Capital Structure Analysis of Investment Bank Bbs Research Report

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CAPITAL STRUCTURE ANALYSIS

OF NEPAL INVESTMENT BANK LIMITED
A Project Work Report
Submitted By:
Shreeya Kharbuja
T.U.Regd.No.:7-2-39-759-2015
Shanker Dev Campus
Exam Roll no.: 390392
Group: Finance (Proposal no.: 81)
Submitted To:
The Faculty of Management
Tribhuvan University
Kathmandu
In Partial fulfillment of the Requirements for the Degree of

BACHELOR OF BUSINESS STUDIES (BBS)
Kathmandu, Nepal
May, 2019

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Declaration
I hereby declare that the project work entitled “CAPITAL STRUCTURE ANALYSIS OF
NEPAL INVESTMENT BANK LIMITED” submitted to the Faculty of Management,
Tribhuvan University, Kathmandu is an original piece of work under the supervision of
Dr. Kapil Khanal, faculty member, Shanker Dev Campus, Kathmandu and is submitted in
partial fulfillment of the requirements for the award of the degree of Bachelor of Business
Studies (BBS). This project work report has not been submitted to any other university or
institution for the award of any degree or diploma.
Shreeya Kharbuja
Date:
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Supervisor’s Recommendation
The project work report entitled “CAPITAL STRUCTURE ANALYSIS OF NEPAL

INVESTMENT BANK LIMITED” submitted by SHREEYA KHARBUJA of SHANKER
DEV CAMPUS, KATHMANDU is prepared under my supervision as per the procedure
and format requirements laid by the Faculty of Management, Tribhuvan University, as
partial fulfillment of the requirements for the award of the degree of Bachelor of Business
Studies (BBS). I, therefore, recommend the project work report for evaluation.
Signature:
……………………
Dr. Kapil Khanal
Date:
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Endorsement
We hereby endorse the project work report entitled “CAPITAL STRUCTURE

ANALYSIS OF NEPAL INVESTMENT BANK LIMITED” submitted by SHREEYA
KHARBUJA of SHANKER DEV CAMPUS, PUTALISADAK, KATHMANDU, in
partial fulfillment of the requirements for award of the Bachelor of Business Studies
(BBS) for external evaluation.
Signature: Signature:
………………………………. …………………………………
Prof. Amuda Shrestha Asso. Prof. Krishna Prasad Acharya
Management Research Committee Campus Chief/Principal
Date: Date:
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Acknowledgement
This field work report entitled "A Report on Capital Structure Analysis of Nepal
Investment Bank Limited” has been prepared in partial fulfillment for the degree of
Bachelor of Business Studies (BBS) under the teachers of Shanker Dev Campus. It is my
privilege of getting helps and co-operation from different persons. It is not possible to
enumerate the names of all of them. However, it will be matter of injustice if I forget the
names of those personalities whose valuable suggestions and co-operation escorted to
complete this field work report.
First and foremost, I would like to offer special thanks to Dr. Kapil Khanal for his proper
suggestions. I would like to thank all the staffs of the Nepal Investment Bank Limited for
their full support in providing all the necessary data, which helped me in preparing this
report. I could not remain without thanking to my teachers and lecturers who all helped
me during my study of BBS and during preparation of this report.
Shreeya Kharbuja
BBS 4th Year
Shanker Dev Campus

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Table of Contents
Declaration ii
Supervisor’s Recommendation iii
Endorsement iv
Acknowledgement v
List of Tables: viii
List of Figures: ix
Abbreviations x
CHAPTER- I: INTRODUCTION………………………………………………………....1
1.1 Background Of Study...............................................................................................1
1.1.1. Meaning of Capital Structure............................................................................1
1.1.2. Components of Capital Structure......................................................................2
1.1.3. Meaning of Capital Structure Analysis.............................................................2
1.1.4. Elements of Capital Structure Analysis:...........................................................3
1.1.5. Introduction to Bank.........................................................................................4
1.1.6. Banking scenario in Nepal................................................................................5
1.2 Profile of organization..............................................................................................6
1.3.1. Present Shareholding pattern of Bank..............................................................6
1.3 Objectives:................................................................................................................7
1.4 Rationale..................................................................................................................8
1.5 Review......................................................................................................................8
1.6 Methods..................................................................................................................11
1.6.1. Research Methodology...................................................................................11
1.6.2. Research Design.............................................................................................11
1.6.3. Data Collection...............................................................................................11
1.6.4. Data Presentation and Analysis Tool..............................................................12
1.7 Limitation of the study...........................................................................................22
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CHAPTER II: RESULTS AND ANALYSIS………………………………………….....23

2.1. Data Presentations..................................................................................................23
2.1.1. Capital Gearing Ratio.....................................................................................23
2.1.2. Leverage Ratios..............................................................................................24
2.1.3. Profitability Ratio...........................................................................................29
2.1.4. Coverage Ratio...............................................................................................33
2.1.5. Leverage Analysis...........................................................................................35
2.1.6. Cost of Capital Analysis.................................................................................36
2.1.7. Capital Structure Theories..............................................................................38
2.2. Analysis of Data:....................................................................................................39
2.2.1. Mean:..............................................................................................................40
2.2.2. Standard Deviation:........................................................................................40
2.2.3. Coefficient of Variation (CV):........................................................................41
CHAPTER III: SUMMARY, CONCLUSION & RECOMMENDATION……………...42
3.1. Summary................................................................................................................42
3.2. Conclusion..............................................................................................................44
BIBLIOGRAPHY………………………………………………………………………...46
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List of Tables:
Table 1: Shareholding pattern

Table 2.1: Capital Gearing Ratio
Table 2.2: Debt to Total assets Ratio
Table 2.3: Long Term Debt to Equity Ratio
Table 2.4: Proprietary Ratio
Table 2.5: Fixed Assets Ratio
Table 2.6: Return on Shareholder’s Equity
Table 2.7: Earnings per Share (EPS)
Table 2.8: Dividend per Share (DPS)
Table 2.9: PE Ratio
Table 2.10: Interest Coverage Ratio
Table 2.11: Dividend Coverage Ratio
Table 2.12: Degree of Financial Leverage
Table 2.13: Cost of Equity
Table 2.14: Cost of Debt
Table 2.15: Market Value of Firm
Table 2.16: Overall Cost of Capital
Table 2.17 Calculation of Standard Deviation of Cash & Balance & Deposit
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List of Figures:
Fig. 1.1: Components of Capital Structure

Fig. 1.2: Shareholding pattern
Fig. 1.3: Ko, Ke, Kd under Net Income Approach
Fig. 1.4: Ko, Ke, Kd under Net Operating Income Approach
Fig. 2.1: Capital Gearing Ratio
Fig. 2.2: Debt to Total assets Ratio
Fig. 2.3: Long Term Debt to Equity Ratio
Fig. 2.4: Proprietary Ratio
Fig. 2.5: Fixed Assets Ratio
Fig. 2.6: Return on Shareholder’s Equity
Fig. 2.7: Earnings per Share (EPS)
Fig. 2.8: Dividend per Share (DPS)
Fig. 2.9: PE Ratio
Fig. 2.10: Interest Coverage Ratio
Fig. 2.11: Dividend Coverage Ratio
Fig. 2.12: Degree of Financial Leverage
Fig. 2.13: Cost of Equity
Fig. 2.14: Cost of Debt
Fig. 2.15: Overall Cost of Capital
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Abbreviations
NIBL = Nepal Investment Bank Limited

DPS = Dividend per Share
DFL = Degree of Financial Leverage
DPS = Dividend per Share
EPS = Earnings per Share
EBIT = Earnings before Interest and Tax
EBT = Earnings before Tax
Fig. = Figure
i.e. = That is
Ltd. = Limited
NI = Net Income
NOI = Net Operating Income
SD = Standard Deviation
ROE = Return on Equity
NRB = Nepal Rastra Bank
NPAT = Net Profit after Tax
PE Ratio = Price Earnings Ratio
MPS = Market Value per Share
NP = Net Profit
No. = Number
CV =Coefficient of Variation

