A PROJECT REPORT ON

“COMPARATIVE ANALYSIS OF CAPITAL STRUCTURE OF SME'SAT NSIC”

A Project submitted to

University of Mumbai for partial completion of the degree

ofMaster in Commerce

Under the faculty of commerce

By
Ms. Ruksar Ibrahim Mahadkar
Roll No. 3218

Under the guidance of

Mr. M.S.Liman Sir

Sheth J .N. Paliwala College,

Pali, Tehsil- Sudhagad,District – Raigad.

OCT - 2021
 A PROJECT REPORT ON
“COMPARATIVE ANALYSIS OF CAPITAL STRUCTURE OFSME'S AT
NSIC”

A Project submitted to
University of Mumbai for partial completion of the degree

ofMaster in Commerce
Under the faculty of commerce

By

Ms. Ruksar Ibrahim Mahadkar

Roll No.3218

Under the guidance

ofMr. M. S. Liman Sir

Sheth J .N. Paliwala College, Pali,

Tehsil- Sudhagad, District – Raigad.
DECLARATION BY LEARNER

I the undersigned Ms. Ruksar Ibrahim mahadkar by, declare that the work in this
project work entitled “COMPARATIVE ANALYSIS OF CAPITAL STRUCTURE OF SME'S AT NSIC”
forms my own contribution to the research work carried out under the guidance of Mr.
Mansing S. Liman is a result of my own research work and has not been previously submitted
to any other University for any other Degree / Diploma to this or any otherUniversity.

Wherever reference has been made to previous works of others, it has been clearly
indicatedassuch and included in the bibliography.

I, here by further declare that all information of this document has been obtained and
presentedinaccordance with academic rules and ethical conduct.

Sign,

Ms. Ruksar Ibrahim mahadkar

Certified by,

Mr. Mansing S. Liman.

CERTIFICATE

This is to certify that Ms. Ruksar Ibrahim Mahadkar has worked and duly
completed his project work for the degree of Master in Commerce under the faculty of
Commerce in the subject of Advanced Financial Accounting and his project is entitled,

“COMPARATIVE ANALYSIS OF CAPITAL STRUCTURE OF SME'S AT NSIC” under my

supervision. I further certify that the entire work has been done by the learner under my
guidanceand that no art of it has been submitted previously for any Degree or Diploma of any
University.

It is his own work and facts reported by his personal findings and investigations.

Seal of

The

College

Mr. M. S. Liman Sir

Date of Submission:
 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous and the depth isso
enormous. I would like to acknowledge the following as being idealistic channels and fresh dimensionsin the
completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do thisproject. I would like
to thank my Principal, Mrs. Anjali. S. Puranik for providing the necessaryfacilities required for completion
of this project. I take this opportunity to thank our Coordinator Mr. Mansing. S. Liman, for his
moralsupport and guidance. I would also like to express my sincere gratitude towards my project guide
Mr.Mansing S. Liman whose guidance and care made the project successful.
I would like to thank my College Library, for having provided various reference books and magazines
related to my project. Lastly, I would like to thank each and every person who directly or indirectly helped
me in the completion of the project especially My Parents and Peers who supported me throughout my
project.
 LIST OF CONTENTS

S. No Topic Pg. no
Abstract 07
1. Chapter -1 08
Introduction 08
Objectives 11
Need for capital structure planning 11
Scope and coverage 12
Research and methodology 12
Limitations 13
2. Chapter-2
Literature review 14
3 Chapter-3
Company & Industry Profile 18,22 & 26
4 Chapter -4
Conceptual framework 30
5 Chapter-5
Data analysis & interpretation 44
6 Chapter -6
Findings & suggestions 52 & 53
7 Chapter-7
Conclusion 54
Bibliography
Annexures-1,2
 LIST OF TABLES

s.n Table no. Name Page No.

o
1 3.2.6 Company profile
2 5.1 Calculation of Debt-equity ratio 45
3 5.2 Calculation of Solvency ratio 47
4 5.3 Calculation of Interest coverage ratio 49
5 5.4 Calculation of Earnings per share ratio 50

LIST OF GRAPHS
s.n Graph Name Page No.
o No.
1 5.1(a) Debt –equity ratios between serwel and raghuvamsi companies 46

