Impact of Capital Structure On Performance of SPL: Department of Finance and Banking Afrina Momtaz

2014
Department of finance
and banking
Afrina momtaz
[IMPACT OF CAPITAL
STRUCTURE ON
PERFORMANCE OF SPL]
SUBMITTED TO : PROFESSOR DR. BEGUM ISMAT ARA HAQUE
Impact of Capital Structure on performance of SPL
Contents
Introduction ............................................................................................................................................ 4
Company brief: ....................................................................................................................................... 4
Statement of the problem ...................................................................................................................... 4
Hypothesis of the study .......................................................................................................................... 5
Objective of the study ............................................................................................................................. 5
Scope and limitation of the study ........................................................................................................... 5
Methodology of the study: ..................................................................................................................... 6
2.1 What is capital structure? ................................................................................................................ 8
2.2: What is optimum capital structure? ................................................................................................ 9
2.3: Key factors governing the capital structure decision: ..................................................................... 9
2.4 Theories of capital structure: .......................................................................................................... 13
3.1 Trend of capital structure of square: .............................................................................................. 16
3.2 Performance of square ................................................................................................................... 17
3.2.1 Measurement of Profitability ...................................................................................................... 17
3.3 Measurement of financial leverage................................................................................................ 18
4.1 Relationship with capital structure and profitability ...................................................................... 22
4.2 capital structure and EPS Performance .......................................................................................... 23
4.3 Capital structure and Return on Equity .......................................................................................... 24
4.4 Summary of findings ....................................................................................................................... 25
5.1 Problems faced by Square pharmaceuticals Ltd:............................................................................ 27
5.2 Suggested policy measures............................................................................................................. 28
Conclusion: ........................................................................................................................................... 29
References: ........................................................................................................................................... 30
Appendix: .............................................................................................................................................. 31
2|Page
CHAPTER ONE
INTRODUCTION
3|Page
Introduction
Impact capital structure on firms performance has remained the controversy issue in the
recent years. Undoubtedly a judicial mix of debt and equity is very much needed for smooth
running of a firm. Too much debt and too much equity both are not expected by a
corporation. Financial performance measure is an effective used tool in measuring a
company’s strength and weakness. Various types of tools are generally used in this regards.
This study has taken an effort in order to assess the financial performance of Square
Pharmaceuticals Ltd and its relationship with the debt- equity mix.
Company brief:
Square pharmaceuticals Ltd (SPL) is a giant pharmaceutical company in Bangladesh. It is
a trusted name in the industry of manufacturing quality medicine for more than four decades.
From the inception in 1958, it has today burgeoned into one of the top line conglomerates in
Bangladesh. The company was founded by Samson H. Chowdhury along with three of his
friends as a private firm. It went public in 1991 and is currently listed on the Dhaka Stock
exchange. Square Pharmaceuticals Ltd, the flagship company, is holding the strong
leadership position in the pharmaceutical industry of Bangladesh. It is now on its way to
becoming a high performance global player. The sales turnover of SPL was more than taka
11.46 Billion ( US $ 163.71 million) with about 10.43 % market share (April 2009-March
2010) having a growth rate of about 16.72 %. Square has extended its range of service
towards the highway of global market. it pioneered exports of medicines from Bangladesh in
1987 and has been exporting antibiotics and other pharmaceutical products.
Statement of the problem

Structure of capital has a profound impact on the performance of a firm. Here
performance means the financial performance of a firm which is measured by net income, net
operating income, Earning per share etc. performance may depend on many things like
4|Page
managements efficiency, price of product, capital structure, nature of industry etc. This report
will find out only the effect of capital structure on the performance of firm.
Hypothesis of the study

A hypothesis is a testable, prediction about what one expects to happen in his study. In
this research, the null hypothesis is ‘ there is no relationship between the capital structure and
the performance of square pharmaceutical Ltd’ and the alternative hypothesis is ‘ there is a
relationship between capital structure and the financial performance of firm’.
Objective of the study

The main objective of the study is to reveal the relationship of using debt in the capital
structure and the financial performance of square ltd. There are also some supporting
objectives which will help to reach at the main objectives:
To get idea about the terminologies of capital structure
To know the nature of square limited company
To analyze the financial structure of square ltd
To analyze the profitability of square Ltd.
To analyze the ability of paying debt of the company
To finding out the problem faced by square ltd company in upgrading the
performance
To give policy measures to be taken by the company.
Scope and limitation of the study