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CHAPTER- I: INTRODUCTION
1.1 Background Of Study

1.1.1. Meaning of Capital Structure
The term ‘structure’ means the arrangement of the various parts. So, Capital Structure
means the arrangement of capital from different sources so that the long-term funds
needed for the business are raised. Thus, Capital Structure refers to the proportions or
combinations of equity share capital, preference share capital, debentures, long-term
loans, retained earnings and other long-term sources of funds in the total amount of
capital which a firm should raise to run its business. Capital Structure denotes some
degree of permanency as it excludes short-term sources of financing.
According to Gerestenberg “Capital structure of a company refers to the composition or

makeup of its capitalization and it includes all long term capital resources viz. loans,
reserves, shares and bonds.”
The term Capital Structure should not be confused with Financial Structure. While
Financial Structure consists of short-term debt, long-term debt and share holders’ fund
i.e., the entire left hand side of the company’s Balance Sheet, Capital Structure consists of
long-term debt and shareholders’ fund.
So, it may be concluded that the Capital Structure of a firm is a part of its Financial
Structure. Some experts of financial management include short-term debt in the
composition of capital structure. In that case, there is no difference between the two terms
—Capital Structure and Financial Structure.
The Capital Structure involves two decisions-
a) Type of securities to be issued: Equity Shares, Preference Shares and Long Term
Borrowings (Debentures).
b) Relative ratio of securities determined.

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1.1.2. Components of Capital Structure
Capital structure involves different sources from which the required long-term capital is
collected by the company. The components of capital structure are given in the diagram
below:
Components of Capital Structure
Shareholder’s Fund Borrowed Funds

- Equity Capital - Debentures
- Preference Capital - Term Loans
- Retained Earnings - Public Deposits
Fig. 1.1: Components of Capital Structure
1.1.3. Meaning of Capital Structure Analysis
Capital structure analysis is a periodic evaluation of all components of

the debt and equity financing used by a business. The intent of the analysis is to evaluate
what combination of debt and equity the business should have. This mix varies over time
based on the costs of debt and equity and the risks to which a business is subjected.
Capital structure analysis is usually confined to short-term debt, leases, long-term
debt, preferred stock, and common stock.
Capital structure analysis is a process that involves evaluating the combination of

different debt and equity holdings that are currently in the possession of a company. The
purpose for the analysis is to determine if the current mix is providing the greatest level
of benefit for the company, or if there is a need to make some changes to the capital
structure that would result in a more sound financial position. In order to engage in a
capital structure analysis, it is important to identify all types of debt and equity currently
held, project the impact of the current combination on the business operation, and then
determine what if any changes should be made in order to strengthen the company’s
position within a defined period of time.

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One of the first steps in any capital structure analysis is to identify the debt and equity
that is currently held by the company. For purposes of the analysis, the debt will include
all short-term and long-term obligations, such as loans, bond issues, and any type of
outstanding payables. Typically, the company’s need for working capital will also be
classed as part of the debt currently held, with this type of obligation classed as part of
the short-term debt.
1.1.4. Elements of Capital Structure Analysis:
 Capital Gearing Ratio:

The term ‘capital gearing’ is used to describe the relationship between equity share capital
including reserves and surpluses to preference share capital and other fixed interest-
bearing loans. The comparison between the preference share capital and other fixed
interest bearing loans define whether the firm is highly geared or lowly geared.
 Leverage Analysis and Leverage Ratio:

Leverage refers to the use of an asset or source of funds which involves fixed costs
or fixed returns. Leverage Analysis means arranging fixed assets in such a way that fixed
return is ensured.
A leverage ratio is any kind of financial ratio that indicates the level of debt incurred by a
business entity against several other accounts in its balance sheet, income statement,
or cash flow statement. These ratios provide an indication of how the company’s assets
and business operations are financed (using debt or equity).
 Profitability Ratio:
Profitability is the most common measure of an enterprise including the banking industry.
Profitability refers to the state or condition of yielding or earning a financial profit or
gain. It refers to the ability of the company to use its resources to generate revenues in
excess of its expenses. Similarly, profitability ratios are generally considered to be the
basic bank financial ratio in order to evaluate how well bank is performing in terms of
profit. For the most part, if a profitability ratio is relatively higher as compared to the
competitor(s), industry averages, guidelines, or previous years’ same ratios, then it is
taken as indicator of better performance of the bank.
 Coverage Ratio:
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A Coverage Ratio is any one of a group of financial ratios used to measure a company’s
ability to pay its financial obligations. A higher ratio indicates a greater ability of the
company to meet its financial obligations while a lower ratio indicates a lesser ability.
Coverage ratios show whether the current capital structure is profitable enough to meet
the expenses of the capital (dividend for equity and preference share capital; interest for
debt).
 Cost of Capital Analysis:

The cost of capital is a term used in the field of financial investment to refer to the cost of
a company's funds (both debt and equity), or, from an investor's point of view "the
shareholder's required return on a portfolio company's existing securities".
 Capital Structure Theories:

Various theories have been propounded to explain the relationship between market value
of a firm and its capital structure decision. There is unanimity in the opinion that the
capital structure should be optimum. However, there is no unanimity about which capital
structure is optimum. On basis of different viewpoints regarding the optimum capital
structure, theories of capital structure have been introduced over period of time.
1.1.5. Introduction to Bank
Bank is an essential institution in modern society. A bank collects money from people as
deposit in various forms and lends it to those who need or otherwise invest it in profitable
investment. Thus, the money which would have remained idle is put to use and lends who
need it. With rapid globalization and economic development all across the world, banks
and financial institutions are found to have played a very important role in the overall
economic development of the society. Banks and financial institutions generally mobilize
the idle resources by collecting from general public in the form of deposits and disbursing
the collected deposits in the form of loan to parties requiring it and generating profits in
the same process. An effective banking system leads to the effective mobilization of
resources like saving and investments, which in turn leads to sound economic growth of
the country.
The commercial banks perform following functions:
a. Accepting deposits:

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Accepting deposits from the public and institution is the main function of any bank.
Deposits are made by the people and institution under current account, saving account
and fixed account as per their necessity.
b. Giving Loans:
Another function of commercial bank is to give loans. Banks provides loans to personal
companies, corporation and takes interest on loan. Commercial bank provides loan
against securities. The banks advance money in any one of the following ways:
i. Short-term loans.
ii. Direct loans i.e. with collateral.
iii. Working Capital Loan
c. Agency Function:
Commercial bank also performs other agency functions. They perform the agency
services to their customers in following ways:
 Collection and payment of cheques, bills, promissory notes.
 Keeping valuable articles, documents in safe custody.
 Purchase and sale of different types of securities.
 Dealing with the transaction of foreign exchange business.
 Acting as executors.
 On behalf of customer bank pay house rent, income tax and premium of insurance
policy.
 Bank collects interest of debentures and dividend of share for their client through
draft, mail transaction and telegraphic transfer.
1.1.6. Banking scenario in Nepal
Establishment of Nepal Bank Limited (commercial bank) in 1994 B.S. is considered as

start of modern organized banking in true sense. Nepal Rastra Bank, the central bank of
Nepal was established in 1956 AD (2013 BS). Then after, In 1957 A.D. Industrial
Development Bank was established to promote the industrialization in Nepal, which was
later converted into Nepal Industrial Development Corporation (NIDC) in 1959 A.D.
Similarly, Rastriya Banijiya Bank was established in 1965 AD (2022 BS) as the second
commercial bank in Nepal.