2 5.2(b) Solvency ratios between serwel and raghuvamsi electronics 48

3 5.3(c) Variations of EBIT ratio in serwel and raghuvamsi companies 49

4 5.4(d) EPS ratio of serwel and raghuvamsi companies 50

 ABSTRACT

One of the most critical areas of the finance function is to make decisions about the firm’s
capital structure. Capital is required to finance investments in plant and machinery,
inventory, accounts receivable and so on. Capital structure is the part of financial structure,
which represents long term sources. It is the permanent financing of the company
represented primarily by shareholders’ funds and long term debt and excluding all short-
term credit. To quote Walker, “The term capital structure is generally defined to include
only long term debt and total stockholder’s investment” (Walker).It refers to the
Capitalization of long term sources of funds such as debentures, preference share capital,
long term debt and equity share capital including reserves and surplus (retained earnings).
According to Bogen, “Thecapital structure may consist of a single class of stock, or it may be
complicated by several issues of bonds and preferred stock, the characteristics of which may
vary considerably”. In other words, “capital structure refers to the composition of
capitalization i.e., to the proportion between debt and equity that make up capitalization”
(Philips).
Weston and Brigham have indicated the capital structure by the following equation
(Weston):
Capital Structure = Long term debt – Preferred stock + Net worth
(or) Capital Structure = Total Assets – Current Liabilities.
In this Project, an attempt has been made to study the “Pattern of Capital
Structure in SME at NSIC. An analysis of long-term solvency, assessment of
debt-equity, debt to total fund and justification for the use of debt through the
application of ratio analysis and statistical test has been undertaken. The time
period considered for evaluating the study is four years.
 Chapter-1
INTRODUCTI
ON
Introduction of capital structure
The financing decisions occupy a pivotal role in the overall finance function in a
corporate firm which mainly concerns itself with an efficient utilization of the funds provided
by the owners or obtained from external sources together with those retained or ploughed
back out of surplus or undistributed profits. These decisions are mainly in the nature of
planning capital structure, working capital and mechanism through which funds can be
raised from the capital market whenever required. The financing decisions explains how to
plan an appropriate mix with least count, how to raise long term funds, and how to
mobilize the funds for working capital within a short span of time. Such a financing policy
provides an appropriate backdrop for formulating effective policies for investment of funds
as well as management of earnings. It contributes to magnifying the earnings on equity as
profitability (expressed as return on equity), to a large extent, is dependent on the degree of
leverage in the capital structure. Besides, the valuation of the structure of physical assets
depends fundamentally on the financing mix. This makes it necessary for the management of
a firm to pursue a well thought out of financing policy, which ought to be framed initially,
incorporating, among other things, the proportion of the debt and equity, types of debts and
own funds to be used and volume of the funds to be raised from each source or combination
of sources, to enable the firm to have a proper capitalization. In the absence of this, the firm
may face the problem of either over-capitalization or under-capitalization impeding its
smooth financial functioning.
It is obvious that functioning decisions are extremely important for corporate firms.
Such decisions, in management parlance, are termed as capital structure decisions. The term
capital structure is used to describe the combination of various sources of finance employed
to raise funds. It implies, in other words, that when a firm chooses to use a group of
sources in certain proportions the resulting pattern is
referred to as capital structure of the firm. The sources of finance could be divided in terms
of ownership of funds and duration of funds. The former comprises owned and borrowed
funds while the latter includes long, medium and short term funds. Of the two, the duration-
based classification is useful for preparing a plan to meet long term as well as short term
capital requirements while ownership-based classification is useful for selection of specified
sources, determining debt-equity ratio and analyzing impact of capital structure decisions
on the earnings on equity. As the ownership based classification suggests that there are two
types of sources of finance, namely owned and borrowed funds, the capital structure
represents the component relationship between owned and borrowed funds. The owned
funds which are also described as equity fund may be defined as funds provided by or
belonging to the share-holders. In the opinion Raj want Singh and Brij Kumar, the capital
structure is made up of the long term borrowings, the preferred stock and the common stock
equity including all related net worth accounts. Similarly Morarka.R observes that the
capital structure implies a degree of permanency and normally omits short term borrowings
of less than one year but would include other intermediate and long term borrowings. The
financial institutions consider only long term sources of finance for computing the debt-equity
ratio of corporate firm.
Definition
A mix of a company's long-term debt, specific short-term debt, common equity and preferred
equity, the capital structure is how a firm finances its overall operations and growth by
using different sources of funds.
Debt comes in the form of bond issues or long-term notes payable, while equity is classified
as common stock, preferred stock or retained earnings. Short-term debt such as working
capital requirements is also considered to be part of the capital structure
Theories of capital structure
Different kinds of theories have been propounded by different authors to explain the
relationship between capital structure, cost of capital and the value of the firm. The main
contributors to the theories are Durand, Ezra, Solomon, Modigliani and Miller.
The important theories are discussed below:
 Net Income Approach
 Net Operating Income Approach.
 The Traditional Approach.
 Modigliani and Miller Approach.
1. Net Income Approach. According to this approach, a firm can minimize the
weighted average cost of capital and increase the value of the firm as well as market
price of equity shares by using debt financing to the maximum possible extent. The
theory propounds that a company can increase its value and decrease the overall cost
of capital by increasing the proportion of debt in its capital structure. This approach
is based upon the following assumptions:
 The cost of debt is less than the cost of equity.
 There are no taxes.
 The risk perception of investors is not changed by the use of debt.
2. Net Operating Income Approach. This theory as suggested by Durand is another
extreme of the effect of leverage on the value of the firm. It is diametrically opposite
to the net income approach. According to this approach, change in the capital
structure if a company does not affect the market value of the firm and the overall
cost of capital remains constant irrespective of the method of financing. It implies
that the overall cost of capital remains the same whether the debt- equity mix is
50:50 or 20:80 or 0:100. Thus, there is nothing as an optimal capital structure and
every capitalstructure is the optimum capital structure. This theory presumes that:
 The market capitalizes the value of the firm as a whole.
 The business risk remains constant at every level of debt equity mix;
 There are no corporate taxes.
3. The Traditional Approach. The traditional approach, also known as intermediate
approach, is a compromise between extremes of net income approach and net
operating income approach. According to this theory, the
 value of the firm can be increased initially or the cost of capital can be decreased by
using more debt as the debt is a cheaper source of funds than equity. Thus, optimum
capital structure can be reached by a proper debt- equity mix. Beyond a particular
point, the cost of equity increases because increased debt increases the financial risk
of the equity shareholders. The advantage of cheaper debt at this point of capital
structure is offset by increased cost of equity. After this there comes a stage, when
the increased cost of equity cannot be offset by the advantage of low-cost debt. Thus,
overall cost of capital, according to this theory, decreases up to a certain point,
remains more or less unchanged for moderate increase in debt thereafter; and
increases or rises beyond a certain point. Even the cost of debt may increase at this
stage due to increased financial risk.
Objectives
The present study aims at endeavoring the following objectives:
 To analyze the pattern of capital structure;
 To assess of long-term solvency; and
 To ascertain the justification for the use of debt.
Capital structure means the mixture of share capital and other long term liabilities. In
capital structure, we include equity share capital, preference share capital, debenture and
long term debt. Some of companies want to become smart. They slowly decrease equity
share capital and increases loan excessively which may be very risky because these
company has to pay fixed cost of interest and has to manage repayment of loan after some
time. Some mistake in it, may be risky for its solvency. So, decision relating to capital
structure is very important for company
Need for capital structure
For the real growth of the company the financial manager of the company should plan an
optimum capital for the company. The optimum capital structure is one that maximizes the
market value of the firm. There are significant variations among industries and companies
within an industry in terms of capital structure. Since a number of factors influence the
capital structure decision of a company, the
judgment of the person making the capital structure decisions play a crucial part. A totally
theoretical model can’t adequately handle all those factors, which affects thecapital structure
decision in practice. These factors are highly psychological, complex and qualitative and do
not always follow accepted theory, since capital markets are not perfect and decision has to
be taken under imperfect knowledge and risk.
An appropriate capital structure or target capital structure can be developed only when all
those factors, which are relevant to the company’s capital structure decision, are properly
analyzed and balanced. The capital structure should be planed generally keeping in view the
interest of the equity shareholders and financial requirements of the company. The equity
shareholders being the owner of the company and the providers of risk capital (equity),
would be concerned about the ways of financing a company’s operations. However, the
interest of other groups, such as employee, customers, creditors, society and government,
should be given reasonable consideration when the company lays down its objective in terms
of the shareholders wealth maximization, it is generally compatible with the interest of
other groups. The management of companies may fix its capital structure near the top of this
range in order to make maximum use of favorable leverage, subject to other requirements
such as flexibility, solvency, control and norms set by the financial institutions- The Security
Exchange Board of India (SEBI) and Stock Exchanges.
Scope and coverage
The present study is confined to SME. This study is restricted to assess the pattern of capital
structure in SME with the help of the ratio analysis. The time period considered for
evaluating the study is four years
Research methodology
“Research Methodology is a systematic and objective process of identifying and formulating
the problem by setting objectives and methods for collecting, editing, calculating,
evaluating, analyzing, interpreting and presenting data in order to find justified solutions.”
Research design:
The Descriptive research design has been using in this study. Descriptive research studies,
which are concerned with describing the characteristics of a particular individual or of a
group or a situation. Studies concerned with specific predictions, with narration of facts and
characteristics concerning individual, group or a situation are examples of descriptive
research studies.in this project, income and balance statements are evaluated to know the
state of affairs as it existed during the years 2010-2015. This helps to know the performance
of the schemes.
Sources of Data:
There are two sources of data namely:
1. Primary data
2. Secondary data
Primary Data:
Primary data are those which are collected for the first time and so are in crude form. They
are original in character. If an individual or an office collects the data to study a problem,
the data are the raw material of the enquiry. Primary data are always collected from the
source. It is collected either by the investigator himself orthrough his agents.

Secondary Data:
Secondary data are those which have already been collected by someone for the purpose
and are available for the present study. The choice to a large extent depends on the
preliminaries to data collection some of the commonly used methods are discussed below;
In this research, the various sources of secondary data, which are used, are:
• Literature Reviews
• Journals
• Magazines
• Balance sheets
 Tools of analysis
The present study is confined to SME. This study is restricted to assess the pattern of capital
structure in SME with the help of the ratio analysis. The time period considered for
evaluating the study is four years
Limitations
 It requires a small business to make regular monthly payments of principaland
interest.
 Availability is often limited to established businesses.
 Since lenders primarily seek security for their funds, it can be difficult for
unproven businesses to obtain loans.
 Very complicate and expensive to administer.


Chapter-2
REVIEW OF LITERATURE
Study on capital structure has become one of the most significant subjects of interest in
modern finance. It has acquired lot of recognition from researchers during recent years.
There exists a vast body of literature that has examined the determinants of the capital
structure of companies in developed economies. Empirical works based on theories of
capital structure has been previously conducted for Australia (Cassar and Holmes, 2003;
Johnsen and McMahon, 2005), Spain (Sorgorb, 2005), UK (Hall et al., 2000) and the US
(Gregory et al., 2005). However studies on capital structure have been extended to the
developing economy contexts only in recent past. The level of development of a country’s
legal and financial systems has been shown to influence the capital structure of its
enterprises (Fan et al., 2006). In economies with relatively weak investor protection,
enterprises are more likely to employ short-term debt than long-term debt in their capital
structure. This is in contrast to enterprises in economies with active stock
markets and large banking sectors which have more long-term debts (Demirguc- Kunt and
Maksimovic (1999). Despite of the growing volume of literature on the determinants of
capital structure in the developing economy context is available, there has been limited
work conducted on SMEs in these countries. One possible reason for this discrepancy is that
SME data is often scarce and sometimes not reliable, since these firms are not officially
required to disclose detailed information or to have their reports audited. Some preliminary
work has been carried out for Poland (Klapper et al., 2006), Vietnam (Nguyen and
Ramachandran, 2006), and Ghana (Abor and Biekpe, 2007). All these studies implies to the
fact that the that theories of capital structure developed to explain the financing decisions of
SMEs in developed economies are not equally applicable in developing economies, due to
their institutional and organizational differences. Many authors suggested the firm size as a
potential determinant of capital structure decision.

Determinants of capital structure of Chinese-listed companies.

Jean J. Chen in this paper develops a preliminary study to explore the determinantsof capital
structure of Chinese-listed companies using firm-level panel data. The findings reflect the
transitional nature of the Chinese corporate environment. They suggest that some of the
insights from modern finance theory of capital structure are portable to China in that
certain firm-specific factors that are relevant for explaining capital structure in developed
economies are also relevant in China. However, neither the trade-off model nor the Pecking
order hypothesis derived from the Western settings provides convincing explanations for the
capital choices of the Chinese firms. The capital choice decision of Chinese firms seems to
follow a “new Pecking order”—retained profit, equity, and long-term debt. This is because
the fundamental institutional assumptions underpinning the Western models are not valid in
China. These significant institutional differences and financial constraints in
the banking sector in China are the factors influencing firms' leverage decision and they are
at least as important as the firm-specific factors. The study has laid some groundwork upon
which a more detailed evaluation of Chinese firms' capital structure could be based.

“Determinants of capital structure of Chinese-listed companies, December 2004

-Jean J. Chen”

Small and medium-size enterprises: Access to finance as a growth constraints

Thorsten Beck in this paper presents recent research on access to finance by small and
medium-size enterprises (SMEs). SMEs form a large part of private sector in many
developed and developing countries. While cross-country research sheds doubt on a causal
link between SMEs and economic development, there is substantial evidence that small firms
face larger growth constraints and have less access to formal sources of external finance,
potentially explaining the lack of SMEs’ contribution to growth. Financial and institutional
development helps alleviate SMEs’ growth constraints and increase their access to external
finance and thus levels the playing field between firms of different sizes. Specific financing
tools such as leasing and factoring can be useful in facilitating greater access to finance
even in the absence of well-developed institutions, as can systems of credit information
sharing and a more competitive banking structure.