This paper covers capital portion of a company. Square pharmaceutical is the sample
company of which data is to be used for analysis. The purpose of such research evolved from
the need for analyzing the relevance of capital structure in the financial performance and
value of firm. This paper has done a lot in carrying preliminary objective and finding the
5|Page
factors affecting the capital structure on Performance of SPL, yet there are much works to be
done. The performance fluctuation is not only the subject to capital structure decision. This
report is not flawless at all. This paper acknowledges the limitation of this study. The main
limitation of this report is the non availability of primary data. There were almost no primary
data would be helpful to analyze the market position of the various products. Though there
were some primary data they were self reported and couldn’t investigate independently.
Another limitation is that there is not enough prior academic research on the topic that could
direct the report to find solution to the major and minor problem. This problem restricted the
report to get an overview of the company in the eye of other researchers. Such limitations
give scope for further research on the facts that have affect on the performance of SPL. These
facts are beyond the scope of this research. Research can be done on the financial policy,
Management policy, Changing Business and social environment of SPL. Such research will
enrich knowledge on this topic.
Methodology of the study:
1.7.1 Population and Sample Design:
The population of the study is the overall pharmaceuticals industry of Bangladesh. About 250
pharmaceutical companies are registered in Bangladesh. In these all industries, Square
Pharmaceutical Ltd (SPL) Ltd is the sample firm of this research study. The sample design used
for doing this study is the random sampling.
1.7.2 Collection of Data:
Primary and secondary data collection is the first and foremost requirement of doing a research.
6|Page
1.7.2.1 Collection of Primary Data:
For collecting primary data of the sample firm, personal interview method, telephone interview
method, observation method, questionnaire, schedule etc can be used. Depth interviews can also
be taken to get opinion from personnel as well as directors about the productivity and
profitability of Apex. Sometimes content analysis may also be helpful for collecting primary
data.
1.7.2.2 Collection of secondary Data:
For secondary data collection, researcher must be very careful. He must scrutinize the reliability,
suitability and adequacy of data collection. Secondary data sources are used such as former term
paper prepared by other students in the same topic productivity and profitability analysis.
Besides the annual report, journal, website and necessary news related to this firm are also
considered as reliable secondary sources of data collection.
1.7.3 Analysis of data:
A qualitative approach was used, since the empirical data was collected on a small scale level
and since purpose of this research paper was to gain a deeper understanding of actions in certain
situations. The ambition of this research was to gain an in- depth view of this situation, hence
qualitative research was most suited.
1.7.3.2 Techniques for analysis of data:
Research regarding technology and the creative process could be successfully observed using
qualitative methods. There are many practical reasons for this topic that are associated with the
nature of qualitative methods. Setting up a qualitative study could consist of Credibility,
transferability, dependability, conformability, authenticity and emancipator. Several analytical
techniques incorporated with the research design could be employed to undertake this research
project including experiments, observations, data collection, and surveys.
7|Page
CHAPTER: TWO
THEORETICAL OVERVIEW
2.1 What is capital structure?
8|Page
The capital structure is how a firm finances its overall operations and growth by using different
sources of funds. It is the mix of a company's long-term debt, specific short-term debt, common
equity and preferred equity. When people refer to capital structure they are most likely referring
to a firm's debt-to-equity ratio, which provides insight into how risky a company is. Usually a
company more heavily financed by debt poses greater risk, as this firm is relatively highly
levered.
It is the proportion of debt and preference and equity shares on a firms balance sheet. (Khan and
Jane 2008)
2.2: What is optimum capital structure?

Optimal capital structure is the best debt-to-equity ratio for a firm that maximizes its value. The
optimal capital structure for a company is one which offers a balance between the ideal debt-to-
equity range and minimizes the firm's cost of capital. In theory, debt financing generally offers
the lowest cost of capital due to its tax deductibility. However, it is rarely the optimal structure
since a company's risk generally increases as debt increases.
Given the objective of the firm to maximize the value of equity shares, the firm should select a
financing-mix/capital structure which will help in achieving the objective of financial
management. Such capital structure is referred to as the optimal capital structure.
2.3: Key factors governing the capital structure decision:

9|Page
1. Business Risk
Excluding debt, business risk is the basic risk of the company's operations. The greater the
business risk, the lower the optimal debt ratio.
As an example, let's compare a utility company with a retail apparel company. A utility
company generally has more stability in earnings. The company has less risk in its business
given its stable revenue stream. However, a retail apparel company has the potential for a bit
more variability in its earnings. Since the sales of a retail apparel company are driven
primarily by trends in the fashion industry, the business risk of a retail apparel company is
much higher. Thus, a retail apparel company would have a lower optimal debt ratio so that
investors feel comfortable with the company's ability to meet its responsibilities with the
capital structure in both good times and bad.
2. Companies Tax exposure
Debt payments are tax deductible. As such, if a company's tax rate is high, using debt as a
means of financing a project is attractive because the tax deductibility of the debt payments
protects some income from taxes
3. financial flexibility
This is essentially the firm's ability to raise capital in bad times. It should come as no surprise
that companies typically have no problem raising capital when sales are growing and
earnings are strong. However, given a company's strong cash flow in the good times, raising
capital is not as hard. Companies should make an effort to be prudent when raising capital in
the good times, not stretching its capabilities too far. The lower a company's debt level, the
more financial flexibility a company has.
4. Management Style
10 | P a g e
Management styles range from aggressive to conservative. The more conservative a

management's approach is, the less inclined it is to use debt to increase profits. An aggressive
management may try to grow the firm quickly, using significant amounts of debt to ramp up
the growth of the company's earnings per share (EPS).
5. Growth Rate
Firms that are in the growth stage of their cycle typically finance that growth through debt,
borrowing money to grow faster. The conflict that arises with this method is that the revenues
of growth firms are typically unstable and unprovenMore stable and mature firms typically
need less debt to finance growth as its revenues are stable and proven. These firms also
generate cash flow, which can be used to finance projects when they arise.
6. Market condition
Market conditions can have a significant impact on a company's capital-structure condition.

Suppose a firm needs to borrow funds for a new plant. If the market is struggling, meaning
investors are limiting companies' access to capital because of market concerns, the interest
rate to borrow may be higher than a company would want to pay. In that situation, it may be
prudent for a company to wait until market conditions return to a more normal state before
the company tries to access funds for the plant.
7. Debt Service Capacity
The higher debt level in capital structure increases the probability of bankruptcy and
bankruptcy costs of the enterprises. Probability of bankruptcy refers to the chances of cash
flows to be less than the amount required for servicing the debt. The debt service ratio
measured by the ratio of operating income to total interest charges indicates the firm's ability
to meet its interest payment out of its annual operating earnings. Therefore, the higher debt
service ratio shows the higher debt capacity of the enterprises. Hence, there is the positive
relation between the debt service capacity and capital structure of the firm.
11 | P a g e
8. Operating Leverage
The use of fixed cost in production process also affects the capital structure. The high
operating leverage; use of higher proportion of fixed cost in the total cost over a period of
time; can magnify the variability in future earnings. There is negative relation between
operating leverage and debt level in capital structure. Higher the operating leverage, the
greater the chance of business failure and the greater will be the weight of bankruptcy costs
on enterprise financing decisions.
9. Stability in Cash Flow
The firm's cash flow stability also affects its capital structure. If firm's cash flows are
relatively stable, then it may find no difficulties in meeting its fixed charge obligation. As a
result, the firm may attempt to take the benefits by using leverage to some extent.
10. Nature Of Industry
Capital structure of a firm also depends on the nature of industry in which it operates. If there
were no barriers in industry for the entry of new competing firms, the profit margin of
existing firms in the industry would be adversely affected. As a result, the firm may find a
more risky to use fixed charge bearing securities.
11. Asset Structure
The sources of financing to be used are affected to several ways by the maturity structure of
assets to be used by the firm. If a firm has relatively longer term assets with assured demand
of their products, the firm attempts to use more long term debt. In contrast to this, the firms
with relatively greater investment in receivables and inventory rather than fixed assets rely
heavily on short-term financing.
12 | P a g e
12. Lender's Attitude
Lender of any firm permits the use of debt financing only to a limited range. If management
seeks to use leverage beyond that permitted by industry norms, this may reduce the credit
standing and credit rating of the firm. As a result, lenders do not permit for additional debt
financing.
2.4 Theories of capital structure:

Net Income theory
David Durand suggested “Net Income Theory” on 1952.This theory assumes that cost of capital
and leverage determines the value of firm. If leverage is increased in capital structure cost of
capital will go down and value of firm will get increased and if leverage is decreased the cost of
capital will be mounted up and value of firm in turn will be decreased. The theory assumes that
there would be no tax and cost of equity capital is higher than cost of debt.
Net operating income theory
Net Operating Theory is also suggested by Durand. This theory depicts that any change in
leverage will not cause any change in the value of the firm. According to the NOI theory overall
cost of capital and EBIT would be fixed. The value of the firm will be derived by dividing the
EBIT by overall cost of capital. Therefore value of the firm will only be affected by cost of
equity.
Traditional theory
Traditional theory suggests that the value of the firm would be highest and overall cost of capital
would be lowest at the optimum point. Therefore leverage should be utilized in capital structure
up to a certain limit where cost of capital would be lowest and value of the firm would be in
highest scale.
13 | P a g e
Modigliani and Miller Theory

It is popularly known as MM theory which is explained in two specific propositions. 1st
proposition is explained for a tax free situation where it depicts that a firms value will not be
changed whatever the mix of leverage and equity is applied in capital structure. 2nd Proposition
describes a tax situation where firm’s value is affected by the use of leverage since the use of
leverage enjoys a tax shield.
Trade off Theory
Trade off theory is based on assumption that benefit from tax shield may get offset by disaster
occurred by the risk aroused by the excessive use of debt in the capital structure. Therefore the
theory suggests that firms with enough taxable income to shield ought to have high target ratios,
the unprofitable firms with risky intangible asset go for equity financing.
Pecking Order theory
In Pecking order theory is no existence of predetermined mix of debt and equity. Rather there
exist two alternatives namely internal and external funds. Pecking order explains why profitable
firms generally borrow less-not because they have low target ratios but because they do not
require external fund.
Signaling Theory
The theory suggests that the use of stock is a negative signal and use of debt is a positive or at
least neutral signal. Therefore companies try to maintain a reserve borrowing capacity and this
means using less debt in normal situations.
14 | P a g e
CHAPTER: THREE
TREND OF CAPITAL
STRUCTURE OF SQUARE
&
TREND OF PERFORMANCE
15 | P a g e
3.1 Trend of capital structure of square:

This paper aims at finding the impact of capital structure on the performance of square
pharmaceuticals Ltd. To enrich the findings of the study there is a need of analyzing the trend of
capital structure of this company. The pattern of their capital structure depicts that financial
manager of the company uses different combination of debt and equity to meet various financial
requirement of the company.
Year Cost of Cost of Weight of Weight of WACC

Debt Equity debt equity
2013 7.52 9.13 5.25 94.75 9.04%
2012 6.14 7.84 4.39 95.61 7.76%
2011 29.73 7.10 3 97 7.78%
Companies assets are either finances by debt or equity. Weighted average cost of capital is
the average of these sources of financing, each of which is weighted by its respective use in the
given situation. By taking a weighted average, we can see how much interest the company has to
pay. There is an upward trend of weighted average cost of capital from the year 2011 to 2013.
The main cause of this increase in the cost is the increase of percentage of debt in the capital
structure. Another cause is that the firm is paying more dividend in the consecutive years.
Dividend in the year 2011 was 17.99%, in the year 2012 is 20.16 and in the year 2013 is 21.53%.
16 | P a g e
3.2 Performance of square
3.2.1 Measurement of Profitability

1. Gross profit margin:
Gross profit margin indicates the higher the company’s sale and gross profit; the more
increase its total gross profit margin ability. The firm gross profit margin is increasing
day by day. So its gross profit margin is in satisfactory level.
Ratio 2014 2013 2012
Gross profit 43.07% 42.90% 42.81%

margin
2. Net profit margin:
This ratio measures net income per taka of sales. It seems that net profit margin is
increasing per year. So undoubtedly, the firm’s net profit margin is in satisfactory level.
Ratio 2012-13 2011-12 2010-11
Net profit margin 18.61% 18.05% 18.80%
3. Return on assets (ROA):
17 | P a g e
The ratio of net income to total assets provides an idea of the overall return on
investment earned by the firm. This ratio shows that 2012-13 is the best year to get good
ROA than 2011-12 & 2010-11.
Ratio 2012-13 2011-12 2010-11
Return on assets 14.88% 14.17% 14.62%

(ROA)
4. Return on equity (ROE):
The ratio of net income to common equity measures the rate of return on common
stockholder’s investment. In the year 2013, the net income becomes low against the
common equity than 2012, 2011. This level is unsatisfactory too.
Ratio 2012-13 2011-12 2010-11
Return on equity 17.73% 17.81% 18.32%

