INTRODUCTION

CAPITAL STRUCTURE ANALYSIS OF BAJAJ AUTO LTD 2019-2020
CHAPTER-I
INTRODUCTION
1.1 INTRODUCTION:
Capital structure is defined as the amount of permanent short-term debt, long-term

debt, preferred stock and common equity used to finance firm. In contrast finance
structure refers to the amounted of total current liabilities, long term debt, preferred
stock and common stock equity used to finance firm. Thus capital structure
representing the permanent sources of the firm’s financing. Capital structure refers to
the way in which a firm is financing its total assets, operations and growth through
issuing equity debt and hybrid securities. Financing is process of collecting money
through certain sources to be used on purchasing or maintain total assets, current
operation of firm and expected growth.
Equity comes from issuing common stock, preferred stock and retained earning
while debt can be classified into long term debt e.g. long term note payable, bond,
debentures and short term debt. i.e. short term bank loan, accounts payable. Beside
these sources of finance, firm issue some hybrid securities- securities that possess the
characteristic of both equity and debt such income bond.
Sources of equity that constitute the equity part of capital structure are quite
different from each other. common stock is major source of equity. Investors who buy
common stock called common shareholders. If firm earns net profit then it usually
pays dividend to common shareholders.
Common stock do not have any maturity. Common shareholders have voting
power to elect firm’s bond of directors in this way they enjoy the control on
organizations. In the condition of liquidation common shareholders have claim on
residual value after paying to creditors and preferred stockholders.
Preferred sock can be defined as category of ownership in a corporation that has

more claims on total assets and net income than common stock. Preferred stock has
fixed dividend at the end each period usually a fiscal year irrespective to whether
1
SANT RAWOOL MAHARAJ COLLEGE, KUDAL
firms earns net profit or not. Some time preferred stock may be regarded as hybrid
security because it possesses the characteristic of no maturity property of equity and
fixed income property of debt. unlike common stockholders, preferred stockholders
do not have any voting power to elect board of directors. Retained earning are
important source in equity position of capital structure. Retained earning refer to the
portion of net income that firm reinvests into business. Retained earning enhance the
stake of common shareholders because it is regarded as property of common
stockholders.
Capital structure refers to the way a corporation finances itself through some
combination of equity sales, equity options, books, and loans, optimal capital
structure refers to the particular combination that minimization the cost of capital wile
maximizing the stock price. Capital structure is the mix of the various types of debt
and equity capital maintained by a firm. The more debt capital a firm has in its capital
structure, the more highly leveraged the firm is considered to be. The permanent long
term financing of a company, including long-term debt, common stock and preferred
stock, and retained earning.
One of the key issues in the capital structure decision is the relationship between
the capital structure and the value of the firm. The capital structure or financial
leverage decision is examined from the point of view of its impact on the value of the
firm. The optimum capital structure is one that maximizes the market value of the
firm. Analysis of capital structure is an important task which financial managers of
every organization go through before formulating capital structure decision of their
company.
Even the investors and promoters has to take every important measure so as to
lead their organization towards growth as well reap maximum profit along with
maximization of company’s value. These all actions need careful watch of their
company, which is helped by capital structure analysis.
Capital structure analysis even helps an organization to decide whether it should

go for debt financing or whether it should it finance itself with the own sources of
2
reserves and surplus. Capital structure in corporate finance is the way a corporation of
equity, debt or hybrid securities.
The relative proportion of various sources of funds used in a business is termed as