“Small and medium-size enterprises: Access to finance as a growth constraints, June 2006

-Thorsten Beck”

The Determinants of Capital Structure Choice

Sheridan Titamin and Robert wessel’s in this paper analyzes the explanatory power of some
of the recent theories of optimal capital structure. The study extends empirical work on
capital structure theory in three ways. First, it examines a much broader set of capital
structure theories, many of which have not previously been
analyzed empirically. Second, since the theories have different empirical implications in
regard to different types of debt instruments, the authors analyze measures of short-term,
long-term, and convertible debt rather than an aggregate measure of total debt. Third, the
study uses a factor-analytic technique that mitigates the measurement problems encountered
when working with proxy variables.

“Determinants of Capital Structure Choice, March 1998

By Sheridan Titamin and Robert wessel’s”

SME Capital Structure: The Dominance of Demand Factors

In this study, Kenny Bell and Ed Vos has described SME capital structure behavior is found
typically to follow pecking order behavior. However, the theoretical underpinnings of the
pecking order theory are doubted in the case of SMEs as SME managers highly value
financial freedom, independence, and control while the pecking order theory assumes firms
desire financial wealth and suffer from severe adverse selection costs in accessing external
finance. Alternatively, the contentment hypothesis of Vos, et al (2007) contends the reason
SMEs exhibit pecking order behavior is the aversion to loss of control to outside financiers
and the preference for financial freedom. This paper develops the capital structure
predictions of the contentment hypothesis, reviews the predictions of the tradeoff and
pecking order theories for relevant variables, reviews the findings of existing SME capital
structure studies, and provides original empirical support for the contentment hypothesis
using a survey of over 2,000 firms from Germany, Greece, Ireland, South Korea, Portugal,
Spain, and Vietnam.
“SME Capital Structure: The Dominance of Demand Factors, August 2009
- By Kenny Bell and Ed Vos”

Impact of Capital Structure on Firm Performance: Evidence from Manufacturing

Sector SMEs in UK

D K Y Abeywardhana states in his study is to investigate empirically the impact of

capital structure on firm performance. This study examined the impact of capital
structure on firm performance of manufacturing sector SMEs in UK for the period of
1998-2008. The authors hypothesize that there is a negative relationship between
capital structure and firm performance. To examine the association, the authors run a
Pearson correlation and multiple regression analysis. Results of this study reveals that
there is a significant negative relationship between leverage and firm performance
(ROA, ROCE), strong negative relationship between liquidity and firm performance and
highly significant positive relationship between size and the firm performance. This
study concluded that firms which perform well do not rely on debt capital and they
finance their operations from retained earnings and specially SMEs have less access to
external finance and face difficulties in borrowing funds. It is recommended that firm
should establish the point at which the weighted average cost of capital is minimized
and to maintain the optimal capital structure and thereby maximize the shareholders
wealth.
“Impact of Capital Structure on Firm Performance: Evidence from Manufacturing
Sector SMEs in UK, November 2015
-D K Y Abheywardhana”
 Chapter-3
COMPANY &INDUSTRIAL PROFILE

3.1 NSIC -
An ISO 9001:2008 Company
Industry profile
To collect and disseminate both domestic as well as international marketing
intelligence benefits of MSMEs. This cell, in addition to spreading awareness about
various programmers/schemes for MSMEs, will specifically maintain database and
disseminate information on the following.
National small industries corporation (NSIC), AN ISO 9001: 2008 certified
company and a govt. of India enterprise has been working to fulfill its mission of
promoting, aiding and fostering the growth of micro, small & medium enterprises in the
country. Over a period of five decades of transition, growth and development, NSIC has
proved its strength within the country and abroad by promoting modernization, up
gradation of technology NSIC operation through country wide network of 123 offices
and technical centre’s in the country. In addition, NSIC has 48 training cum incubation
centers & with a large professional manpower; NSIC provides a package of services as
per the needs of MSME sectors. To manage operations in African countries, NSIC
operatesfrom its office in Johannesburg, South Africa.
This cell provides a single point contact to collect database relating to bulk
buyers in government, public and private sectors, the detail of exporters, international
buyers and technology suppliers. Besides, the information on trade leads and products
wise buyers and sellers as well as database relating to DGS & D suppliers with prices of
their products, shall also be provided by this NSIC marketing intelligence cell to help
MSMEs in getting appropriate information at one place and at the right time which will
enable MSMEs in enhancing their ability to gauge and be at par with the global
demand. MSMEs need to be provided with market related information, new avenues for
their products, new business practices, both domestically as well as overseas. MSMEs
are handicapped because of non availability of information pertaining to central
government / state government policies and programs, the support schemes and services
of central /state PSUs availability of new technologies, international and national
tenders, opportunities available in various countries for products and project exports
 Schemes of NSIC:
The national small industries corporation limited an ISO 9001: 2008 certified company
established in 1955, has been working to fulfill its mission of promoting, aiding and
fostering the growth of micro and small enterprises in the country.
NSIC carries forward its mission to assist micro and small enterprises with a set of specially
tailored schemes designed to put them in a competitive and advantageous position. The
scheme comprises of facilitating marketing support, credit support, technology support and
other support services.
Marketing is a strategic tool for business development and survival of the enterprises in
today’s Competitive era. NSIC acts as a facilitator to promote micro and small enterprises
products and has devised a number of schemes to support in their marketing efforts both in
the outside the country. Some of the schemes are briefly described an under.
Single point registration for government purchase:
Government is the largest buyer of product from micro and small enterprises. In
order to meet its requirement of purchase, NSIC operation a single point registration
scheme under the government purchase program, where in NSIC issue registration to
eligible micro and small enterprises for the purpose of suppliers to the government
departments. The registration is par with DGS & D, the unit registration under this gets the
following facilities.
• Issue of tender sets free of cost
• Exemption from payment of earnest money
• Waiver of security deposit up to the money limit for which the unit is registered
 Infomediary services:

Information plays a vital role in the success if any business. Keeping in mind the
information needs to micro and small enterprises. NSIC has launched its infomediary
services. A one stop, one window bouquet for aids that will provide information on business,
technology, finance and also exhibit the core competence of Indian micro and small
enterprises in terms of price and quality internationally as well as domestically.
Some important services provided are:
• Tender information in your e-mail box and web based browsing
• Banner display on NSIC’C website
• Accesses to wide range of technologies from India and abroad
• Joint venture opportunities and information on of trade and events
• Comprehensive information on government policies rules, regulations,
schemes and incentives.
Raw material assistance:
NSIC extends short term financial assistance to micro and small enterprises for
procurement of raw material on need basis.
The salient features
• Financial assistance for procurement of raw material up to 90 days
• MOU with NALCO, HCL, SAIL, RINL FOR supply of bulk materials
• Easy and quick disbursement
• Flexibility of repayment
Tender marketing:
The corporation participates in bulk global tender enquiries and local tenders of central &
state government and public sector enterprises on behalf of micro and small enterprises.
It is aimed to assist micro and small enterprises with ability to manufacture quality products
with brand equity & credibility or have limited financial capabilities.
 Benefits:
NSIC will provide all financial support depending upon the unit’s individual requirements
like purchase of raw materials and financing of sale bill. Enhance business volume helps
micro and small enterprises to achieve maximum capability utilization. Micro and small
enterprises are exempted from depositing earnest money. It ensures fair margin to micro and
small enterprises for their production.

Performance and credit rating scheme for micro and small

enterprises:
To ensure micro and small enterprises to ascertain the strength and weakness of their
existing operation and to take corrective measures to enhance their organization strength,
NSIC is operating performance and credit rating scheme through empanelled agencies like
ICRA; ONICRA, DUN & BRAD STREET, CRISIL, FITCH, CARE and SNERA. Micro and
small enterprises has the liberty to choose among any of the rating agencies empanelled
with NSIC. The rating agencies will charge the credit rating fee according to their policies.
The benefits to small enterprises are as follows.
• An in dependent trusted third party opinion on capabilities and credit-
worthiness of micro and small enterprises
• Availability of credit at attractive interest
• Recognition in global trade
• Prompt sanctions of credit from banks financial institutions.
Facilitation of credit support through banks:
Any kind of financial assistance i.e., terms loan, working capital loan, bill
discounting facility and export finance can be arrange through united bank of India, UCO
bank, oriental bank of commerce, central bank of India, bank of Maharashtra, YES bank and
HSDC at the most competitive interest rates. The terms and condition of finance shall be of
individual bank. NSIC will undertake the follow up the proposals with the bank selected by
the unit for obtaining finance shall ensure timely disposal. Application forms of the
individual banks can be had from the office of the NSIC.
 Company profile - About serwel electronics ltd.
Serwel Electronics was established in 1996 with a vision to provide Power Solutions. Sewell is
committed to excellence in the areas of Designing, Manufacturing and Development of all
types of power products which is a Power and Distribution Transformers, Servo Voltage
Stabilizers, UPS, Variac's etc. Sewell products are appreciated for its Efficient Performance,
Long Service Life, Reliability, Sturdy Construction and Dimensional Accuracy.