(ROE)
Overall performance of Square Ltd is showing an upward trend from the year 2011-2013.
Net income dropped in the fiscal year 2011-2012 from 18.32% to 17.81%. This poor
performance shows managements inefficiency. Company’s management was not efficient
enough to utilize its assets properly.
3.3 Measurement of financial leverage

1. Current ratio:
18 | P a g e
Current ratio measures the short term solvency of a firm. In 2013, the current ratio is
less than the previous year. The firm should be improved its short term liquidity for
solvency.
Ratio (times) 2012-13 2011-12 2010-11
Current ratio 1.58 1.59 1.50
2. Quick ratio:
Quick ratio measures the firms’ ability to honor short term liabilities. The firm
degraded its quick ratio than previous year. It has to be improved more from 0.93 to 1.00
times.
Ratio (times) 2012-13 2011-12 2010-11
Quick ratio 0.93 0.95 0.96
3. Debt to equity:
A low ratio of debt to equity is always desirable. Firm has reduced its debt against its
equity which is the desirable ratio for the firm in 2013.
Ratio 2012-13 2011-12 2010-11
Debt to equity 24.43% 31.89% 40.72%
19 | P a g e
4. Equity to total assets:
Firm’s equity position is improved per year. This poses increasing in the
shareholder’s equity level against all of its total assets.
Ratio 2012-13 2011-12 2010-11
Equity to total 80.37% 75.82% 71.06%

assets
5. Debt to total assets:
A low ratio of debt to total assets is also always desirables. The firm ensures its total
debt to total assets ratio in a better position in 2013 than other years.
Ratio 2012-13 2011-12 2010-11
Debt to total assets 19.63% 24.18% 28.94%
Companies ability to meet short term obligations is good. This ability has been reduced in the
year 2012-2013. Company has fallen short of enough cash in this year. Debt to equity ratio
shows that the management has reduced using debt in its capital structure because cost of debt
20 | P a g e
CHAPTER: FOUR
RELATIONSHIPS WITH
CAPITAL STRUCTURE AND
PERFORMANCE
21 | P a g e
4.1 Relationship with capital structure and profitability

Both Gross profit margin and Net profit margin is at a satisfactory level. They are in
upward trend in the three consecutive years. This is because of the increasing use of debt
in the capital structure. ROE has decreased in the year 2012. This is because of the
highest finance cost in that year that is 433,581,036 tk.
percentage of debt and change in net profit

20
18
16
14
percentage
12
10 weight of debt
8 Net income
6
4
2
0
2011 2012 2013
The figure shows that net profit is not fully related to the capital structure. There are
other factors that affect the net income of square like office expense, sales growth,
product price etc.
22 | P a g e
4.2 capital structure and EPS Performance
percentage of debt and trend of EPS

20
18
16
14
percentage
12
10 weight of debt
8 EPS
6
4
2
0
2011 2012 2013
Financial statement of the respective years shows that amount of EPS has been
changed because of the diluted share capital. Stock bonus and share dividend has
increased the number of share not the percentage of debt. The following table is bearing
the proof of this statement:
23 | P a g e
Year 2009 2010 2011 2012 2013

Number of share 1961739 1961739 2648347 2624537 3037696
used for 0 0 60 639 965
calculation
EPS 127.07 106.43 9.56 9.01 7.82
4.3 Capital structure and Return on Equity
percentage of debt and change ROE

20
18
16
14
percentage
12
10 weight of debt
8 ROE
6
4
2
0
2011 2012 2013
Return on Equity (ROE) measures the rate of return on common stockholders’ investment. It
measures profitability from the common stockholders viewpoint. This ratio shows how many tk.
of net income were earned for each tk. invested by the owner. It is computed by dividing net
24 | P a g e
income by average common stockholders’ equity. The above figure shows that ROE is not
changing at the same with proportion of debt.
4.4 Summary of findings

Capital structure is not the only determinant of firm’s performance. Through the use of
debt in the capital structure firms can get rid of tax expenses because f interest tax shield as
interest rate given for debt is tax deductible item. Managerial efficiency, administrative
expenses, selling expense, product price, promotion these factors has also affected the
performance of square pharmaceuticals Ltd.
25 | P a g e
CHAPTER FIVE
PROBLEMS OF SQUARE AND