financial structure. Capital structure is a part of the financial structure and refers to the
proportion of the various long-term sources of financing. It is concerned with making
the array of the sources of the funds in a proper manner, which is in relative
magnitude and proportion.
The capital structure of a company is made up of debt and equity securities that
comprise a firm’s financing of its assets. It is the permanent financing of a firm
represented by long-term debt, preferred stock and net worth. So it relates to the
arrangement of capital and excludes short-term borrowings. It denotes some degree of
permanency as it excludes short-term sources of financing.
Again, each component of capital structure has a different cost to the firm. In case
of companies, it is financed from various sources. In proprietary concerns, usually, the
capital employed, is wholly contributed by its owners. In this context, capital refers to
the total of funds supplied by both—owners and long-term creditors.
Capital structure is the combination of debt and equity which influences the overall
cost of capital. The decision regarding the capital structure is very important because
it affects the earnings per share or wealth of the shareholders. Capital structure is the
crucial decision to be taken by every business, the positives and negatives of these
decisions plays an important role in determining the future of every business. Capital
structure plays a vital role in financial decision making process, maximizing the
firm’s performance and its value. The capital structure is the mix of different
securities issued by firms for raising funds. Funds used for firms' operations are
generated internally as well as externally.
When raising funds externally, firms choose between equity and debt. The overall
objective of the companies is to reduce the cost of capital and to maximize the value
of the firm. Determinants of capital structure are mainly short term debt to capital
ratio, long term debt to capital ratio and total debt to capital ratio. Usually, capital
3
structure policy depends upon the company’s size, ownership, profitability, various
costs, earning growth and liquidity of a company’s assets. In developing countries,
optimum benefits of the debt and equity depends upon the managers that are engaged
in the management of the financial issues of the company. Most of the effort of
financial decision making process is centred on the determination of the optimal
capital structure of a firm.
Capital structure refers to the way a corporation finances its assets through
some combination of equity and debt. A firm's capital structure is the composition of
structure of its liabilities. According to modigliani-miller theorem, in a perfect capital
market (no transaction or bankruptcy costs; perfect information); firms and
individuals can borrow at the same interest rate; no taxes; and investment decisions
aren't affected by financing decisions. Modigliani and miller made two findings under
these conditions. Their first 'proposition' was that the value of a company is
independent of its capital structure. Their second 'proposition' stated that the cost of
equity for a leveraged firm is equal to the cost of equity for an unleveraged firm, plus
an added premium for financial risk.
That is, as leverage increases, while the burden of individual risks is shifted
between different investor classes, total risk is conserved and hence no extra value
created. Under a classical tax system, the tax deductibility of interest makes debt
financing valuable; that is, the cost of capital decreases as the proportion of debt in the
capital structure increases. The optimal structure then would be to have virtually no
equity at all. However, there is no such perfect market in real world. Under this
situation, capital structure is necessary when scrutinize a company’s performance
from finance perspective.
And our project will examine the capital structure of coca cola company from
the aspects of trade-off theory (bankruptcy cost and debt issue), pecking order theory
(financing priority), and agency cost (debt-to –equity ratio and cash flow), because all
of these theories are related to capital structure.
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1.2.Overview:
A firms capital structure is the composition or structure of its liabilities. For

example a firm that has $20 billion in equity and $80 billion in debt is said to be 20%
equity financed and 80% debt financed. The firms ratio of debt to total financing 80%
in this example is referred to as the to as the firm leverage. In reality capital structure
may be highly complex and includes dozens of sources of capital.
Leverage (or gearing ) ratios represent the proportion of a firms capital that is
obtained through debt which may be either bank loans or bonds.
In the events of bankruptcy, the seniority of the capital structure comes into play.
The Modigliani- miller theorem proposed by franco modighianii and meton miller
in 1958 forms the basis for modern thinking on capital structure though it is generally
viewed as a purely theoretical result since it disregards many important factors in the
capital structure in the capital structure process factors like fluctuations and uncertain
situation that may occur in the course of financing a firm. The theorem states that in a
perfect market, how a firm is financed is irrelevant to its value.
This result provide the base with which to examine real world reasons why capital
structure is relevant that is a company’s value is affected by the capital structure it
employs. Some other reasons include agency cost, taxes . this analysis can then be
extended to look at whether there is in fact an optimal capital structure. Debt is
amounted borrowed by a firm to finance its business by issuing debt instruments.
Firms usually pay interest is cost of debt for firm and fixed income for creditors.
Debt has maturity- refers to time period unit particular debt remains outstanding
such as a 10 years bond 20 years bond etc. debt can be categorized as short term debt
and long term debt. Short term debt borrowing of firm that have maturity of one year
less such as short term bank loan. T-bill etc. while long term debt represents the debt
that remains outstanding for more than one year for example, note, debenture, bond
etc. debt can also be classified as secured and unsecured debt
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. Secured debt is borrowing that pledge certain asset of firms as a security in