Infrastructure Set Up and Our Team

Sewell products are manufactured on state-of-the-art machines with latest technology, we
deliver zero defect power products. This is achieved through team of experts and
streamlined production process. With synchronous approach, we strive to deliver quality
proven power products meeting our customer’s expectations. Our plants are well equipped
with most modern Machinery & Testing Equipments to conduct tests as per IS: 5142 with an
installed capacity of 100000 units per annum. Serwel operations includes 3 manufacturing
facilities, two facilities located in Hyderabad and one in Bangalore. We provide sales and
supportservices from marketing offices spread across pan India.

Quality
Sewell is an ISO 9001:2000 certified company with a commitment of well defined quality
systems that ensures quality products and services are delivered to our customers. R & D is
a continuous process in Sewell and we are committed to introduce new products which can
be customized as per customers request and configurations. All products are tested on
various parameters like safety, electricity consumption, durability, maintainability, etc. The
stringent quality check imbibed by us assures conformance of products in relation to
international quality standards.
 Products
 Electronic voltage stabilizers.
 Power & Distribution Transformers.
 Automatic power Factor.
 LT panel boards.
 Energy saver.
 UPS.

Infrastructure
We possess a state-of-the-art manufacturing units, which are facilitated with the latest
machinery, equipment and technology. With these facilities, we are able to meet the bulk
requirements of our clients. We make sure that we upgrade our machinery from time to time
for the smooth functioning of our manufacturing process.

Profile
Serwell is one of the leading manufacturers of Servo Stabilizers, Distribution and Power
Transformers, Ultra Isolation Transformers, APFC Panels, Auto Transformers and Power
Savers. Sewell constantly adds new products every year to existing product line and is in
business to address electrical needs of customers from more than 16 years.
 Company Profile
Basic Information
Business Type
 Supplier
 Manufacturer
 Service provider

Ownership & Capital

Year of Establishment 1996
Ownership Type Public Limited Company

Trade & Market

Annual Turnover Rs. 50 - 100 Cr (or US$ 10 million - 20 million Approx).
Export Percentage 20-40%

Quality & Certification

Trade Memberships Enclosed

Team & Staff

Total Number of Employees 101 to 500 People

Company USP
 Experienced R&D  Good financial
Primary competitive Department position &TQM
advantage

 Large production  Provide customized

capacity solutions

Statutory Profile
PAN No. AAECS3499J
Registration Authority Hyderabad
Registration No. AAECS3499JXM003
TIN No. / VAT No. 28250204177V
Packaging/Payment and Shipment Details
Payment Mode  Cheque  Credit card

 DD  LC

Shipment mode  By air  By cargo

 By road  By sea

Core Value
Sewell Electronics Limited values its customers and enjoys working side-by-side with them
in delivering solid business value. We believe in respecting our customers, listening to their
requests and understanding their expectations. We strive to exceed their expectations in
affordability, quality and on-time delivery.
For our employees, we treat them with respect and trust, and lead through competence,
creativity and teamwork

Our Infrastructure
Sewell Electronics Limited processes modernized and sophisticated infrastructure that
spread across a widespread land area. To accomplish bulk demands with utmost ease, we
have segregated our infrastructure into a number of specialized departments. These
departments are well-equipped with modernized machines andrequisite tools to timely
execute our work processes with utmost precision. Our manufacturing cum designing
department is installed with hi-tech machines and sophisticated equipment and designing
patterns to ensure that dimensionally accurate and robust range of products in the market
Quality Policy / Processes
Premier aim of our organization is to offer quality-assured range of products to our
worldwide customers. To manufacture our exclusive product range, we make use of finest
grade components and material that are sourced from trusted sources. Besides the product
development is carried under strict surveillance of experienced quality inspectors. These
professionals ensure that the product range is developed as per the agreed demands and
regulatory specifications. Not only this, our ardent quality inspectors have proper
arrangement to cautiously check these products on the basis of varied quality checks. Owing
to robust and never failing quality control, we are able to offer internationally acclaimed
range of products to our customers.

Production Capacity
With installed modernized machines and sophisticated tools and equipment, we are able to
furnish bulk demands of our customers with utmost ease and within the constraints of time.
Besides, machines installed aids in conduction of thorough testing as per IS: 5142 norms.
Owing to the use of modernized machines and tools, we are able to produce around 35000
units per year. Our manufactured productsare safely stored in our capacious warehousing
facility. Owing to proper segregation into various sections, our warehouse aids in storing
range as per proper nomenclature and labeling, thereby ensuring quick retrieval and timed
dispatch. minimum turnover as of the eligibility criteria for MSE's.

RaghuVamsi Machine Tools Pvt Ltd

Company Profile
 About the company-
Incorporated in 1992 RaghuVamsi Machine Tools Pvt. Ltd have created an enviable niche in
industry for our products’ excellence in all across the nation. The company is engaged in
manufacturing, exporting and supplying a wide assortment of Aero Engine Components,
Aero structure Components, Avionic Components, Defense Components, Oil & Gas
Components and Power Transmission Components. Our company has earned a dignified
position by efficiently serving to its valuable clients’ with qualitative products. We develop
products incorporating advanced technologies and better quality material, which have
enabled us making best products available to the customers. The material, we use in the
production process, is sourced from trustworthy vendors, whom we have chosen conducting
stringent surveys of industry. We work in close proximity with the customers, in order to
comprehend their aspirations and offer products accordingly. As a result, we have acquired
the trust of maximum customers and expanded our base of satisfied clients from all across
the country.
Our company possesses team of extremely dedicated and talented professionals, who
dedicatedly perform the whole task and ensure accomplishing the specific targets
successfully. They cordially perform the whole operations and ensure to achieve the
predetermined objectives of a company successfully.
Mr. G.Vamshi Vikas is the managing director of our organization, who have helped us
growing and achieving a desired niche in industry. All these are just because of his sound
managerial qualities, business acumen, foresightedness, industrial experience and sincere
business approach.
Company Mission
To create value and make a difference in the field of Precision Manufacturing by using
world class machine shop, best quality methods, up to date technology - achieving consistent
delivery and zero-defect parts to our customers at competitiveprices.

Company Core Values

Reliability: To be Reliable towards Quality and Delivery to enhance customer satisfaction
Integrity: Our Integrity towards Work, Values & Customers
Social Responsibility: Responsible towards society - Primary focus on Education &
Environment.
Company Management
Raghu Vamsi’s Management Team is comprised of Professional & Highly experienced
leaders from a variety of industry backgrounds. They have a comprehensive vision of the
aerospace industry and understand the strategic business needs of our customers. Together
they continue to drive our integrated vision of growth.
Vamshi Vikas Ganesula - Managing Director
Vamshi vikas Ganesula is managing director of raghuvamsi reporting to the board of
directors provides leadership to ensure the organization achieves its mission and vision while
meeting the expectation of all stakeholders. He heads the strategy &business development of
the company.
A business graduate from IIM-C took over the business in 2004 at an age of 23 after the
sudden death of the founder. In spam of 8 years company grew from 15 employees to
200 entering important sectors of Aerospace, Defense and oil &gas.
Reporting to the Managing Director, Mr.Subba rao heads the Sales & Coordination Team.
He ensures the customer requirements are met and bridges the customer with the company
to ensure 100% quality & on time delivery.
A Master’s graduate in Mechanical Engineering from MIT, Chennai joined Raghu Vamshi
in 2008. He has over 40 years of experience in Aerospace industry and has worked in
various senior management disciplines including Operations, Marketing, and Customer
Coordination in Hindustan Aeronautics Limited before retiring as AGM, Production in
2004. He also Served as Secretary HAL in Indian Embassy, Moscow coordinating all
aerospace industries in Russia with all HAL’s in India.
Mallikarjuna Swami – General Manager Mallikarjuna Swami is General Manager -
Operations of Raghu Vamsi mechanical engineer having 42 years of experience and worked
as a senior management member in HAL – koraput division and in reputed automotive
component manufactures like range engine valves, range Die cart and Synergies Casting
Ltd.
Company Future Plans
Raghu Vamshi, in a short span of time, has evolved as a successful manufacturingpartner to
its customers by providing High Precision machining and Engineering CAD/CAM Services.
A strategically defined plan till 2015 will further enhance our current capabilities

Our future plans include value-added services like:

 Sheet Metal
 Welding
 NADCAP NDT
 NADCAP Plating
 Assembly Services
 EMS Activity

Awards and Achievements

Managing Director of Raghu Vamshi, Mr.G.Vamsi Vikas was honored with “Bharat Guarav
Award” in 2007 by All India Business and Community foundation in the 37th National
Seminar on “outstanding contributions to National development”.
He was honored with “Bharat vikas rattan award” in 2009. He was honored with
“Rashtriya udyog samman puraskar” in 2006. He was also honored with “young
enterprising award “f or the year 2005 by Fenner India Ltd.