POLICY RECOMMENDATIONS
26 | P a g e
5.1 Problems faced by Square pharmaceuticals Ltd:

1. Firm’s liquidity ratio has been lowered in the year 2013. This is not a good indication.
2. Financial statement of square shows that it has increased its fixed asset. This means that
the firm is keeping its fund idle instead of investing it in sales activities. This is the main
reason of lower liquidity ratio in the year 2013 which is dropped to .93 from .95.
3. There is over expense in selling and distributing its products. It is increased by 4000000
taka in the year 2013. This is unexpectedly lowering the earning of SPL.
4. Extra ordinary expenditure in selling showing the inefficiency of management of the
company.
5. The firm has incurred loss of t 101,475,954k in the investment in marketable securities
comparing to the previous year’s gain of taka 139,986,324
6. The portion of equity of the firm is not enough comparing to the total assets. It is the
major reason to decrease its net profit.
7. The portion of the debt is low. So the firm is getting less tax advantages.
8. Firm is facing liquidity shortage. Though the liquidity position is upgrading, it is not
enough with the industry average.
9. SPL’s cost of goods sold has increased from Taka 9,167,253,620 to 10,223,478,073 but
the net income has not been increased proportionately.
10. The entire business unit of square is not performing the same which is lowering the
overall consolidated performance of SPL.
27 | P a g e
5.2 Suggested policy measures

1. The company should give more attention to improve efficiency in utilizing the capital.
2. The company should give more attention on how to effectively manage its cost and
revenue mixes.
3. The company should give more emphasizes in making the investment decision in a
much better way.
4. The firm is recommended to decrease its short term liabilities to get more exposure to
liquidity.
5. SPL should increase external financing that is issuing bond lowering pressure on the
equity financing.
6. It should prefer long term loan to get interest rate benefit.
7. Financial ratios show that company is not utilizing its assets properly. So it should give
attention on utilizing the fixed assets
8. It is highly recommended to change the policy measures on capital structure of the
firm.
28 | P a g e
Conclusion:
Considering the entire financial ratio for the Square Pharmaceutical Ltd. we can say that
at present the overall condition of the company is good. It had a mixed period from the year
2011 to 2013. Though the ROI is increasing gradually and ROE is not stable, it has
decreasing tend in 2012 but then again went up in 2013. The company gross profit margin is
stable at around 42% constant rate. Net profit margin was stable but the company had a weak
asset turnover ratio over this period.
But we find that their financial management is as stronger as required to attract large
number of shareholders. At the end we can conclude that, the company has strong growth rate
in recent years with a strong market reputation. But still the company should keep keen eyes
in management operation to improve the financial condition. The firm is not debt oriented.
Though there are other factors that affects the performance of the firm, it should increase the
amount of debt in the capital structure .
29 | P a g e
References:
 ROSS, WESTERFIELD, JORDAN(2003),Fundamentals corporate finance,standard
publication, TaTa McGraw-Hill.
 BRIGHAM & HOUSTOM, (2007-2008), Fundamentals of financial management,tenth

edition, Thomson publication.
 LAWRENCE J. GITMAN (2009-20100, managerial finance, twelfth Edition, Pearson

Pentice Hall publication.
 Richard A. Brealey, Stewart C. Myers and Franklin Allen, 2007, Principles of corporate
Finance, 9th Edition, Shivarma Kishan Publication.
 SCRIBD, Financial Profile Analysis of Square (online), available at

http://www.scribd.com/doc/62362884/Financial-Profile-Analysis-of-Square-
Pharmaceuticals-Limited-Bangladesh (accessed: 10th August,2014)
 SQUARE PHARMACEUTICALS LTD BANGLADESH, financial statements (online),

available at http://www.squarepharma.com.bd/ (accessed : 5th August,2014)
 Boundless, Capital structure overview and theory, [Online] available

athttps://www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-
structure-13/introducing-capital-structure-104/capital-structure-overview-and-theory-
446-3785/ , (Accessed on 1st August, 2014 )
 Net MBA, Financial Ratios, [online] available at
file:///C:/Users/SoftPc/Desktop/Capital%20structure/Financial%20Ratios.htm, (Accessed
on 25th July, 2014)
30 | P a g e
Appendix: calculation of financial ratios