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There are various types of banks working in modern banking system in Nepal. It includes
central, development, commercial, financial, co-operative and Micro Credit (Grameen)
banks. The Nepal Rastra Bank (NRB) is the regulatory body that classifies the institutions
into “A”, “B”, “C” & “D” groups on the basis of the minimum paid-up capital and
provides the suitable license to the bank or financial institution. Group ‘A’ is for
commercial bank, ‘B’ for the development bank, ‘C’ for the financial institution and ‘D’
for the Micro Finance Development Banks.
1.2 Profile of organization
Nepal Investment Bank Limited

Nepal Investment Bank Limited (NIBL) has been in operation in Nepal since 1986,
initially registered as Nepal Indosuez Bank Ltd., a joint venture between Nepalese (50%)
and French partners (50%). Later, in 2002, a group of Nepalese companies compromising
of bankers, professionals, industrialists and businessmen acquired the 50% foreign
shareholding and accordingly named Nepal Investment Bank Limited. Present bank’s
shareholding pattern is 69% promoters and 31% general public. It was incorporated with
a vision to be the most preferred provider of financial services in Nepal.
Share capital of the bank as on Asadh end, 2075 is Rs. 10,645,599,000. NIBL currently
operates through 79 branches, 4 extension counters and 98 ATM outlets dedicated to
customer service.
1.3.1. Present Shareholding pattern of Bank
Present bank’s shareholding pattern of Nepal Investment Bank limited is 69% promoters
and 31% general public.
Table 1.1:
Shareholding pattern
Particulars Amount in Rs. Million
Authorized Capital: 15,000
Issued Capital: 10,646
Paid Up Capital: 10,646
Promoters’ Contribution 69%
Public Contribution 31%
Sources: Official Website of Nepal Investment Bank Ltd
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Shareholding pattern
80%
70%
60%
50%
40%
30%
20%
10%
0%
Promoters' Contribution Public Contribution
Fig. 1.2: Shareholding Pattern of NIBL
1.3 Objectives:
The general objective of this research will be analyzing the capital structure of Nepal Investment
Bank Limited.
Other specific objectives are as follows.
a) To analyze the capital structure of Nepal Investment Bank Ltd. by using different
capital structure approach.
b) To analyze relationship of the capital structure with various important variables
such as earnings per share.
c) To verify the impact of capital structure on the banking performance
d) To identify the profitability position by use of Return on Assets, Return on Equity
etc.
1.4 Rationale
For the overall development of the country, development of economic condition of the
country is very important. Bank is an organization which collects the deposits and
provides loans; simply it utilizes and manages the fund of nation. The study intends to
provide the capital structure overview of one of the major commercial bank of Nepal.

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1.5 Review
Introduction
Review refers to research studies or other relevant propositions in the related area of the
study so that all the past studies, their conclusions and deficiencies may be known and
further research can be conducted. It enables a researcher to know the outcomes of the
past researches in areas where similar concepts and methodologies had been used
successfully.
It is impossible to conduct a research report without first knowing that other researches in
the same field have done. That’s why all the books, journals, articles, thesis, etc related
with the subject matter will be reviewed as much as possible. A review is a summary and
analysis of current knowledge about a particular topic. Thus it is an essential part of all
research studies.
Empirical Review
Berle and Means (1932) initially developed the Agency Theory and they argued that
there is an increase in the gap between ownership and control of large organizations
arising from a decrease in equity ownership. This particular situation provides a platform
for managers to pursue their own interest instead of maximizing returns to the
shareholders.
The Modigliani- Millers Study (1958)

In their first study, MM used the previous works of Allen and Smith in support of
their independence hypothesis. Allen's Study consisted of an analysis of the relation
between security yield and financial structure for 43 large electric utilities, which is
based on average figure of the year’s figure of the years 1947 and 1948, while smith
designed his study of 42 electric utilities.
 In the first part of their work MM tested their proposition I; the market value
of the firm is independent of the proportion of debt equity mix. They found
that the correlation coefficient is statistically insignificant and positive in sign.
 In the second part of their study, they tested their proposition II the expected
yield on common share is linear function of debt to equity ratio. The second

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part of their study is consistent with their views i.e. if the cost of borrowed
funds increases, the cost of equity will decline to offset this increase.
 Modigliani & Miller conducted the second study in 1963. In their article, they
discussed the existence of corporate tax and its impact on tax liability and
value of firm. They held that because of deductibility of interest charges for
tax computation, the value of levered firm would be higher than that of the
unlevered firm.
 For this they conducted the mathematical analysis regarding the effect of
leverage and other variable on the cost of capital, they found that the leverage
factor are significant only because of the tax involved. (Modigliani and Miller,
1966:333-391)
 The need to balance gains and cost of debt financing emerged as a theory
known as the static trade off theory by Myers. It values the company as the
value of the present value of bankruptcy and agency costs.
The “Pecking Order Theory” propounded by Stewart Myers and Nicholas Majluf
(1984) through article titled “Corporate Financing and Investment Decisions when Firms
have Information that Investors don’t” emphasizes on the target capital structure. This
theory suggests that in presence of asymmetric information, a firm prefer to raise finance
in following orders:
 Use internal finance first.
 When they do not have internal finance, they refer to issue debt.
 Last option preferred is equity issue.
Joshi, M. J. (2008), has made a study on "Capital Structure Management of

Commercial Banks of Nepal.” The objective of the study was to analyze all the
variables in the form of Ratio Analysis, Statistical Analysis. He tried to analyze
Capital Structure of Commercial Banks in Nepal. His finding and suggestion are as
follows.
 He found the banks lacked the theoretical knowledge regarding the Capital
Structure. So, banks should follow the theoretical aspects.

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 All banks have used high percentage of total debt in raising the assets. The
higher ratio constitute that the outsider claim in total assets of the banks is
higher than owners’ claim.
 Interest Coverage Ratio, Return on Total Assets, Return on Shareholder's

Equity seemed to be in a better position. The banks were also recommended to
minimize their financial and other expenses so that the interest coverage ratio
could be improved.
Kaﬂe, P. P. (2001), in his study "A Comparative Analysis of Capital Structure

between Lumbini Sugar Factor and Birgunj Sugar Factory Limited”, stated that both
the companies were facing serious deterioration in earnings according to the net
operating income approach. As this the main objective is to comparatively analyze
the capital structure of above factories and to know whether companies were facing
deterioration in earning. His finding and suggestion are as follows.
 He noted down both the companies had defective capital structure as debt
equity ratio were not so much satisfactory. Birgunj Sugar Factory had high
debt equity ratio indicating more financial risk while Lumbini Sugar Mills had
low debt equity ratio which suggests that the access dominance of equity
holder might exist.
 Both the companies had been unable to pay interest because they were
operating at loss.
 As Birgunj Sugar Factory was highly levered Lumbini Sugar Factory was
unlevered both the companies had defective capital structure.
Research Gap
Going through the above study, it can be said that capital structure analysis is an
important element for every financial institution as it is the base to operate the financial
institutions and also helps in managing the assets, which is raising problem for financial
institutions. Here, in this study impact on financial performance of the institutions is also
included because the smooth financial performance is dependent on availability of assets
in an organization which subsequently depends upon the availability of capital. This
research work has tried to include the capital structure analysis of Nepal Investment Bank
Limited using various financial as well as statistical tools. Therefore, this study is useful
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to the concern bank as well as different persons such as shareholders, investors, policy
makers, stockholders, state of government.
1.6 Methods
1.6.1. Research Methodology

Research methodology refers to the various segmental steps along with the rationale of
each step to be adopted by a researcher in studying a problem with certain objectives in
view. In other words research methodology describes the methods and process applied in
the entire aspects of the study. It helps to collect reliable data and information from
various sources in order to prepare report writing.
1.6.2. Research Design

The research design will consists of descriptive research designs to deal with the various
aspects. The descriptive research design will be developed with the aim of studying the
subject of research in detail.
1.6.3. Data Collection

There are various data collection sources are available i.e. primary sources and secondary
sources. The major data used in this project report are collected from secondary sources.
The sources of detailed data are as follows.
Primary data:
The data, which is first time collected for an investigation by an investigator or his /her
agent or research organization, is known as primary data. It is original in character and
just like raw material. It used the following procedures to collect the primary data.
Method of collection Primary Data:

 Direct personal Interview.
 Observation method.
 Information from local correspondents
 Mailed /Telephonic questionnaire method
 Schedules sent through enumerators
Population and Sample
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The size of population is defined. So, a total of 50 questionnaires are distributed among
employees, investors, Board of director and company secretary and CEO. The
questionnaires are mixed questions such as ranking and multiple choices. Five questions
were about respondent profile and demographic information.
Secondary Data:
The data are collect from the published and unpublished sources. Secondary data are
those data which are already available and have been collected for some other purpose.
• Annual financial reports of Nepal Investment Bank Limited.
• Official website of NIBL
• News paper
• Various research papers
• Books and articles
1.6.4. Data Presentation and Analysis Tool
Various statistical as well as financial tools have been used in analysis of data obtained in
the due course of research. The obtained data is presented, tabulated and graphed and
subsequently done the same to the results computed to analyze and achieve the goal of the
study. The following tools which are used for data analysis.
I. Capital Gearing Ratio
II. Leverage Ratios
III. Profitability Ratios
IV. Coverage Ratios
V. Leverage Analysis
VI. Cost of Capital Analysis
VII. Analysis based on Capital Structure Theories
Further, following tools have been used for data presentation:

I. Tabulation
II. Line Charts
III. Pie charts
IV. Bar diagrams
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A) Ratio Analysis
A ratio is simply one number expressed in terms of another and on such it express the
quantitative relationship between any two numbers. Ratio can be expressed in terms of
percentage, proportion and as a coefficient.
I. Capital Gearing Ratio

The term ‘capital gearing’ is used to describe the relationship between equity share capital
including reserves and surpluses to preference share capital and other fixed interest-
bearing loans. Capital gearing stands for the determination of proportion of various kinds
of securities to the total capitalization. The gearing may be high, low, or even. When the
proportion of Equity Share capital is high in comparison to other securities in the total
capitalization, it is called low geared; and, in the opposite case, it is high geared.
At the same time, if the Equity Share Capital is equal to the other securities it is called
evenly geared. This ratio can be calculated as follows:
Or,
II. Leverage Ratios

Leverage ratio is known as capital structure ratio or solvency ratio. It is calculated to
measure the long term financial position of a firm. Leverage ratio measures the overall
financial risk as well the ability of the bank in using debt for the benefit for the
shareholders. Thus, there should be appropriate mix of debt and owners’ equity in
financing the firm's assets. This ratio indicates the fund provided by owners & creditors.
The leverage ratios used in this study are as follows:
 Debt to Total Assets Ratio

The debt ratio is a financial ratio that measures the extent of a company’s leverage. The
debt ratio is defined as the ratio of total debt to total assets, expressed as a decimal or
percentage. It can be interpreted as the proportion of a company’s assets that are financed
by debt.
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A ratio greater than 1 shows that a considerable portion of assets is funded by debts. In
other words, the company has more liabilities than assets. A high ratio also indicates that
a company may be putting itself at a risk of default on its loans if interest rates were to
rise suddenly. A ratio below 1 translates to the fact that a greater portion of a company's
assets is funded by equity.
The debt ratio is also referred to as the debt-to-assets ratio. This ratio is calculated as
under:
 Long Term Debt to Equity Ratio

It is a ratio that expresses the relationship in between the outsiders’ contribution through
debt financial resource and shareholders’ contribution through equity share capital,
preference share capital and past accumulated profits. It reveals the cover or cushion
enjoyed by the firm due to the owners’ contribution over the outsiders’ contribution.
The long term debt to equity ratio tells the shareholders as well as debt holders the
relative amounts they are contributing to the capital. The ratio is used to evaluate a
company's financial leverage. It is a measure of the degree to which a company is
financing its operations through debt versus wholly owned funds. More specifically, it
reflects the ability of shareholder equity to cover all outstanding debts in the event of a
business downturn.
Long-term debt means total amount of fixed and loan from banks and shareholders fund
consists of general reserve, share premium other reserves, general loans, loss provision,
retained earnings and proposed capitalization.
The ratio can be calculated by using following formula:
 Proprietary Ratio
The proprietary ratio (also known as the equity ratio) is the proportion of shareholders'
equity to total assets, and as such provides a rough estimate of the amount
of capitalization currently used to support a business. In simple words, how much funds
are contributed by the owners in financing the assets of the firm.
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If the ratio is high, this indicates that a company has a sufficient amount of equity to
support the functions of the business, and probably has room in its financial structure to
take on additional debt, if necessary. Conversely, a low ratio indicates that a business may
be making use of too much debt or trade payables, rather than equity, to support
operations (which may place the company at risk of bankruptcy).
Thus, the equity ratio is a general indicator of financial stability. This ratio is calculated
by:
 Fixed Assets Ratio

This ratio establishes the relationship between long term funds and fixed assets. Since
financial management advocates that fixed assets should be purchased out of long term
funds only. The long term funds include Equity Shares, Preference Shares, Debentures,
and Long Term Loans. Fixed Assets Ratio is calculated by following formula:
III. Profitability Ratio

Profitability ratio measures the efficiency and searches the degree of success in achieving
desired profit. Any firm should earn satisfactory profit to survive and grow over a long
period in the competitive environment profitability ratio can be determined on the basis of
either sales investment.
It measures the efficiency and searches the degree of success in achieving desired profit.
Moreover, such ratios enable an investor to decide whether to invest or not. Some of the
important profitability ratio have been calculated and interpreted in this study which is
presented below:
 Return on Shareholder’s Equity

It is the most vital to judge whether a concern has earned a satisfactory return to its owner
or not. ROE is considered a measure of how effectively management is using the
shareholders’ fund to create profits. This ratio is expressed by dividing net profit after tax
to ordinary shareholder's equity.
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 Earnings per Share (EPS)

Earnings per share (EPS) are the portion of a company's profit allocated to each share of
common stock. It measures the profit available to the common shareholders as per share
basis i.e. the amount they get from every share. The earnings per share is calculated by
dividing net profit after tax by the total number of outstanding shares.
 Dividend per Share (DPS)

Dividend is that part of earning which is distributed to shareholders as a price of their
investment in common stock, either as investment or cash. Dividend per share (DPS) is
the sum of declared dividends issued by a company for every ordinary share outstanding.
Thus, dividend per share is computed by dividing the total amount of dividend paid by the
no. of outstanding share.
 PE Ratio
The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its
current share price relative to its per-share earnings. The price-earnings ratio is also
sometimes known as the price multiplier or the earnings multiple.
It can be measured by the given formula below:
IV. Coverage Ratios

The interest coverage ratios used for this study are presented below:
 Interest Coverage Ratio

The interest coverage ratio measures the ability of a company to pay the interest expense
on its debt. An interest coverage ratio of two or higher is generally considered
satisfactory. The ratio, also known as the times interest earned ratio, is defined as:
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 Dividend Coverage Ratio

Dividend Coverage Ratio states the number of times an organization is capable of paying
dividends to shareholders from the profits earned during an accounting period. It can be
calculated as follows:
V. Leverage Analysis
Leverage, refers to debt or to borrowing funds to finance the purchase of inventory,
equipment and other company assets. Business owners can use either debt or equity to
finance or buy the company's assets. Using debt, or leverage, increases the company's risk
of bankruptcy - but, it also can increase the company's profits and returns; specifically
its return on equity.
Leverage analysis means arranging fixed assets in such a way that fixed return is ensured.
The type of leverage used in the study is:
 Degree of Financial Leverage