condition of financial distress such as collateral. Unsecured debt is borrowing that
does not pledge any assets of firm such as note and debenture. The instruments differ
by maturity, interest rate , currency , seniority, and whether the debt can be converted
into equity and debt. i.e. convertible bond, income bond. Convertible bonds are bond
that can be converted into equity before maturity and any change in price of shares
affected convertible bond. Income bonds have fixed maturity but are paid interest if
firms earns sufficient income.
1.3.MEANING OF CAPITAL STRUCTURE:
According to gerstaendberg, capital structure refers the make upon firm’s

capitalism in order words capital structure refers to composition of long term funds
such as debenture long borrowing, preference share equity share in the capitalization
of a company. The essence of capital structure decision is to a determine the relative
proposition of equity and debt. Equity here in border sense means owner funds which
is can be raised by issue of equity shares and preference share and by retained
earnings. Debts can be raised by issuing debenture or bonds by taking long term
borrowings. The capital structure decisions a significant financial decision because it
affect the shareholder ‘s return and risk and consequently the market value of share.
The capital structure is used to represent the proportionate relationship between the
various long- term forms of financing, such as debenture, long termdebt, preference
capital and equity capital reserve and surplus. The term capital structure frequently
used to indicate the long- term sources of funds employed in a business enterprise. In
other words, it can be said that it represent permanent financing of the concern. This
is usually measured by subtracting current liabilities from total assets. Thus , capital
structure, general reserve, preference share and long term-debts.
concept of capital structure :
The use of the source of funds with fixed cost, such as debt and preference share
capital along with the owner’s equity capital in the capital structure is described as
6
financial leverage or trading and equity. The also use of the term trained and on equity
is derived from the fact that it is the owner’s funds equity which is used as basis to
raised debt that is the equity that traded upon.
1.4. DEFINITION
1. capital structure of a company refers to the make-up of its capitalization and it

include all long term capital resources, viz. shares, loans, reserves and bonds.
Gerstenberg
2.capitaliuzation include capital stock and debt.
Dewing
3. capitalization is the total accounting valve of the capital stock, surpluses in

whatever from it may appear and long term debt.
Lillian dories
4. capital structure refers to the make up of the amount of long term financing is to be
called capitalization.
Gerstenberg
The term capitalization is concerned with the amount of long-term investment,