F Formula
ormula
2013 2012 2011
(Gross 7736011 6887171 5767763

1 G
ross Profit/Net (17959489)×100 (16054425)×100 (13471424)×100
profit sales)×100
margi
n
(Net 3341427 2897710 2532054

2 N
et Profit/Net (17959489)×100 (16054425)×100 (13471424)×100
profit sales)×100
margi
n
(Net Profit 3341427 2897710 2532054

3
(ROA) after ((23447645+21453784)/2) ((21453784+19444409)/2) (
(19444409+15196452)/2
)
tax/Average ×100
Total
×100 ×100
Assets)×100
(Net 3341427 2897710 2532054
4
(ROE) Profit/Total (18844746)×100 (16266884)×100 (13817708)×100
Equity)×100
5 Q (Current 5996697 − 2503683 6745507 − 2687818 7022213 − 2541688

uick Assets – ( ) ( ) ( )
Inventory)/Curr 3792438 4252934 4668189
ratio
ent Liability
6 D (Total 4602899 5186895 5626700

ebt to Debt/Total ( ) ( ) ( )
Equity) 18844746 16266884 13817708
equit
y
7 E ( Total 18844746 16266884 13817708

quity Equity/ Total ( ) ( ) ( )
assets) 23447645 21453784 19444409
to
total
assets
8 D (Total 4602899 5186895 5626700

ebt to Debt/ Total ( ) ( ) ( )
assets) 23447645 21453784 19444409
total
assets
Note 1: Long term loan and share capital is included in measuring capital structure trend.
short term loan is excluded from finance mix considering the short term loan as working capital.
31 | P a g e
32 | P a g e

Impact of Capital Structure On Performance of SPL: Department of Finance and Banking Afrina Momtaz

Diunggah oleh

Informasi Dokumen

Judul Asli

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Impact of Capital Structure On Performance of SPL: Department of Finance and Banking Afrina Momtaz

Diunggah oleh

Hak Cipta:

Format Tersedia

2014

Statement of the problem

Hypothesis of the study

Objective of the study

Scope and limitation of the study

Methodology of the study:

1.7.1 Population and Sample Design:

1.7.2 Collection of Data:

1.7.2.1 Collection of Primary Data:

1.7.2.2 Collection of secondary Data:

1.7.3 Analysis of data:

1.7.3.2 Techniques for analysis of data:

2.1 What is capital structure?

2.2: What is optimum capital structure?

2.3: Key factors governing the capital structure decision:

2. Companies Tax exposure

Management styles range from aggressive to conservative. The more conservative a

Market conditions can have a significant impact on a company's capital-structure condition.

7. Debt Service Capacity

9. Stability in Cash Flow

10. Nature Of Industry

11. Asset Structure

12. Lender's Attitude

2.4 Theories of capital structure:

Modigliani and Miller Theory

3.1 Trend of capital structure of square:

Year Cost of Cost of Weight of Weight of WACC

2013 7.52 9.13 5.25 94.75 9.04%

2012 6.14 7.84 4.39 95.61 7.76%

2011 29.73 7.10 3 97 7.78%

3.2 Performance of square

3.2.1 Measurement of Profitability

Ratio 2014 2013 2012

Gross profit 43.07% 42.90% 42.81%

2. Net profit margin:

Ratio 2012-13 2011-12 2010-11

Net profit margin 18.61% 18.05% 18.80%

3. Return on assets (ROA):

Ratio 2012-13 2011-12 2010-11

Return on assets 14.88% 14.17% 14.62%

4. Return on equity (ROE):

Ratio 2012-13 2011-12 2010-11

Return on equity 17.73% 17.81% 18.32%

3.3 Measurement of financial leverage

Ratio (times) 2012-13 2011-12 2010-11

Current ratio 1.58 1.59 1.50

Ratio (times) 2012-13 2011-12 2010-11

Quick ratio 0.93 0.95 0.96

Ratio 2012-13 2011-12 2010-11

Debt to equity 24.43% 31.89% 40.72%

4. Equity to total assets:

Ratio 2012-13 2011-12 2010-11

Equity to total 80.37% 75.82% 71.06%

5. Debt to total assets:

Ratio 2012-13 2011-12 2010-11

Debt to total assets 19.63% 24.18% 28.94%

4.1 Relationship with capital structure and profitability

percentage of debt and change in net profit

4.2 capital structure and EPS Performance

percentage of debt and trend of EPS

Year 2009 2010 2011 2012 2013

4.3 Capital structure and Return on Equity

percentage of debt and change ROE