Financial leverage is the main source of financial risk. It is also called trading on equity.
The effect of financial leverage emerges if a company uses debt financing. By issuing
more debt, the company incurs the fixed costs associated with the debt (interest
payments).
A high degree of leverage may translate to a more volatile stock price because of the
higher volatility of the company’s earnings. Increased stock price volatility means the
company is forced to record a higher expense for outstanding stock options, which
represents a higher cost of debt. Therefore, companies with extremely volatile operating
incomes should not take on substantial leverage because there is a high probability
of financial distress for the business. It is calculated as below:
VI. Cost of Capital Analysis
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The cost of capital is the cost of a firm’s debt and equity funds, or the required rate of
return on a portfolio of the company’s existing securities. It is used to evaluate new
projects of a company as it is the minimum return that investors expect for providing
capital to the company, thus setting a benchmark that a new project has to meet.
 Cost of Equity
Equity is the permanent capital for a firm. The company may raise equity capital both
internally and externally. It can rise internally by retained earnings and externally by
issuing new shares. When a company wants to raise funds by way of equity shares, their
expectations have to be evaluated and for that cost of equity is calculated.
 Cost of Debt
A company may raise debt in various ways. It may be in the form of debenture or loan
borrowed from financial or public institutions for a certain period of time at a specific rate
of interest. The debenture or bond may be issued at par, discount or premium. It forms the
basis for calculating cost of debt.
VII. Capital Structure Theories

Some of the capital structure theories used in this study are as follows:
 Net Income (NI) Approach,
The essence of the NI approach is that the market value of equity shares is decided on
the basis of net income available to equity shareholders after payment of interest on
debt if it is included in the capital structure. Under this approach, the cost of debt (K d)
and the cost of equity (Ke) are assumed to independent of the capital structure. The
weighted average cost of capital declines and the total value of the firm rise with
increased use of leverage.
According to this approach, as debt increase, overall cost of capital decreases and
vice versa. Therefore, increase in debt results in increase in value of firm and
consequently increase in value of equity shares. So, the firms try to optimize the
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capital structure by introducing more and more debt having less cost than equity in
capital structure.
The overall cost of capital under this approach is determined as under:
Market Value of Firm= Market Value of Equity (E) + Market Value of debt (D)
Where, NI= Net income available to equity shareholders

I= Interest on debt
Ke= Cost of equity
Kd= Cost of debt
KO= Overall Cost of Capital
This approach can be expressed as:
Ke
Cost of Capital
Ko
Kd
0 Degree of Leverage X
Fig 1.3: Ko, Ke, Kd under Net Income Approach
 Net Operating Income (NOI) Approach

According to NOI approach the market value of the firm is not affected by the capital
structure charges. The market value of the firm is based on the earning available to
fund providers after paying all expenses except interest on debt.
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As per NOI approach, even if the firm uses more and more debt in the capital
structure, the overall cost does not change. This is because the equity shareholders
increase their expectations of return on investment with increase in debt.
The market value of firm is determined as follows.
Value of firm = Market value of debt + Market Value of common share
As per NOI approach, the cost of capital remains same at any level of debt; hence, the
capital structure is optimum at any level of debt-equity mix. Under the circumstances,
the optimum level of capital structure becomes indeterminate
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This approach can be expressed as:
Ke
Y
Cost of Capital
Ko
Kd
0 Degree of Leverage X
Fig. 1.4: Kd, K0 and Ke under Net Operating Income (NI) Approach
B) Statistical tools
 Mean
The statistical mean refers to the mean or average that is used to derive the central
tendency of the data in question. It is determining by adding all the data points in a
population and then dividing by total number of points.
It can be calculated as:
Where, ∑X = Sum of all datas

N= Number of datas
 Standard Deviation
Standard deviation is a statistic used as a measure of the dispersion in a distribution,
equal to the square root of the arithmetic mean of the squares of the deviations from
the arithmetic mean.
S.D=
 Coefficient of Variance:
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It is a standardized measure of dispersion of a profitability distribution. It is often

expressed as a percentage, and is defined as the ratio of the standard deviation to the
mean.
CV=
1.7 Limitation of the study

Limitation is the boundary line of the study which narrows the area of study into a
specific circumstance. The major limitations of this study are mentioned below:
 The Research is based on records of five years fiscal years’ analysis only i.e. from
FY 2070/71 to FY 2073/2074.
 The researcher has used only some statistical tools for presentation and analysis of
data.
 Most of the data used in this study are based on secondary sources mainly official
website of Nepal Investment Bank Limited.
 The main focus is given to the quantitative aspect rather than qualitative aspect.
 The data are prepared by bank so it mainly focused on portfolio motive.
 The case study is confined only an organization, which is Nepal Investment Bank
Limited.
 It is only for partial fulfillment of Bachelor of Business Studies (BBS).
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CHAPTER II: RESULTS AND ANALYSIS
2.1. Data Presentations
The main purpose of presentation of the capital structure analysis according to research
methodology is to attain the research objective that includes highlighting the strength and
weakness of M/s Nepal Investment Bank Limited. Therefore, this chapter includes the
analysis and result of gathered with a view to assessing the capital structure of the bank
for the period of five years.
In this chapter, the data are presented and calculated and effort has been made to analyze
the financial statement of the bank for five years. The secondary data is used for the
purpose and for the data presentation of five years (2069/70 to 2073/74).
Presentation of data
As mentioned in the earlier chapter, following financial ratios and other tools are applied
to judge the capital structure of the M/s Nepal Investment Bank Limited and the
secondary data are presented as below:
2.1.1. Capital Gearing Ratio
Table 2.1:
Capital Gearing Ratio
Amount in Rs.
Equity Share Reserve & Fixed Interest Bearing
Year Total Ratio
Capital Surplus Securities (Debt)
2070/71 4,768,713,625 3,156,764,971 7,925,478,596 1,050,000,000 7.55
2071/72 6,345,700,655 3,461,251,924 9,806,952,579 1,550,000,000 6.33
2072/73 8,706,611,760 7,581,139,857 16,287,751,617 1,550,000,000 10.51
2073/74 10,626,435,695 8,081,448,401 18,707,884,096 1,550,000,000 12.07
2074/75 10,645,599,000 14,225,423,126 24,871,022,126 1,250,000,000 19.90
Sources: Annual Report of Nepal Investment Bank Ltd.
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Capital Gearing Ratio

25
Capital Gearing Ratio 20
15
10
0
2070/71 2071/72 2072/73 2073/74 2074/75
Year
Fig. 2.1: Capital Gearing Ratio
From above information, it is known that NIBL is a very low levered or low geared
company. The majority of capital is formed from Equity Share Capital. NIBL utilizes
significantly less amount of debt as compared to the equity share capital. There is
decrease in the capital gearing ratio during the FY 2071/72 due to issue of additional
debentures. However, after 2071/72 the capital gearing ratio is observed to be in an
increasing trend. This signifies that NIBL has been increasing its equity share capital
during this period. The highest capital gearing ratio is in FY2074/75.
2.1.2. Leverage Ratios
The leverage ratios used in this study are as follows:
 Debt to Total Assets Ratio
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Table 2.2:
Debt to Total Assets Ratio
Amount in Rs.
Year Total Liabilities Total Assets Ratio
2070/71 78,248,448,978 86,173,927,574 0.91
2071/72 94,538,483,834 104,345,436,413 0.91
2072/73 113,494,953,697 129,782,705,314 0.87
2073/74 132,110,149,458 150,818,033,554 0.88
2074/75 147,022,524,484 171,893,546,610 0.86

0.92
0.90
0.88
0.86
0.84
0.82
0.80
2070/71 2071/72 2072/73 2073/74 2074/75
Year
Fig. 2.2: Debt to Total Assets Ratio
The debt to total assets ratio of NIBL for all the five years is lower than 1 which clearly
shows that the greater portion of the bank’s assets is funded by its equity capital. So, the
bank doesn’t have any risk of default of its debts and loans even if the interest rates on
such debts and loans and increased. NIBL has greatest debt to total assets ratio during FY
2070/71 and FY 2071/72 which is in a decreasing trend after that year. This clearly shows
that the equity share capital of bank has increased during such period.
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 Long Term Debt to Equity Ratio
Table 2.3:
Long Term Debt to Equity Ratio
Amount in Rs.
Year Long Term Debt Shareholders' Equity Ratio
2070/71 19,069,365,111 7,925,478,596 2.41
2071/72 22,779,162,283 9,806,952,579 2.32
2072/73 28,035,129,893 16,287,751,617 1.72
2073/74 55,242,553,760 18,707,884,096 2.95
2074/75 67,259,623,916 24,871,022,126 2.70