ISO Certification
 Chapter-4 CONCEPTUAL FRAMEWORK
Capital structure theories

The financing decisions occupy a pivotal role in the overall finance function in a corporate
firm which mainly concerns itself with an efficient utilization of the funds provided by the
owners or obtained from external sources together with those retained or ploughed back out
of surplus or undistributed profits. These decisions are mainly in the nature of planning
capital structure, working capital and mechanism through which funds can be raised from
the capital market whenever required. The financing decisions explains how to plan an
appropriate mix with least count, how to raise long term funds, and how to mobilize
the funds for working capital within a short span of time. Such a financing policy provides
an appropriate backdrop for formulating effective policies for investment of funds aswell
as management of earnings. It contributes to magnifying the earnings on equity as
profitability (expressed as return on equity), to a large extent, is dependent on the degree of
leverage in the capital structure. Besides, the valuation of the structure of physical assets
depends fundamentally on the financing mix. This makes it necessary for the management of
a firm to pursue a well thought out of financing policy, which ought to be framed initially,
incorporating, among other things, the proportion of the debt and equity, types of debts and
own funds to be used and volume of the funds to be raised from each source or combination
of sources, to enable the firm to have a proper capitalization. In the absence of this, the firm
may face the problem of either over-capitalization or under-capitalization impeding its
smooth financial functioning.
It is obvious that functioning decisions are extremely important for corporate firms.
Such decisions, in management parlance, are termed as capital structure decisions. The term
capital structure is used to describe the combination of various sources of finance employed
to raise funds. It implies, in other words, that when a firm chooses to use a group of sources
in certain proportions the resulting pattern is referred to as capital structure of the firm. The
sources of finance could be divided in terms of ownership of funds and duration of funds.
The former comprises owned and borrowed funds while the latter includes long, medium and
short term funds. Of the two, the duration-based classification is useful for preparing a plan to
meet long term as well as short term capital requirements while ownership-based
classification is useful for selection of specified sources, determining debt-equity ratio and
analyzing impact of capital structure decisions on the earnings on equity. As the ownership
based classification suggests that there are two types of sources of finance, namely owned
and borrowed funds, the capital structure represents the component relationship between
owned and borrowed funds. The owned funds which are also described as equity fund may
be defined as funds provided by or belonging to the share-holders. In the opinion Raj want
Singh and Brij Kumar, the capital structure is made up of the long term borrowings, the
preferred stock and the common stock equity including all related net worth accounts.
Similarl Morarka.R observes that the capital structure implies a degree of permanency and
normally omits short term borrowings of less than one year but would include other
intermediate and long term borrowings. The financial institutions consider only long term
sources of finance for computing the debt-equity ratio of corporate firm.
Definition
A mix of a company's long-term debt, specific short-term debt, common equity andpreferred
equity, the capital structure is how a firm finances its overall operations and growth by
using different sources of funds.
Debt comes in the form of bond issues or long-term notes payable, while equity is classified as
common stock, preferred stock or retained earnings. Short-term debtsuch as working capital
requirements is also considered to be part of the capital structure
Theories of capital structure
Different kinds of theories have been propounded by different authors to explain the
relationship between capital structure, cost of capital and the value of the firm. The main
contributors to the theories are Durand, Ezra, Solomon, Modigliani and Miller. The
important theories are discussed below:
 Net Income Approach
 Net Operating Income Approach.
 The Traditional Approach.
 Modigliani and Miller Approach.
1. Net Income Approach. According to this approach, a firm can minimize the
weighted average cost of capital and increase the value of the firm as well as market
price of equity shares by using debt financing to the maximum possible extent. The
theory propounds that a company can increase its value and decrease the overall cost
 of capital by increasing the proportion of debt in its capital structure. This approach
is based upon the following assumptions:
 The cost of debt is less than the cost of equity.
There are no The risk perception of investors is not changed by the use of debt.
2. Net Operating Income Approach. This theory as suggested by Durand is another
extreme of the effect of leverage on the value of the firm. It is diametrically opposite
to the net income approach. According to this approach, change in the capital
structure if a company does not affect the market value of the firm and the overall
cost of capital remains constant irrespective of the method of financing. It implies
that the overall cost of capital remains the same whether the debt- equity mix is
50:50 or 20:80 or 0:100. Thus, there is nothing as an optimal capital structure and
every capitalstructure is the optimum capital structure. This theory presumes that:
 The market capitalizes the value of the firm as a whole.
 The business risk remains constant at every level of debt equity mix;
 There are no corporate taxes.
The Traditional Approach. The traditional approach, also known as intermediate
approach, is a compromise between extremes of net income approach and net operating
income approach. According to this theory, the value of the firm can be increased initially
or the cost of capital can be decreased by using more debt as the debt is a cheaper source of
funds than equity. Thus, optimum capital structure can be reached by a proper debt- equity
mix. Beyond a particular point, the cost of equity increases because increased debt
increases the financial risk of the equity shareholders. The advantage of cheaper debt at this
point of capital structure is offset by increased cost of equity. After this there comes a stage,
when the increased cost of equity cannot be offset by the advantage of low-cost debt. Thus,
overall cost of capital, according to this theory, decreases up to a certain point, remains
more or less unchanged for moderate increase in debt thereafter; and increases or rises
beyond a certain point. Even the cost of debt may increase at this stage due to increased
financial risk
How can financial leverage affect the value?

One thing is sure that wherever and whatever way one sources the finance from, it cannot
change the operating income levels. Financial leverage can, at the max, have an impact on
the net income or the EPS (Earning per Share). The reason is explained further. Changing
the financing mix means changing the level of debts and change in levels of debt can impact
the interest payable by that firm. Decrease in interest would increase the net income and
thereby the EPS and it is a general belief that the increase in EPS leads to increase in the
value of the firm.

concept of optimal capital structure

Optimal capital structure may be defined as that relationship of debt and equitywhich
maximizes the value of company’s share in the stock exchange.
Kulkarni and Satyaprasad defined optimum capital structure as ‘the one in whichthe
marginal real cost of each available method of financing is the same’. They included both
the explicit and implicit cost under the term real cost.
According to Prof Ezra Solomon, ‘Optimal capital structure is that mix of debt and equity
which will maximize the market value of a company’. Hence there should be a judicious
combination of the various sources of long-term funds which pro¬vides a lower overall cost
of capital and so a higher total market value for the capital structure. Optimal capital
structure may thus be defined as, the mixing of the permanent sources of funds used by the
firm in a manner that will maximize the company’s common stock price by minimizing the
firm’s composite cost of capital.The concept of optimal capital structure has drawn a great
deal of attention in accounting and finance literature. Capital structure means the
proportion of debt and equity in the total capital of a firm. The objective of a firm is to
maximize the value of its business.
This is done by maximizing market value of the shares and minimizing the cost of capital of
a firm. An optimal capital structure is that proportion of debt and equity, which fulfils this
objective of a firm. Thus an optimal capital structure tries to optimize two variables at the
same time: cost of capital and market value of shares.
frame work of capital structure: FRICT analysis
A financial structure may be evaluated from various perspectives. From the owner’s point
of view, return, risk and value are important considerations. From the strategic point of
view, flexibility is an important concern. Issue of control, flexibility and feasibility assume
great significance. A sound capital structure will be achieved by balancing all these
considerations:
 Flexibility: the capital structure should be determined within the debt capacity of the
company, and this capacity should not be exceeded. The debt capacity of a company
depends on its ability to generate funds cash flows. It should have enough cash to
pay creditor’s fixed charges and principal sum and leave some excess cash to meet
future contingency. The capital structure should be flexible. It should be possible for
a company to adapt its capital structure with a minimum cost and delay if warranted
by a changed situation. It should also be possible for the company to provide funds
whether needed to finance its profitable activities.
 Risk: the risk depends on the variability in the firm’s operations. It may be caused by
the macroeconomic factors and industry and firm specific factors. The excessive use of
debt magnifies the variability of shareholders’ earnings, and threatens the solvency of
the company.
 Income: the capital structure of the company should be most advantageous to the
owners (shareholders) of the firm. It should create value; subject to other
considerations, it should generate maximum returns to the shareholders with
minimum additional cost.
 Control: the capital structure should involve minimum risk of loss of control of the
company. The owners of closely held companies are particularly concerned about
dilution of control.
 Timing: the capital structure should be feasible to implement given the current and
future conditions of the capital market, the sequencing of sources of financing is
important. The current decision influences the future options of raising capital.
The FRICT (flexibility, risk, income, control and timing) analysis provides general
framework for evaluating a firm’s capital structure. The particular characteristics of a
company may reflect some additional specific features. Further the emphasis given to each
of these features will differ from company to company.
Factors affecting capital structure theories:
Debt and equity differ in cost and risk. As debt involves less cost but it is very risky securities
whereas equity is expensive securities but these are safe securities from companies’ point of
view. Debt is risky because payment of regular interest on debt is a legal obligation of the
business. In case they fail to pay debt security holders can claim over the assets of the
company and if firm fails to meet return of principal amount it can even go to liquidation
and stage of insolvency. Equity securities are safe securities from company’s point of view
as company has no legal obligation to pay dividend to equity shareholders if it is running in
loss but these are expensive securities.
Capital structure of the business affects the profitability and financial risk. A best capital
structure is the one which results in maximizing the value of equity shareholder or which
brings rise in the price of equity shares. Generally companies use the concept of financial
leverage to set up capital structure.
The various factors which influence the decision of capital structure are:
1. Cash Flow Position:
The decision related to composition of capital structure also depends upon the ability of
business to generate enough cash flow.
The company is under legal obligation to pay a fixed rate of interest to debenture holders,
dividend to preference shares and principal and interest amount for loan. Sometimes
company makes sufficient profit but it is not able to generate cash inflow for making
payments.
The expected cash flow must match with the obligation of making payments because if
company fails to make fixed payment it may face insolvency. Before including the debt in
capital structure company must analyze properly the liquidity of its working capital.
A company employs more of debt securities in its capital structure if company is sure of
generating enough cash inflow whereas if there is shortage of cash then it must employ
more of equity in its capital structure as there is no liability of company to pay its equity
shareholders.
2. Interest Coverage Ratio (ICR):
It refers to number of time companies earnings before interest and taxes (EBIT) cover the
interest payment obligation.
ICR= EBIT/ Interest
High ICR means companies can have more of borrowed fund securities whereas lower ICR
means less borrowed fund securities.
3. Debt Service Coverage Ratio (DSCR):
It is one step ahead ICR, i.e., ICR covers the obligation to pay back interest on debt but
DSCR takes care of return of interest as well as principal repayment.

