Capital structure is designed to maximize the value of a firm. However there is no unanimity on the effect of capital structure on the ultimate value of a firm. Various theories hold varied opinions. According to Modigliani and Miller approach value of the firm is created by optimal capital structure. In M&M approach the firm value is created by reducing the Tax on interest paid for its Debt capital. In fact is that the value of the firm is dependent on the host factors. The project has examined the effect of capital structure on the earning per share by regression analysis on the data of the steel companies both large/medium sectors. Classification is made accordingly to the analysis.
The analysis found that the steel companies have poor debt equity mix. The companies showed severe financial crisis during the period 1999-2000 in the repayment interest on the debt. The increase in the prices of iron & steel lead the companies to over comes its debt. The rising prices both in global and domestic markets lead the changes in debt equity and maintained higher reserves. The decrease in the debt moved the steel companies to have higher reserves. This lead the companies to expand e.g. Tata steel maintained $4billion has reserve and acquired course a European based steel manufacturing company. Another e.g. is JSW steels had undergone 2MT of production expansion. The other classification is made on the basis of age of the companies. The aged company like Tata steels & SAIL are performed as same has the adult companies.
Capital structure plays an important role in the creation of higher market value in terms of higher earning per share. The earning per share increase with the leverage of the firm. But the leverage also increases the financial risk of the shareholders e.g. Essar steel (Essar), the leading sponge iron manufacturer and the flagship company of the Essar group, during the late 1990s faced a serve financial crisis when it defaulted the repaying the Floating rate Note holders on the maturity date. As a result, it can be affected by capital structure or financing decisions, a firm would like to have capital structure, which maximizes the market value of the firm. If the leverage affects the cost of capital and the value of the firm, an optimum capital structure would be obtained at that combination of debt equity that maximizes the total value of the firm or minimize the weighted average cost of capital.
[...] In case of 100% equity firm, the overall cost of the capital of the firm is equal to the cost of equity but when the debt is introduced in the capital structure and the financial leverage increases, the cost of equity remains constant as the investors expect a minimum leverage increases, the cost of equity remains constant as the equity investor s expect a minimum leverage in every firm. The ke doesn't increase even with increase in leverage. The argument for ke, remaining unchanged may be that up to a particular degree of leverage, the interest change may not be large enough pose a real dividend payable to share holders. [...]
[...] Net operating profit 1.000 Less: corporate tax at 0.3370 Income for distribution 0.6630 Less: dividend tax @ 15% 0.0950 Dividend 0.568 Total tax ( 0.337 +.095) 0.432 The company payout 100% dividend the government gets about of the firm equity earnings A capital structure trend in Indian Steel industry Capital structure in Indian steel industries large/medium had under gone various changes due to the growth in the infrastructure projects and global demand. This made the steel industry to grow at a wide range by reducing debt. [...]
[...] Maharashtra Seamless Ratio Correlation = - 0.416955602 Southern Ispat Ratio Correlation = - 0.027419953 Chapter 5 Summary of findings, Conclusion Recommendation Summary of Findings: The steel industry has undergone a drastic change in the capital structure during 2000-2006. The changes are due to the high demand for steel both at the global and domestic arena. This brought changes in the debt equity ratio and capital structure of the firm. The changes in the capital structure helped to recover the long term debt at higher rate. [...]
[...] Companies under Slightly dependent Table 4.1 Table showing Categorizing the companies based on their values between the Debt Equity & EPS Table 4.2 Table Categorizing the companies based on their values between the coverage Ratio and EPS Fig 4.4 Graph showing Categorizing the companies based on their Interest coverage ratio on EPS Table 5.1 Average growth in EPS from 2002-06 Table Executive summary Capital structure is designed to maximize the value of a firm. However there is no unanimity on the effect of capital structure on the ultimate value of a firm. [...]
[...] Chapter 4 Analysis of capital structure trend in the Indian steel sector. The volume of dependence of EPS on the Debt Equity structure of the companies, all the 29 are grouped into 4 categories as shown in the table viz., Saturated, Dependent, Slightly dependent and Independent. Saturated category is so named because the EPS has reached the point where a change in the Debt Equity structure is no way benefit the EPS of the companies of the total sample falls under this category. [...]
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