3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2070/71 2071/72 2072/73 2073/74 2074/75
Year
Fig. 2.3: Long Term Debt to Equity Ratio
A long term debt to equity ratio of 2:1 is supposed to be an ideal one. The long term debt
and equity ratio of NIBL is lowest during the year 2072/73 and highest during the year
2073/74. This shows that NIBL has a greater amount of debt as compared to equity share
capital in its capital structure.
 Proprietary Ratio
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Table2.4:
Proprietary Ratio
Amount in Rs.
Year Shareholders’ Equity Total Tangible Assets Ratio
2070/71 7,925,478,596 1,058,313,402 7.49
2071/72 9,806,952,579 1,054,131,517 9.30
2072/73 16,287,751,617 1,050,445,762 15.51
2073/74 18,707,884,096 1,304,305,089 14.34
2074/75 24,871,022,126 3,727,972,124 6.67
Proprietary Ratio
18
16
14
Proprietary Ratio
12
10
8
6
4
2
0
2070/71 2071/72 2072/73 2073/74 2074/75
Year
Fig. 2.4: Proprietary Ratio
A low proprietary ratio indicates that the company is already heavily depending on debts
for its operations. The ideal value of the proprietary ratio depends on the risk appetite of
the investors. NIBL has a high proprietary ratio which had been in an upward trend till
FY 2073/74 but has significantly decreased during FY 2074/75. This indicates that the
bank is not depending upon debt for its operations. The decrease in the ratio during the
last year denotes that NIBL is shifting the dependency on shareholders’ equity to debt.
 Fixed Assets Ratio
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Table 2.5:
Fixed Assets Ratio
Amount in Rs.
Year Total Fixed Assets Long Term Funds Ratio
2070/71 1,058,313,402 8,975,478,596 0.12

2071/72 1,054,131,517 11,356,952,579 0.09
2072/73 1,050,445,762 17,837,751,617 0.06
2073/74 1,304,305,089 20,257,884,096 0.06
2074/75 3,727,972,124 26,121,022,126 0.14
Fixed Assets Ratio

0.16
0.14
0.12
Fixed Assets Ratio
0.10
0.08
0.06
0.04
0.02
0.00
2070/71 2071/72 2072/73 2073/74 2074/75
Year
Fig. 2.5: Fixed Assets Ratio
If the fixed assets ratio is lesser than one means that the firm made use of the short term
fund for the acquisition of long term assets. If the ratio is greater than one means that the
acquired fixed assets are lesser in quantum than that of the long term funds raised for the
purpose. The fixed assets ratios of NIBL are less than 1 which suggests that it has made
use of short term funds for acquiring the long term assets.
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2.1.3. Profitability Ratio
Some of the important profitability ratio have been calculated and interpreted in this study
which is presented below:
 Return on Shareholder’s Equity
Table 2.6:
Return on Shareholder’s Equity
Amount in Rs.
Year Net Profit after Tax Shareholders’ Equity ROE (%)
2070/71 1,939,612,344 7,925,478,596 24.47%
2071/72 1,961,852,380 9,806,952,579 20.00%
2072/73 2,550,883,563 16,287,751,617 15.66%
2073/74 3,114,131,140 18,707,884,096 16.65%
2074/75 3,659,322,725 24,871,022,126 14.71%
Return on Shareholders' Equity (%)
Return on Shareholders' Equity

30
25
20
15
10
5
0
2070/71 2071/72 2072/73 2073/74 2074/75
Year
Fig. 2.6: Return on Shareholder’s Equity

The Return on Shareholder’s Equity of NIBL has been declining. NIBL had high highest
ROE during the FY 2070/71 i.e. 24.47%. Even though the profit has been in an increasing
trend, it has not been increasing in the rate as increase in shareholders’ equity which is the
reason for declining ROE which had slightly increased during 2073/74 but then again
suffered in the next year.
 Earnings per Share (EPS)
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Table 2.7:
Earnings per Share (EPS)
Amount in Rs.
Year Net Profit after Tax Number of Shares EPS(Rs.)
2070/71 1,939,612,344 41,467,075 46.77

2071/72 1,961,852,380 47,712,035 41.12
2072/73 2,550,883,563 72,555,096 35.16
2073/74 3,114,131,140 92,403,789 33.70
2074/75 3,659,322,725 106,455,990 34.37
Earnings Per Share

50
45
40
Earnings Per Share
35
30
25
20
15
10
5
0
2070/71 2071/72 2072/73 2073/74 2074/75
Year
Fig. 2.7: Earnings per Share (EPS)

Higher the EPS is, the better it is for the equity shareholder and higher will be the number
of interested shareholders. The EPS of NIBL has also been in a downward trend till
2073/74 which has increased during the year 2074/75.
 Dividend per Share (DPS)
Table 2.8:
Dividend per Share (DPS)
Amount in Rs.
Dividend Paid to Number of
Year DPS(Rs.)
Shareholders Shares
2070/71 1,036,676,875 41,467,075 25.00
2071/72 82,868,272 47,712,035 21.73
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2072/73 1,523,657,058 72,555,096 21.00

2073/74 2,310,094,717 92,403,789 25.00
2074/75 2,342,031,780 106,455,990 22.00
Dividend Per Share

26
25
Dividend Per Share
24
23
22
21
20
19
2070/71 2071/72 2072/73 2073/74 2074/75
Year
Fig. 2.8: Dividend per Share (DPS)
There is no preference dividend due to absence of preference capital in the capital

structure. The highest DPS of NIBL was during FY 2070/71 and 2073/74. The bank has
distributed low amount of dividend during the year 2072/73. For the DPS to increase, the
dividend distribution amount should increase in a greater rate than the number of paid up
shares. Also, decrease in debt in a capital structure also increases DPS as it decreases the
interest expenses subsequently increasing the net profit.
 PE Ratio
Table 2.9:
PE Ratio
Amount in Rs.
Year MPS EPS Ratio
2070/71 990 46.77 21.17
2071/72 704 41.12 24.08
2072/73 1,040 35.16 29.58
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2073/74 770 33.70 22.85

2074/75 618 34.37 17.98
PE Ratio
35
30
25
PE Ratio
20
15
10
5
0
2070/71 2071/72 2072/73 2073/74 2074/75
Year
Fig. 2.9: PE Ratio
Higher PE Ratio indicates the amount that the investors are interested to invest to earn the
earnings. NIBL has the highest PE ratio during the year 2072/73 after which the ratio has
been decreasing significantly.
2.1.4. Coverage Ratio
 Interest Coverage Ratio
Table 2.10:
Interest Coverage Ratio
Amount in Rs.
Year EBIT Interest Expenses Ratio
2070/71 5,863,602,757 2,820,475,438 2.08
2071/72 5,906,505,580 2,807,361,350 2.09
2072/73 6,933,841,137 2,855,650,146 2.43
2073/74 9,390,607,392 4,464,551,946 2.10
2074/75 12,664,144,887 7,723,923,816 1.64
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Interest Coverage Ratio

3.0
Interest Coverage Ratio 2.5
2.0
1.5
1.0
0.5
0.0
2070/71 2071/72 2072/73 2073/74 2074/75
Year
Fig. 2.10: Interest Coverage Ratio
The interest coverage ratio presents the bank’s ability to serve its debts and helps in
analyzing whether the debt is becoming burden to the company. The interest coverage
ratio of NIBL was in an increasing state till 2072/73 and then in a decreasing state after
the period. NIBL has a coverage ratio greater than 1 which shows that NIBL is able to pay
its interest.
 Dividend Coverage Ratio
Table 2.11:
Dividend Coverage Ratio
Amount in Rs.
Year Profit after Tax Dividend paid Ratio
2070/71 1,939,612,344 1,036,676,875 1.87
2071/72 1,961,852,380 82,868,272 23.67
2072/73 2,550,883,563 1,523,657,058 1.67
2073/74 3,114,131,140 2,310,094,717 1.35
2074/75 3,659,322,725 2,342,031,780 1.56
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25