If DSCR is high then company can have more debt in capital structure as high DSCR
indicates ability of company to repay its debt but if DSCR is less then company must avoid
debt and depend upon equity capital only.
4. Return on Investment:
Return on investment is another crucial factor which helps in deciding the capital structure.
If return on investment is more than rate of interest then company must prefer debt in its
capital structure whereas if return on investment is less than rate of interest to be paid on
debt, then company should avoid debt and rely on equity capital. This point is explained
earlier also in financial gearing by giving examples.
5. Cost of Debt:
If firm can arrange borrowed fund at low rate of interest then it will prefer more ofdebt as
compared to equity.
6. Tax Rate:
High tax rate makes debt cheaper as interest paid to debt security holders is subtracted from
income before calculating tax whereas companies have to pay tax on dividend paid to
shareholders. So high end tax rate means prefer debt whereas
at low tax rate we can prefer equity in capital structure.

7. Cost of Equity:
Another factor which helps in deciding capital structure is cost of equity. Owners or equity
shareholders expect a return on their investment i.e., earning per share. As far as debt is
increasing earnings per share (EPS), then we can include it in capital structure but when
EPS starts decreasing with inclusion of debt then we must depend upon equity share capital
only.
8. Floatation Costs:
Floatation cost is the cost involved in the issue of shares or debentures. These costs include
the cost of advertisement, underwriting statutory fees etc. It is a major consideration for
small companies but even large companies cannot ignore this factor because along with
cost there are many legal formalities to be completed before entering into capital market.
Issue of shares, debentures requires more formalities as well as more floatation cost Whereas
there is less cost involvedin raising capital by loans or advances.
9. Risk Consideration:
Financial risk refers to a position when a company is unable to meet its fixed financial
charges such as interest, preference dividend, payment to creditors etc. Apart from financial
risk business has some operating risk also. It depends upon operating cost; higher operating
cost means higher business risk. The total risk depends upon both financial as well as
business risk.
If firm’s business risk is low then it can raise more capital by issue of debt securities
whereas at the time of high business risk it should depend upon equity.
10. Flexibility:
Excess of debt may restrict the firm’s capacity to borrow further. To maintain flexibility it
must maintain some borrowing power to take care of unforeseen circumstances.
11. Control:
The equity shareholders are considered as the owners of the company and they
have complete control over the company. They take all the important decisions for
managing the company. The debenture holders have no say in the management andpreference
shareholders have limited right to vote in the annual general meeting. So the total control of
the company lies in the hands of equity shareholders.
If the owners and existing shareholders want to have complete control over the company,
they must employ more of debt securities in the capital structure because if more of equity
shares are issued then another shareholder or a group of shareholders may purchase many
shares and gain control over the company.
Equity shareholders select the directors who constitute the Board of Directors and Board
has the responsibility and power of managing the company. So if another group of
shareholders gets more shares then chance of losing control is more.
Debt suppliers do not have voting rights but if large amount of debt is given then debt-
holders may put certain terms and conditions on the company such as restriction on
payment of dividend, undertake more loans, investment in long term funds etc. So company
must keep in mind type of debt securities to be issued. If existing shareholders want
complete control then they should prefer debt, loans of small amount, etc. If they don’t mind
sharing the control then they may go for equityshares also.
12. Regulatory Framework:
Issues of shares and debentures have to be done within the SEBI guidelines and for taking
loans. Companies have to follow the regulations of monetary policies. If SEBI guidelines are
easy then companies may prefer issue of securities for additional capital whereas if
monetary policies are more flexible then they may go for more of loans.
13. Stock Market Condition:
There are two main conditions of market, i.e., Boom condition. These conditions affect the
capital structure specially when company is planning to raise additional capital. Depending
upon the market condition the investors may be more careful in their dealings.
During depression period in the market business is slow and investors also hesitate to take
risk so at this time it is advisable to issue borrowed fund securities as these are less risky and
ensure fixed
repayment and regular payment of interest but if there is Boom period, business is
flourishing and investors also take risk and prefer to invest in equity shares to earn more in
the form of dividenz
 Essential features of a capital mix
A sound or an appropriate capital structure should have the following essentialsfeatures:
1. Maximum possible use of leverage.
2. The capital structure should be flexible so that it can be easily altered.
3. To avoid undue financial/business risk with the increase of debt.
4. The use of debt should be within the capacity of a firm. The firm should be in aposition
to meet its obligations in paying the loan and interest charges as when due.
5. It should involve minimum possible risk of loss of control.
6. It must avoid undue restrictions in agreement of debt.
7. It should be easy to understand and simple to operate to the extent possible.

EBIT –EPS Analysis:

EBIT-EPS analysis gives a scientific basis for comparison among various financial plans
and shows ways to maximize EPS. Hence EBIT-EPS analysis may be defined as ‘a tool of
financial planning that evaluates various alternatives of financing a project under varying
levels of EBIT and suggests the best alternative having highest EPS and determines the most
profitable level of EBIT.
Concept of EBIT-EPS Analysis:
The EBIT-EBT analysis is the method that studies the leverage, i.e. comparing alternative
methods of financing at different levels of EBIT. Simply put, EBIT-EPS analysis examines
the effect of financial leverage on the EPS with varying levels of EBIT or under alternative
financial plans.
It examines the effect of financial leverage on the behavior of EPS under different financing
alternatives and with vary¬ing levels of EBIT. EBIT-EPS analysis is used for making the
choice of the combination and of the vari¬ous sources. It helps select the alternative that
yields the highest EPS.
We know that a firm can finance its investment from various sources such as borrowed
capital or equity capital. The proportion of various sources may also be different under
various financial plans. In every financing plan the firm’s objec¬tiveslie in maximizing EPS.
Advantages of EBIT-EPS Analysis: We have seen that EBIT-EPS analysis examines the
effect of financial leverage on the behavior of EPS under various financing plans with varying
levels of EBIT. It helps a firm in determining optimum financial planninghaving highest EPS.
Various advantages derived from EBIT-EPS analysis may be enumerated
below: Financial Planning:
Use of EBIT-EPS analysis is indispensable for determining sources of funds. In case of
financial planning the objective of the firm lies in maximizing EPS. EBIT-EPS analysis
evalu¬ates the alternatives and finds the level of EBIT that maximizes EPS. Comparative
Analysis:
EBIT-EPS analysis is useful in evaluating the relative efficiency of depart¬ments, product
lines and markets. It identifies the EBIT earned by these different departments, product lines
and from various markets, which helps financial planners rank them according to
profitability and also assess the risk associated with each.
Performance Evaluation:
This analysis is useful in comparative evaluation of performances of various sources of
funds. It evaluates whether a fund obtained from a source is used in a
project that produces a rate of return higher than its cost.
Determining Optimum Mix:
EBIT-EPS analysis is advantageous in selecting the optimum mix of debt and equity. By
emphasizing on the relative value of EPS, this analysis determines the optimum mix of debt
and equity in the capital structure. It helps determine the alternative that gives the highest
value of EPS as the most profitable financing plan or the most profitable level of EBIT as
the case may be.
Limitations of EBIT-EPS Analysis:
Finance managers are very much interested in knowing the sensitivity of the earnings per
share with the changes in EBIT; this is clearly available with the help of EBIT-EPS analysis
but this technique also suffers from certain limitations, as described below
No Consideration for Risk:
Leverage increases the level of risk, but this technique ignores the risk factor. When a
corporation, on its borrowed capital, earns more than the interest it has to pay on debt, any
financial planning can be accepted irrespective of risk. But in times of poor business the
reverse of this situation arises—which attracts high degree of risk. This aspect is not dealt in
EBIT-EPS analysis.
Contradictory Results:
It gives a contradictory result where under different alternative financing plans new equity
shares are not taken into consideration. Even the comparison becomes difficult if the
number of alternatives increase and sometimes it also gives erroneous result under such
situation.
Over-capitalization:
This analysis cannot determine the state of over-capitalization of a firm. Beyond a certain
point, additional capital cannot be employed to produce a return in excess of the payments
that must be made for its use. But this aspect is ignored in EBIT-EPSanalysis.

