CAIRN INDIA

Submitted to :
Prof Hetal Jhaveri

Submitted By
Hiren Chavla B-08

Date :Friday, February 13, 2015

1. What are the changes in the capital structure?

Year
Total Equity
Paid up equity capital
Borrowings
Debentures and bonds

2010-11
19,019.2
0
19,019.2
0
13,500.0
0
13,500.0
0

2011-12
19,074.0
0
19,074.0
0
12,500.0
0
12,500.0
0

2012-13
19,102.4
0
19,102.4
0

2013-14
19,076.3
0
19,076.3
0

Answering the question from 2010-11 to 2011-12 the Debt is reducing by

1000 million and
And the in the next year company is repaying all its debt. While equities have
been more or less the same. Buy back and Release of equity has been
evident from the report

2. What are the reasons for these changes?

The Company was founded in 2007 and deals in OIL drilling and exploration.
Until the year 2011-12 it did do any sales as they were setting up production
plant. The day they made sales they had excess money so the company decided
to repay its debt. Company started making its sales from main product in 2012 it
self, before this minimal revenue came from financial activities. The company
changes its capital structure to provide higher rate of returns to the
shareholders. The company increases the balance of its reserve and surpluses to
meet the contingencies
As the company have enough of working capital and no shortage of liquidity.
So there is no requirement to issue more debt. Even the reserves of the
company have been increasing after the sales increased
From Shareholders Point of view, if there were any changes in the Capital
Structure, an increase in debt could make them highly leveraged company
this would result in paying high interest from Earnings and less part would
remain for Equity Share Holders.
3. What is the debt-equity ratio?

Year

2010-11

2011-12

201213

Total Equity

19,019.20

19,074.00

19,102.40

19,076.30

19,019.20

19,074.00

19,102.40

19,076.30

13,500.00

12,500.00

13,500.00

12,500.00

0.7098
09

0.6553
42

Paid up equity capital

Borrowings
Debentures and bonds
Debt Equity Ratio

201314

It seems that company has a huge capital investment and has huge turnover
thats why from the day it started making profits out of sales, it repaid all its
debt. While talking about debt to equity Ratio in 2 years the debt has been
around 0.7 to 0.65 that shows the stability of company and acquiring a huge
debt and paying interest on time is what shows the stability of company.
Company has a strong hold and the incomes and expenditure are well
planned.
The ideal ratio considered is 1:1 that would help them give a tax shelter but
as such there is Dividend Distribution Tax (DDT) it wouldnt matter much.
4. What is the cost of the debt?

Year
Interest paid
Borrowings
Debentures
bonds

2011-12

201213

201314

1,367.20

1,095.50

0.2

0.005

13,500.00

12,500.00

13,500.00

12,500.00

10.13

8.764

and

Cost of Debt

2010-11

As shown in the table the cost of debt is around 9-11% this of course is a
good rate at which the debt is acquired.

5. What is the impact on interest cost to the company?

Company in the 2010-11 and 2011-12 had debt rest of the year it managed
to repay all its debt so it had to pay interest but even got the tax shelter.
Then repaying all its debt the cost of debt becomes 0. No interest to pay.

The equity shareholder will probably get lesser amounts of returns as the
return amount is shared by paying interest as such after a point of time the
debt becomes 0 so the amount to pay becomes 0 and all earnings are for
equity holders. And when all debt is paid that is the First time when company
pays dividend (interim Dividend as well as final dividend) to equity
shareholders

6. What is the impact on shareholders returns?

Announcement
date

Dividend
rate
(%)

Dividend per
share
(Rs.)

23-Apr-14

65

6.5

22-Oct-13

60

22-Apr-13

65

6.5

31-Oct-12

50

Dividend type

Final
Interim
Final
Interim

When there is debt the company isnt paying any returns to equity share
holders as such it has not been making sales in regards to production being
setup so as soon as it starts sales the company pays off all its debts and even
gives return to equity share holders. P-E ratio (From -1.1 in 2011-12 to 32.5 in
2012-13) and EPS increased drastically

7. Your analysis based on the classroom discussion and the above

questions.
The company is in stong position. And as there is no debt it is good for the
company
Capital structure is the composition of debt and equity which are considered
as sources of capital. We can understand how the company efficiently uses
the funds provided. The working capital structure measures the market
capitalization as well as the return on assets.
Therefore it can be concluded that the primary factors that affects the capital
structure decisions are business risk, companys tax exposure, growth rate,
financial flexibility, market conditions

Thank You