while capital structure is concerned in what proportion ownership and creditor ship
securities would be raised. Capital structure consists of:
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1.Owned fund:
Owned fund include share capital, free reserves and surplus.
2. borrowed fund:
Borrowed funds are represented by debentures, bands and long term loans provided
by banks and term lending institutions.
The main objective to be considered while designing a capital structure is that the
cost and the risk both should be minimum. The capital structure is obtained when the
market value of equity share is the maximum. While designing the capital structure
the finance should minimize the cost of capital and maximize the value of company’s
shares..
A complex capital structure pattern may be of following forms:
i. Equity Shares and Debentures (i.e. long term debt including Bonds etc.),
ii. Equity Shares and Preference Shares,
iii. Equity Shares, Preference Shares and Debentures (i.e. long term debt including
Bonds etc.).
However, irrespective of the pattern of the capital structure , a firm must try to
maximize the earnings per share for the equity shareholders and also the value of the
firm.
8
2.OBJECTIVE :
1. to study capital structure analysis
2. to study affecting capital structure
3. to study of the element capital structure
4. to study of the financial leverage
5. study of the financial leverage ratio
6. study of the debt – equity ratio trend of bajaj motors
9
3. SCOPE OF THE STUDY :
The used of the sources with fixed cost, such as debt and preference share
capital along with the owners equity capital structure is describe as financial
leverage or trading on equity. The also use of the term trained on equity is
derived from the fact that it is the owners funds equity which is used as basis
to raised debt that is the equity that traded upon.
the proportion at relationship between the various long term from financing
debenture long-term debt ,preference capital and equity capital reserve and
surplus.
The term capital structure is frequently used to indicate the long-term
sources of funds employed in a business enterprise. In other word, it can be
said that it represent permanent financing of the concern. This is usually
measured by subtracting current liabilities from total assets. Thus, capital
structure general reserve, preference share and long-term debts.
Structural ratio are head are based on the allocation of debt and equity in the
financing pattern of firms assets. Capital structure of the borrower has strong
implications.
This term refers to make up of long- term funds as represent by the equity
share capital preference share capital and long-term funds debt.
10
4.STATEMENT OF THE PROBLEM
The financial success of every firm depends mainly on its capital structure.
A good capital structure of the company leads to stable profit and high
earnings to the shareholders. The choice of debt and equity in the firm’s
capital structure is an important financial decision which influences both the
return and risk of the shareholders. The excessive use of debt may endanger
the survival of the corporate firm.
At the same time, non-use of debt prevents the firm from an opportunity to
enhance the rate of return to its equity holders. The company’s performance
has been evaluated by analyzing its financial statement. The financial
condition and the liquidity status of the company are of fluctuating nature. The
value of earning per share (EPS) varies highly due to the changes in the debt
and equity mix in the recent years.
Hence, the optimum capital structure can be obtained by appropriate
capital decisions in order to standardize their earning capacity. In a developing
country like India, it is more important to acquire funds economically and
allocate them effectively for the optimal growth of the company. Thus,
attaining an optimum capital structure is a vital challenge for every company.
11
5.SIGNIFICANCE OF THE STUDY:
The capital structure decision refers to proportion of debt and equity mix which a
company uses to finance its long term operations. The terms ‘financial structure’ and
‘capital structure’ are sometimes used synonymously. Financial structure although is a
wider term, as it denotes the way in which a company's assets are financed, such as
short-term borrowings, long-term debt, and owners equity.
The difference between financial structure and capital structure is that; the capital
structure accounts for long-term debt and equity only and mainly refers to permanent
financing of a company whereas financial structure is referred to as the liabilities side
of a firm's balance sheet, specifying how its assets are financed, including all source's
of finance - short term debt including current liabilities, long term debt and equity
issues. It is generally understood that financial structure differs from capital structure
as capital structure accounts for long term debt and equity only and does not include
short term liabilities. Financial structure is a wider term and capital structure is a part
of financial structure.
6.METHOD OF DATA COLLECTION:

Primary sources:
1.Data collected from observation in bajaj showroom in kudal.
secondary sources:
1. internet
2.newspaper
3.magazines
4.accouunting records
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7.LIMITATION OF THE STUDY:
The report faced some problems during the preparation, which has limited
the purpose of the report. The limitation are:
To maintain the confidentiality of the information data availability is a big
issue.
8.EXECUTIVE SUMMARY:
Capital structure refers to make upon firm’s capitalism in other words capital
structure refers to the composition of long term funds such as long borrowing,
preference share, equity shares it is capitalization of a company. The essence of
capital structure decision is to determine the relative proposition of equity and debt.
equity herein border sense means owner’s funds which can be raised by issue of
equity shares and preference shared and by retained earnings . debt can be raised by
issuing debenture or bonds by taking long term borrowings. The capital structure
decision because it affect the shareholder’s return and risk and consequently the
market value of shares.
Capital structure refers to the way a corporations finances itself though some
combination of equity sales, equity options, bonds , and loans. Optimal capital
structure refers to the particular combination that minimizes the cost of capital while
maximizing the stock price. A capital structure that is leveraged more has a greater
proportion of debt versus equity. Capital structure refers to a mixtures of a variety of
long term sources of funds and equity shares including reserves and surplus of an
enterprise.
The two principal sources of finances for a company are equity and debt ,capita
structure is the mix of the various types of debt and equity capital maintained by a
firm. The more debt capital a firm has its capital structure the more highly leveraged
13
the firm is considered to be. The permanent long term financing of a company,
includes long term debt common stock and preferred and preferred stock and retained
earning. It differs from financial structure, which includes short- term debt and
accounts payable. It is the mix of long term debt and equity used to finance or
capitalize a business enterprise.
This may include long term debt, common stock, preferred stock, warrants,
pension, and lease liabilities. It hardly takes in its structure all the complex
quantitative factors as well as qualitative attributes affecting investment decision done
of the key issues in the capital structure decision is the relationship between the
capital structure and the value of the firm. The capital structure or financial leverage
decision is examined from the point of view of its impact on the value of the firm.
The optimum capital structure is one that maximizes the market value of the firm.
. Debts can be raised by issuing debenture or bonds by taking long term borrowings.
The capital structure decisions a significant financial decision because it affect the
shareholder ‘s return and risk and consequently the market value of share.
The capital structure is used to represent the proportionate relationship between the
various long- term forms of financing, such as debenture, long term debt, preference
capital and equity capital reserve and surplus. The term capital structure frequently
used to indicate the long- term sources of funds employed in a business enterprise. In
other words, it can be said that it represent permanent financing of the concern. This
is usually measured by subtracting current liabilities from total assets.
Thus , capital structure, general reserve, preference share and long term-debts.
The use of the source of funds with fixed cost, such as debt and preference share
capital along with the owner’s equity capital in the capital structure is described as
financial leverage or trading and equity. The also use of the term trained and on equity
is derived from the fact that it is the owner’s funds equity which is used as basis to
raised debt that is the equity that traded upon.
There is also the concept of leverage which has been used as synonym to denote
the Debt-Equity ratio or Capital Structure by several authors. “The employment of an
14
asset or source of funds for which the firm has to pay a fixed cost or fixed return is
termed as leverage”.
Actually there exist two types of leverages- Operating leverage and Financial
leverage. The extent of fixed costs in operating activities of a firm determines the
Operating leverage.
It is defined as, “the firm’s ability to use fixed operating costs to magnify the
effects of change in sales on its earnings before interest and taxes.”. Financial
leverage is related to financing activities of the firm. “The use of fixed charges source
of funds, such as debt and preference capital along with the owners’ equity in the
Capital Structure, is described as Financial leverage or gearing or trading on equity”.
Capital structure is defined as the amount of permanent short-term debt, long-term
debt, preferred stock and common equity used to finance firm. In contrast finance
structure refers to the amounted of total current liabilities, long term debt, preferred
stock and common stock equity used to finance firm. Thus capital structure
representing the permanent sources of the firm’s financing. Capital structure refers to
the way in which a firm is financing its total assets, operations and growth through
issuing equity debt and hybrid securities. Financing is process of collecting money
through certain sources to be used on purchasing or maintain total assets, current
operation of firm and expected growth.
15

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CAPITAL STRUCTURE ANALYSIS OF BAJAJ AUTO LTD 2019-2020

Capital structure is defined as the amount of permanent short-term debt, long-term

Preferred sock can be defined as category of ownership in a corporation that has

Capital structure analysis even helps an organization to decide whether it should

The relative proportion of various sources of funds used in a business is termed as

A firms capital structure is the composition or structure of its liabilities. For

. Secured debt is borrowing that pledge certain asset of firms as a security in

1.3.MEANING OF CAPITAL STRUCTURE:

According to gerstaendberg, capital structure refers the make upon firm’s

concept of capital structure :

1. capital structure of a company refers to the make-up of its capitalization and it

2.capitaliuzation include capital stock and debt.

3. capitalization is the total accounting valve of the capital stock, surpluses in

The term capitalization is concerned with the amount of long-term investment,

Owned fund include share capital, free reserves and surplus.

A complex capital structure pattern may be of following forms:

ii. Equity Shares and Preference Shares,

1. to study capital structure analysis

2. to study affecting capital structure

3. to study of the element capital structure

4. to study of the financial leverage

5. study of the financial leverage ratio

6. study of the debt – equity ratio trend of bajaj motors

3. SCOPE OF THE STUDY :

4.STATEMENT OF THE PROBLEM

5.SIGNIFICANCE OF THE STUDY:

6.METHOD OF DATA COLLECTION:

1.Data collected from observation in bajaj showroom in kudal.

7.LIMITATION OF THE STUDY:

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