Pattern of Capital Structure

The term ‘capital structure’ refers to the relationship between the various long-term forms of
financing such as debenture, preference share capital and equity share capital. Financing
the firm’s assets is a very crucial problem in every business and as a general rule there
should be a proper mix of debt and equity capital in financing the firm’s assets. The use of
long-term fixed interest bearing debt and preference share capital along with equity shares
is called financial leverage or trading on equity. In case of new company the capital
structure may be of any of the following four patterns:
 Capital structure with equity shares only
 Capital structure with equity as well as preference shares
 Capital structure with equity shares and debt capital
 Capital structure with equity shares, preference shares and debt capital.

Approaches to establish target capital structure

The capital structure should be planned initially when a company is incorporated. The
initial capital structure should be designed very carefully. The management of the company
should set a target capital structure and the subsequent financing decisions should be made
with a view to achieve the target capital structure. The company needs funds to finance its
activities continuously. Every time when funds have to be procured, the financial manager
weighs the pros and cons of various sources of finance and selects the most advantageous
sources keeping in view the target capital structure and financial manager deals with
existing capital structure. Thus the capital structure decision is a continuous one and has to
be taken whenever a firm needs additional finances.
Three common approaches to decide about a firm’s capital structure
EBIT-EPS approach for analyzing the impact of debt on shareholders’ return and risk.
Valuation approach for determining the impact of debt on the shareholder’s values Cash
flow analysis for analyzing the firm’s ability to service debt and avoid financial distress.
 Changes in capitalization
No scheme of capitalization or capital structure can be said to be of permanent character
or of static nature in the fast changing world of business. The initial patterns of
capitalization, however planned, can never fully anticipate the efforts of these changes in the
economy. The scheme of capitalization may become outmoded with the changing conditions
of the financial markets. Thus it may become necessary to make changes in the scheme of
capitalization to suit the present needs of a company. A sound capital structure is one which
can be adjusted according to the needs of the changing conditions.
 The following are the main reasons necessitating change in capitalization:
 To restore balance in the financial plan: if the financial structure of a company has
become top heavy with fixed cost bearing securities resulting into a great strain on
the financial position of the company ,the company may readjust its capital structure
by redeeming the preference shares or debentures out of the proceeds of new issue of
equity shares. This will lead to easing out the tension or reduce the strain and
restore the balance in the financial plan.
 To simplify the capital structure: when a company has issued a variety of securities
at different points of time to raise funds at difficult terms, it may need to consolidate
such securities to simplify the financial plan as and when the market conditions are
favorable.
 To suit investors needs: a company may have to change capitalization to suitthe needs
of its investors. The companies often resort to split up of its shares to make these
more attractive especially when the market activity in the company’s share is limited
due to high face value and wide fluctuations in its market prices.
To write off the deficit: In case a company has not been doing well and book value of its assets is overvalued as
compared to their real worth or when there are accumulated losses ,it is better for the company to reorganize its
capital by reducing book value of its liabilities and assets to their real values such reorganization is also
necessitated, because, otherwise the company cannot legally pay dividends to its shareholders even in future
when it makes profits without writing off the losses
 Chapter-5
DATA INTERPRETATION AND ANALYSIS

Ratio analysis:
Ratio analysis is one of the oldest methods of financial statements analysis. It was developed
by banks and other lenders to help them chose amongst competing companies asking for
their credit. Two sets of financial statements can be difficult to compare. The effect of time,
of being in different industries and having different styles of conducting business can make it
almost impossible to come up with a conclusion as to which company is a better investment.
Ratio analysis helps creditors solve these issues.
Ratio analysis is a tool that was developed to perform quantitative analysis on numbers
found on financial statements. Ratios help link the three financial statements together and
offer figures that are comparable between companies and across industries and sectors.
Ratio analysis is one of the most widely used fundamental analysis techniques.
However, financial ratios vary across different industries and sectors and comparisons
between completely different types of companies are often not valid. In addition, it is
important to analyze trends in company ratios instead of solely emphasizing a single
period’s figures.
What is a ratio? It’s a mathematical expression relating one number to another, often
providing a relative comparison. Financial ratios are no different—they form a basis of
comparison between figures found on financial statements .As with all types of fundamental
analysis, it is often most useful to compare the financial ratios of a firm to those of other
companies.
Financial ratios fall into several categories. For the purpose of this analysis, the commonly
used ratios are grouped into four categories: activity, liquidity, solvency and profitability.
Following ratios have been used to analyze and interpret the result of the study:
 Debt – Equity ratio.
 Solvency ratio.
 Interest coverage ratio.
 Earnings per share ratio.
Computation of ratio

Debt-equity ratio
The main object of calculating the debt-equity ratio is to measure the relative interest of
owners and creditors in the firm. From the creditors’ point of view, it measures the extent to
which their interest is covered by owned funds. A standard debt-equity norm for all
industrial units is neither desirable nor practicable. Different standard debt-equity ratios are
used for different industry groups. However, in less developed countries, such standards
cannot be accepted. Therefore, this ratio depends upon industry, circumstances, and
prevailing practices and so on. The generally accepted standard norm of debt-equity ratio is
2:1. The ratio may be calculated in terms of the relative proportion of long term debt i.e.
borrowed funds and shareholders' equity i.e. net worth. This is a vital ratio to determine
the
efficiency of the financial management of business undertakings (Roy Chowdhary). Debt -

equity ratio is calculated by using the following formula:

Debt – Equity Ratio = Long Term Debt / Net Worth.

The debt - equity ratio of Serwel private Limited and Raghuvamsi private limited is
presented in

Table -5.1

Serwel private Ltd. Raghuvamsi private Ltd.

Year Debt Equity Rati Year Debt Equity RATIO

( in Rs) (in Rs) o (in Rs) (in Rs)

09-10 90194572 80883376 1.11 09-10 25361218 19017075 1.33

10-11 18201951 142525426 12.7 10-11 20800000 20915100 0.99

11-12 28083967 20292436 1.38 11-12 28083967 20292436 1.38

12-13 44902047 269394812 0.41 12-13 42042434 51438286 0.81

13-14 87183784 208336107 0.41 13-14 39409580 58572104 0.67

14-15 288095383 97369359 2.95 14-15 47741624 31786007 1.5

5.1(a)Graph showing the variation of ratios between serwel and raghuvamsi

5.1(b) Interpretation:
 Table 1 shows Debt-Equity ratio of Serwel pvt. Ltd. And Raghuvamshi pvt.Ltd. The
Debt-Equity ratio is calculated by dividing the long term debt and Net worth.
 It is evident that long term debt of the company serwel decreased remarkably from
Rs.90194572 in 2009 to 87183784 in 2014 and again a rapid increase of
Rs.288095383 in 2015. Net Worth had a gradual rise of Rs.80883376 in 2010 and a
rapid fall in 2014 by Rs. 26939481 and again rose by Rs. 97369359 in 2015. In other
words Net Worth is fluctuating in the entire study in serwel electronics pvt.Ltd.
 It is evident that long term debt of the company raghuvamshi increased remarkably
from Rs. 25361218 in 2010 to Rs.47741624 in 2015. Net worth is also rapidly
increasing from Rs.19017075 in 2010 to Rs.31786007 in the year2015.
 Debt-Equity ratio had varied from the higher of 1.3 times in 2010 to the lowest 2.9 in
2015. The ratio is well slight above than the standard ratio of 2:1. It means that the
debt employed by the company was slight high from the point of view as the
standard ratio. However, the interest of the debt-
 holders of the company was well protected.

Solvency ratio
Solvency is the term which is used to describe the financial position of any business which is
capable to meet outside obligations in full out of its own assets. So their ratio establishes
relationship between total liabilities and total assets.
Solvency ratio is calculated by using the following formula:
Solvency ratio = total liabilities / total assets.
The solvency ratio of Serwel private Limited and Rraghuvamshi private limited is presented
in
Table – 5.2

SURWELL PVT. LTD. RAGHUVAMSI PVT. LTD.