20
15
10
0
2070/71 2071/72 2072/73 2073/74 2074/75
Year
Fig. 2.11: Dividend Coverage Ratio
NIBL has the highest dividend coverage during the FY 2071/72 which signifies that it has
retained as higher portion of earnings during that year to meet its financing requirements.
The dividend coverage ratios after 2071/72 are nearer to 1.5 which may suggest that
NIBL might not be able to maintain the present level of dividends.
2.1.5. Leverage Analysis
 Degree of Financial Leverage
Table 2.12:
Degree of Financial Leverage
Amount in Rs.
Year EBIT EBT DFL
2070/71 5,863,602,757 2,766,479,381 2.12
2071/72 5,906,505,580 2,817,403,845 2.10
2072/73 6,933,841,137 3,707,446,355 1.87
2073/74 9,390,607,392 4,478,232,224 2.10
2074/75 12,664,144,887 4,940,221,071 2.56
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3.0

2.5
2.0
1.5
1.0
0.5
0.0
2070/71 2071/72 2072/73 2073/74 2074/75
Year
Fig.2.12: Degree of Financial Leverage
DFL is invaluable in helping a company assess the amount of debt or financial leverage it
should opt in its capital structure. NIBL has made highest use of debt in FY 2074/75.
2.1.6. Cost of Capital Analysis
 Cost of Equity
Table 2.13:
Cost of Equity
Amount in Rs.
Year DPS MPS Cost of equity (%)
2070/71 25 990 2.53%

2071/72 22 704 3.09%
2072/73 21 1,040 2.02%
2073/74 25 770 3.25%
2074/75 22 618 3.56%
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Cost of Equity
4.0
3.5
Cost of Equity 3.0
2.5
2.0
1.5
1.0
0.5
0.0
2070/71 2071/72 2072/73 2073/74 2074/75
Year
Fig. 2.13: Cost of Equity
The cost of equity of NIBL is highest in 2074/75 and lowest in 2072/73 which means that
the rate of return to equity shareholder is greatest in 2074/75.
 Cost of Debt
Table 2.14:
Cost of Debt
Amount in Rs.
Year Interest Interest net of tax Debt Cost of Debt (%)
2070/71 114,018,035 79,812,625 1,474,339,748 5.41%
2071/72 157,494,645 110,246,252 1,813,116,232 6.08%
2072/73 138,268,658 96,788,061 1,800,479,530 5.38%
2073/74 145,451,738 101,816,217 1,791,324,234 5.68%
2074/75 232,275,543 162,592,880 5,498,256,888 2.96%
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Cost of Debt
7
5
Cost of Debt
0
2070/71 2071/72 2072/73 2073/74 2074/75
Year
Fig. 2.14: Cost of Debt
2.1.7. Capital Structure Theories
Some of the capital structure theories used in this study is as follows:

 Net Income (NI) Approach
The overall cost of capital under this approach is determined as under:
Market Value of Firm= Market Value of Equity (E) + Market Value of debt (D)
,D
Where, NI= Net income available to equity shareholders

I= Interest on debt
Ke= Cost of equity
Kd= Cost of debt
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KO= Overall Cost of Capital
Table 2.15
Market Value of Firm
Amount in Rs.
Cost
Cost Market
of Market Value Market Value
Year NI Interest (I) of Value of
Equit of Equity of Firm
Debt Debt
y
2070/7 1,939,612,34 5.41 1,474,339,74
2.53% 76,808,648,822 79,812,625 78,282,988,570
1 4 % 8
2071/7 1,961,852,38 157,494,64 6.08 2,590,166,04
3.09% 63,565,799,586 66,155,965,631
2 0 5 % 6
2072/7 2,550,883,56 126,329,468,20 138,268,65 5.38 2,572,113,61 128,901,581,82
2.02%
3 3 9 8 % 4 3
2073/7 3,114,131,14 145,451,73 5.68 2,559,034,62
3.25% 95,915,239,444 98,474,274,064
4 0 8 % 0
2074/7 3,659,322,72 102,793,702,00 232,275,54 2.96 7,854,652,69 110,648,354,69
3.56%
5 5 2 3 % 7 9
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Table 2.16
Overall Cost of Capital
Amount in Rs.
Overall Cost of
Year Net Operating Income Market Value of Firm
Capital
2070/71 5,712,085,722 78,282,988,570 7.30%
2071/72 5,353,209,441 66,155,965,631 8.09%
2072/73 6,555,338,898 128,901,581,823 5.09%
2073/74 9,194,334,750 98,474,274,064 9.34%
2074/75 12,682,839,563 110,648,354,699 11.46%
Cost of Overall Capital under NI Approach

14
12
Cost of Overall Capital
10
8
6
4
2
0
2070/71 2071/72 2072/73 2073/74 2074/75
Year
Fig. 2.15: Overall Cost of Capital
The market value of the firm is in an upward trend since the debt is also in an upward
trend. Had the net operating income been constant, the overall cost of capital would
have been declining. But since, the NOI is changing with change in debt, the overall
cost of capital is fluctuating instead of it declining.
2.2. Analysis of Data:
The data produced above for the relation between market value of debt and overall cost of
capital are analyzed with the calculation of the mean, standard deviation, coefficient of
variation as presented below:
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Table 2.17
Calculation of Standard Deviation of Cash & Balance & Deposit
Rs. in Million
Shareholders' Equity Total Debt
Year (X-X')2 (Y-Y')2
(X) (Y)
2070/71 7,925 78,248 57,684,025 1,213,463,291
2071/72 9,807 94,538 32,638,369 343,909,607
2072/73 16,288 113,495 589,824 169,909
2073/74 18,709 132,110 10,169,721 362,034,340
2074/75 24,871 147,023 87,441,201 1,151,937,176
Total 77,600 565,414 188,523,140 3,071,514,323
Source: Annual Report of Nepal Investment Bank Ltd.
2.2.1. Mean:
Here, ∑X =77,600, ∑Y =565,414, N= No. of years = 5
= = 15,520
= = 113,083
So, the average shareholders’ equity of Nepal Investment Bank during the last five years
is Rs. 15,520 million and average debt is Rs. 113,083 million.
2.2.2. Standard Deviation:
Here, ∑ (X-X’)2 = 188,523,140 and ∑ (Y-Y’)2 = 3,071,514,323 = 6,140.41

= 24,785.13
Therefore, the SD based on Shareholders’ Equity of Nepal Investment Bank Ltd. for last
five year is Rs. 6,140.41 million and SD of Debt is Rs. 24,785.13 million.
2.2.3. Coefficient of Variation (CV):
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The coefficient of variation measures the variability of the observation with reference to
the mean of the above data. There is more uniformity in the changes of debt as compared
to the shareholders’ equity because CV of debt is less than CV of shareholders’ equity i.e.
21.92% < 39.56%
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CHAPTER III: SUMMARY, CONCLUSION & RECOMMENDATION
This chapter is dedicated to provide conclusions after tabulation and analysis of the
different financial ratios as depicted in the earlier chapters on the financial performance
and position of Nepal Investment Bank Limited. It also tries to provide some
recommendations to the concerned banks from the conclusion derived from the study.
3.1. Summary
Banks and financial institutions generally mobilize the idle resources by collecting from
general public in the form of deposits and disbursing the collected deposits in the form of
loan to parties requiring it and generating profits in the same process. Absence of modern
banking system leads to lack of sufficient capital. Thus, any country cannot have a
developed economy in the absence of modern banking system. An effective banking
system leads to the effective mobilization of resources like saving and investments, which
in turn leads to sound economic growth of the country.
This project report has been prepared for the fulfillment of the internal assessment of BBS
program. From this purpose, here we have analyzed the financial performance of Nepal
Investment Bank Limited over the period of FY 2070/71 to FY 2074/75. To evaluate the
capital structure of the bank, we have divided the whole report to different chapters. In
every chapter, there are several sub-chapters. The first Introduction chapter gives
background information about the project work, introduction of Nepal Investment Bank
Limited, Review related studies etc. The second chapter called Presentation and Analysis
of Data; we tried to analyze its capital structure using ratio analysis, leverage analysis,
cost of capital analysis and capital structure theories. By using these financial tools, we
computed different ratios to evaluate its leverage position, profitability position and
subsequently its capital structure.
In summary, it has been observed that the Nepal Investment Bank has been using more
amount of debt as compared to share capital. Its capital structure has been dominated by
use of debts (long term debts as well as short term debts) which has been increasing from
2070/71 to 2074/75.
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The major findings of the study are as follows:

 From the study, it has been noted that the capital structure of the bank is majorly
governed by the debts which indicates that the operations of bank heavily depends
on the debts. Also, due to more debt, the interest expense of the bank has been
increasing.
 From the calculation of the Capital Gearing Ratio, it has been observed that Nepal
Investment Bank Ltd. is a low geared company. NIBL has been using significantly
less amount of fixed interest bearing securities i.e. in case of NIBL, debentures as
compared to equity share capital.
 The Leverage Ratios of NIBL have indicated that the greater portion of the bank’s
total assets has been funded by its equity capital. However, the fixed assets have
been funded by the short term funds i.e. short term deposits, short term
borrowings. Also, the ratios suggested that the capital structure of NIBL has
greater amount of debts as compared to equity share capital.
 From the Profitability Ratios, it has been observed that the return to equity as well
as Earnings per Share of the shareholders of NIBL have been gradually decreasing
despite increase in profit. This is due to profit not increasing with the rate that the
shareholders’ equity has been increasing as well as increasing interest expenses.
 The Coverage Ratios greater than 1 have indicated that the bank is able to pay its
interest and serve its debts. Also, the dividend coverage ratio is low except in the
year 2071/72 signifying the majority of profit being distributed to the
shareholders.
 Leverage analysis of the bank shows that the degree of financial leverage is
fluctuating and NIBL has greatest financial leverage during 2074/75 which
signifies that the debt is greater in that year which has increased the interest
expenses.
 The cost of debt as well as cost of equity of the bank has been fluctuating in the
past 5 years. The cost of equity in 2074/75 is highest due to the low market price
during the year.
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3.2. Conclusion
Bank is a very important and vital for economic development in mobilizing capital and
other resources. NIBL is also contributing to the advancement of the socioeconomic
condition of the country. With increasing globalization and development activities rapidly
progressing with increased competition in the banking industry, NIBL is following
several strategies and taking new initiatives, offering new products and services to the
customers.
From the above findings, it has been concluded that the bank has a satisfactory capital
structure. The amount of debt in the capital structure is greater than equity in all the years.
NIBL is one of the most popular commercial banks and it may be one of the leading
banks in the Nepalese banking sector. So, it needs to maintain a proper capital structure
which can be a base for better financial performance as well as better services to the
customers. The profitability of an institution heavily depends upon its capital structure.
Following points may help Nepal Investment Bank Limited to enhance its capital
structure for its profitability as well as its customers considering that the bank right now
is in the developing stage and is one of the leading banks in the country. Mentioned below
are the recommendations suggested to overcome the weakness and inefficiency and to
improve the capital structure of the bank:
1. It is suggested for the Nepal Investment Bank Ltd. to maintain the same proportion of
debt- equity ratio or to reduce the ratio. In the future, the company can use equity
capital for long term obligations and debt capital for the short term obligations as
equity capital is best suited for long run and debt is suited for day to day activities.
2. The bank can use certain tools like debt restructuring and inventory management in
order to lower their debt-to-capital ratio. By using certain bottom-line accounting
techniques, the bank can help to make itself appear in a better financial position
without the fear of insolvency.
3. Considering the present fixed assets ratio of the bank, it will be better for the bank to
make utilization of long term funds to obtain the fixed assets rather than the short
term funds it has been using at the present.
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4. Analyzing the decreasing earning per share of the bank, the bank must give special
attention to increase the earning per share to safeguard and improve the welfare of its
shareholders.
5. In order to increase the profitability of bank to provide better return to the
shareholders, loan programs should be made attractive to increase the loan portfolio
since the major income source is the interest income from the loans and advances
provided.
6. Focusing on the interest expenses of the bank which is rapidly increasing though the
bank has a good coverage ratio, it is recommended to reduce the interest expenses by
repaying the debt it has.
7. For better utilization of the shareholders’ fund, the bank should conduct researches
regarding which sectors are profitable and which are not considering the risk as well.
8. In order to earn high return in the future, the company should take necessary steps to
minimize the cost of capital.
9. The market price per share of NIBL has been decreasing, the price during 2074/75
being the lowest. NIBL should make efforts to increase its MPS so that the investors
are attracted towards investment in the bank.
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BIBLIOGRAPHY
Dangol, R.M (2070) “Accounting for Financial Analysis and Planning”, Taleju
Publication
Banerjee, S., Heshmati, A. & Wihlborg, C. (2004) “The Dynamics of Capital Structure.
Research in Banking and Finance”
Baral, K.J (2004) “Determinants of Capital Structure: A case study of listed companies of
Nepal. Journal of Nepalese Business Studies”
Hannan, A.S. and Shaheed, A. (1998). “Financial Position and Performance analysis of
Bangladesh Shilpa Bank, Islamic University Studies”, Volume-1, June 1998.
Joshi, M.J. (2008), “Capital Structure Management of Commercial Bank in Nepal”,

Unpublished thesis
Kalra, A (2016), “Strategic Financial Management”
Kafle, P.P (2001), “Comparative Analysis of Capital Structure between Lumbini Sugar
Factory and Birgunj Sugar Factory” Unpublished Thesis
Research paper on Capital Structure Management of Joint Venture Banks of Nepal, May
2016
Solomon, E. 1963 “Leverage and the Cost of Capital: The Journal of Finance”
Velnampy, T. & Niresh, J. A (2012) “The Relationship between Capital Structure and
Profitability.” Global Journal of Management and Business Research
Other References:
Annual Report of Nepal Investment Bank Limited (for the year 2070/71 to 2074/75)
Website: www.nibl.com.np
www.investopedia.com
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Bbsniblsriya - Final report of bbs 4th year Nibl bank

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CAPITAL STRUCTURE ANALYSIS

A Project Work Report

In Partial fulfillment of the Requirements for the Degree of

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The project work report entitled “CAPITAL STRUCTURE ANALYSIS OF NEPAL

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We hereby endorse the project work report entitled “CAPITAL STRUCTURE

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CHAPTER II: RESULTS AND ANALYSIS………………………………………….....23

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Table 1: Shareholding pattern

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Fig. 1.1: Components of Capital Structure

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NIBL = Nepal Investment Bank Limited

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1.1 Background Of Study

According to Gerestenberg “Capital structure of a company refers to the composition or

The Capital Structure involves two decisions-

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1.1.2. Components of Capital Structure

Components of Capital Structure

Shareholder’s Fund Borrowed Funds

Fig. 1.1: Components of Capital Structure

1.1.3. Meaning of Capital Structure Analysis

Capital structure analysis is a periodic evaluation of all components of

Capital structure analysis is a process that involves evaluating the combination of

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1.1.4. Elements of Capital Structure Analysis:

 Capital Gearing Ratio:

 Leverage Analysis and Leverage Ratio:

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 Cost of Capital Analysis:

 Capital Structure Theories:

1.1.5. Introduction to Bank

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1.1.6. Banking scenario in Nepal

Establishment of Nepal Bank Limited (commercial bank) in 1994 B.S. is considered as

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1.2 Profile of organization

Nepal Investment Bank Limited

1.3.1. Present Shareholding pattern of Bank

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Fig. 1.2: Shareholding Pattern of NIBL

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The Modigliani- Millers Study (1958)

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Joshi, M. J. (2008), has made a study on "Capital Structure Management of

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 Interest Coverage Ratio, Return on Total Assets, Return on Shareholder's

Kaﬂe, P. P. (2001), in his study "A Comparative Analysis of Capital Structure

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1.6.1. Research Methodology

1.6.2. Research Design

1.6.3. Data Collection