A study of capital structure trend in the Indian steel industry

Type :

Theses

Pages :

61 pages

Format :

.doc

Published date :

05/13/2009

Category :

Business & market

Sub category :

Accounting

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Summary :

Introduction
1. Capital structure
2. Modigliani-Miller approach
3. A capital structure trend in Indian Steel industry
Research design
1. Statement of the problem
2. Objectives of study
3. Scope of the study
4. Operational definitions
5. Methodology
6. Limitations of the study
Profile of the industry
Analysis of capital structure trend in the Indian steel sector
Summary of findings, conclusion and recommendations
Bibliography
Annexure
1. Correlation coefficient between EPS on Debt Equity & coverage ratio
2. Earning Per Share of steel companies from 2002 to 2006
3. Interest paid by steel companies in Year 2002 to 2006
Tables and graphs

Abstract

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.