Year Total liabilities Total assets Rati Year Total Total assets Ratio
(in (in Rs.) o liabilities (in Rs.)
Rs.) (in Rs.)
09-10 172610403 172610403 1 9-10 57368776 5736776 1
10-11 327250093 327250093 1 10-11 8495300 8495300 1
11-12 927662724 9277662724 1 11-12 102138072 102138072 1

12-13 1225470915 1225470915 1 12-13 116767188 116767188 1

13-14 1311264590 1311264590 1 13-14 114422012 114422012 1
14-15 1074191635 1074191635 1 14-15 110996369 110996369 1
5.2(a) Graph showing solvency ratio of serwel and raghuvamshi pvt.Ltd.

5.2(b) Interpretation:
 Table 2 shows solvency ratio of Serwel pvt. Ltd. And Raghuvamshi pvt.ltd.
Solvency ratio is calculated by dividing total liabilities by total assets giving 1 as
ratio from the year 2010 to 15.
 Total assets and liabilities had a gradual rise in 2011 of Rs.172610403 and a
rapid fall in 2015 by 1074191635 in serwel electronics and also it is rise from
Rs.5736776 in 2010 to Rs.110996369 in 2015 in raghuvamsi electronic Pvt.
Ltd.In other words Net Worth is fluctuating in the entire study.

Interest coverage Ratio = EBIT/interest

Interest Coverage Ratio, sometimes called Times Interest Earned Ratio and theabbreviation
TIE is used. It is a term that indicates how many times the total income
covers interest payments. The interest coverage indicates the size of safety cushion for
creditors. The indicator is one of the balance sheet debt ratios (of long- term financial
stability).
Calculation: Interest Coverage Ratio = EBIT / Total Interest Payable
The interest coverage ratio of Serwel private Limited and Rraghuvamshi private limited is
presented in
Table - 5.3
Serwel Pvt.Ltd. Raghuvamsi Pvt.Ltd.
Year EBIT (in Interest Ratio Year EBIT (in Interest Ratio
Rs.) (in Rs.) Rs.) (in Rs.)
09-10 36095913 9945333 36.2 09-10 5477108 3839642 1.42
10-11 71508287 16491369 11.32 10-11 3689174 3515770 1.04
11-12 89018291 4294877 20.74 11-12 5665064 4580779 1.23
12-13 111747738 60437125 1.85 12-13 10277314 6699981 1.53
13-14 152821207 69432605 2.26 13-14 10736974 5462317 0.31
14-15 951254340 91997441 10.32 14-15 8524233 4841782 1.76

5.3(a) Graph showing variation in EBIT ratios in serwel and raghuvamshi

electronics pvt.Ltd.

5.3(b) Interpretation
 Table 3 shows EBIT ratio of Serwel pt. Ltd. And Raghuvamshi pt. ltd. EBITratio
is calculated by dividing EBT by interest from the year 2010 to 2015.
 EBIT had a gradual rise in 2011 of Rs.71508287 and increasing gradually to
 Rs.951254340 in 2015 in Serwel electronics Ltd. In the same way RAGHU VAMSI
company has rise from Rs.5477108 in 2010 to Rs. 8524233.In other words EBIT has
been increasing from past few years.
 Graph shows that Serwel Company has decreased EBIT ratio from year 2010 of 36.2
to 2015 of 10.3 where as raghuvamshi company has increased EBIT ratio from 2010
of 1.4 to 1.7 in 2015.

5.4 Earnings per share

The portion of a company's profit allocated to each outstanding share of commonstock.
Earnings per share serve as an indicator of a company's profitability.
Calculated as = Earnings after tax
No. of shares
The EPS of Serwel private Limited and Raghuvamsi private limited is presented intable
Table – 5.4
Serwel pvt.Ltd. Raghuvamshi pvt.Ltd.
Year EAT (in No. Of Ratio Year EAT (in No. of Ratio
Rs.) shares Rs.) shares
09-10 20161351 1863300 108.2 09-10 590475 190170.7 3.1
10-11 33191254 186330 178.1 10-11 1160252 202925.3 5.7
11-12 57590554 321920 178.8 11-12 113017 201795.1 5.6
12-13 40278831 417370 96.5 12-13 246608 257191.4 0.9
13-14 84683957 417370 202.8 13-14 3566909 292860.5 12.1
14-15 22058556 973693.59 22.6 14-15 2544574 317860 8.05

5.4(a) Graph shows EPS ratio of serwel and Raghuvamashi pvt.Ltd.

5.4(b) Interpretation
 Table 4 shows EPS ratio of Serwel pt. Ltd. And Raghuvamsi pvt. ltd. EBIT ratio is
calculated by dividing EAT by no. of shares.EPS is calculated here from the year
2010 to 2015.
 EAT had a gradual rise in 2010 of Rs. 20161351 and is being increasing in 2015 by
22058556 in serwel electronics and in Raghuvamsi company Rs. 590475 in 2010
rose to Rs. 2544574 in 2015. In other words EAT has gained profits in entire study.
 Earnings per share ratio is 108.2 in 2010 and has increased to 22.6 in 2015 in serwel
and 3.1 in 2010 and raised to 8.05 in 2015 in Raghuvamsi company.
 Chapter-6
FINDINGS, SUGGESTIONS &CONCLUSIONS

FINDINGS
 The average ratio of debt and equity is better in serwel as compared to raghuvamsi
electronics. It shows that serwel is more using debt financing in its capital structure
pattern as compared to raghuvamsi electronics. It implies that company is adopting
NOI approach of capital structure. The more use of debt financing in this industry is
increasing the value of the firm and minimising the cost of capital resulting in overall
wealth maximisation ofshareholders.
 It has been found from the study that average of debt equity ratio of serwel in 2014-
15 i.e. 2.97 where as the average of debt equity ratio in Raghu vamsi pvt.Ltd. is only
1.5 as per the standard norm of 2:1 of debt equity ratio forthe industries.
 It has been found from the study that the average solvency ratio is maintained as 1:1
from the last five years in both raghuvamsi and serwel electronics.
 The average EBIT ratio of serwel is better compared to Raghuvamsi in past few
years and the ratio has been declined from 36.2 in 2010 to 10.6 in 2015,where as
raghuvamsi is maintained with 1.4 in 2010 to 1.7 in 2015.
 The EPS of Serwel private Limited is far better compared to Raghuvamsi private
limited in the year 2014-15 is 22.6 and 8.05 respectively.
 The rising overall average of trend of debt and equity in case of both the SME’s this
implies that these industries have access to market for both equity and debt
financing. Initially, companies were raising maximum debt fund to reduce the cost of
capital but which resulted in increase in financial risk. So they shifted to equity
financing also .They are maintaining a trade-off
 between debt and equity.

SUGGESTIONS
 The SERWEL and Raghuvamsi industries should improve their debt equity ratio as it
is not as per the standard norm. These industries are not using as much debt as
expected from them.
 The average ratio of debt and equity is not better in raghuvamsi industry as
compared to serwel industry. The Raghuvamsi industry should pay more attention
towards their reserves and surpluses, because due to this they are not getting higher
profits. They should more focus towards debt financing to maximise the wealth of
shareholders.
 Both the SME’s are advised to maintain a trade –off between debt and equityin future
also so as to achieve the objective of optimum capital structure.
 The solvency ratio of Serwel private Limited and Raghuvamshi private limited
presented is good and if maintained in the same manner would be profitable.
 The EPS of Serwel private Limited and Raghuvamsi private limited presented shows
that serwel has better yields in as profits, if Raghu vamshi shareholders investment
is to be increased in coming years then this would excellent opportunity for
raghuvamsi to maximize the profits.
 The interest coverage ratio of serwel is great compared to raghuvamsi capital
structure of Raghuvamsi is to be increased for good profit returns.
 Chapter-7

CONCLUSION
Results of the present empirical study revealed that long term funds had apportioned nearly
two-third of total funds when compared to short term funds in the SMEs selected for the
study. The firms had utilized more owned funds than borrowed funds. The SMEs had shown
an inclination in strengthening long term funds consisting of both shareholders’ funds as
well as long term borrowed funds in order to finance its assets requirement. The financial
risk of the firms is comparatively low since it mostly depended on equity financing. The
mobilization of the debt funds by the company means that it could raise the external funds to
bring the optimum capital structure i.e. minimize the cost of capital and maximize the share
value of the firm. This may due to the tax deductibility of the interest paid on debt. Thus the
benefits of financial leverage can be reaped for improving the financial performance of the
firm. The behaviour of the interest coverage ratio was unpredictable. The interest charges
are fully covered by the earnings before interestand taxes. A higher interest coverage ratio is
desirable, but too high ratio indicates that the firm is very conservative in using debt, and it
is not using debt to the best advantage of the shareholders. Hence, it is suggested that SMEs
shall tap the debt funds optimal to maintain a balanced capital structure. The financial
performance of a firm is greatly influenced by its capital structure. An optimal capital
structure maximizes the shareholder’s wealth with best combination of debt and equity mix
thereby minimizing the cost of capital
 BIBLIOGRAPHY
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november/3392

WEBSITES

 http://www.nsic.co.in/

 http://www.raghuvamsi.com/
  http://serwel.com/
8. http://www.moneycontrol.com/