the
same level of capital structure decisions to maximize its earning for the forth
coming years.
 LIMITATIONS OF THE STUDY
► The study mainly depends on the secondary data taken from annual
report and internal records of the company.

► The figures taken from the financial statement for analysis were
historical in nature.

► The study is confined to a short period of two months. This would not
picture the exact position of the company.

► The results by using the statistical techniques will be of expected

outcomes and not the fact.

► Every company will be having their own factors and situations. The
findings of the study could be taken only as guidelines and cannot be
applied directly to other companies of the same industry.