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Finance is an important integral part of modern economic life. Financing decision plays a vital role. It involves raising funds for the company. It is concerned with the designing of capital structure. The financial decision should be shaped in such a way it should support the companys capital structure. Capital structure should be examined from the viewpoint of its impact on the value of the firm. The firm should select the financing mix in such a way that it maximizes the shareholders wealth. The combination of debt and equity determines it. If the company opts for more debt, they may trigger off a high Interest burden, devour profits and depress earnings per share and, above all, endanger the very survival of the firm. On the other hand, a conservative policy may deprive the company of its advantage in terms of magnifying the rate of return to its equity owners as higher equity component results in low earnings per share. The finance manger should consider various factors while deciding the choice of debt and equity. Apart from risk return financial considerations, the financial manager also considers nonfinancial factors. When equity shareholders are more in numbers; they have access to control the company. But when debts Owings are more then equity, finance managers consideration is more on debt then equity. Financial crisis may arise in the firm due to two main reasons. They are Unexpected decline in operating profit. Requirement for increased funds. Non-payment of interest or principal amount to lenders at specified time will have to be recovered through liquidations in the company. At the same time the non use of debt prevents the firm from availing an opportunity to have the advantage on rate of return to its shareholders. The financial manger would always try to maximize the wealth of shareholders. Hence the credit of the financial manger lies on how he settle Disputes, overcome difficulties with help of optimum mix of debts and equity, which would satisfy both the shareholders and creditors. He has to make a risk return transaction between these two sources in such a way that it earns maximum benefits to the company. When the finance manger, is not able to provide benefits to the company he needs to redefine capital structure.
DEFINITIONS
Capital structure of a company refers to the composition of its capitalization and it includes all long term capital sources i.e., loans, reserves, shares and bonds. GERESTENBEG The Capital structure of business can be measured by the ratio of various kinds of permanent loan and equity capital to total capital. - SCHWARTY
2. Risk
The use of excessive debt threatens the solvency of the company. Debt can be used the point where there is no significance risk, it should be avoided.
3. Flexibility
The capital structure should be flexible. It should be possible for the company to adapt its capital structure with a minimum cost and delay if warranted by a changed situation. It should also possible for the company to provide funds whenever needed to finance its profitable activities.
4. Capacity
The capital structure should be determined within the debt capacity of the company, and the capacity should not be exceeded. The capacity depends on the ability to generate future cash flows. They should have enough cash to pay the creditors fixed charges and principal sum.
5. Control
The capital structure should involve minimum risk of loss of control of the company. The owners of closely held companies are particularly concerned about dilution of control. For example, a company may give more importance to flexibility then control while another company may be more concerned about solvency than any other requirement; Furthermore the relative importance of the requirement may change with shifting conditions.
Each In Detail:
EQUITY CAPITAL: This refers to money put up and owned by the shareholders (owners). Typically, equity capital consists of two types: 1. Contributed capital, which is the money that was originally invested in the business in exchange for shares of stock or ownership and 2. Retained Earnings, which represents profits from past years that have been kept by the company and used to strengthen the balance sheet or fund growth, acquisitions, or expansion. Many consider equity capital to be the most expensive type of capital a company can utilize because its "cost" is the return the firm must earn to attract investment. A speculative mining company that is looking for silver in a remote region of Africa may require a much higher return on equity to get investors to purchase the stock than a firm such as Procter & Gamble, which sells everything from toothpaste and shampoo to detergent and beauty products. DEBT CAPITAL: The debt capital in a company's capital structure refers to borrowed money that is at work in the business. The safest type is generally considered long-term bonds because the company has years, if not decades, to come up with the principal, while paying interest only in the meantime. Other types of debt capital can include short-term commercial paper utilized by giants such as Wal-Mart and General Electric that amount to billions of dollars in 24-hour loans from the capital markets to meet day-to-day working capital requirements such as payroll and utility bills. The cost of debt capital in the capital structure depends on the health of the company's balance sheet - a triple AAA rated firm is going to be able to borrow at extremely low rates versus a speculative company with tons of debt, which may have to pay 18% or more in exchange for debt capital. Other Forms of Capital: There are actually other forms of capital, such as Creditors where a company can sell goods before they have to pay the bill to the vendor that can drastically increase return on equity but don't cost the company anything. This was one of
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the secrets to Sam Walton's success at Wal-Mart. He was often able to sell Tide detergent before having to pay the bill to Procter & Gamble, in effect, using PG's money to grow his retailer. In the case of an insurance company, the policyholder "float" represents money that doesn't belong to the firm but that it gets to use and earn an investment on until it has to pay it out for accidents or medical bills, in the case of an auto insurer. The cost of other forms of capital in the capital structure varies greatly on a case-by-case basis and often comes down to the talent and discipline of managers.
for betterment expenditure or for some productive purposes. The betterment expenditure, being non-productive, may be incurred out of funds raised by issue of shares or from retained profits. On the contrary, funds for productive purposes may be raised through borrowings. Requirements of the Potential Investors:-The capital structure of a business enterprise is also affected by the requirement of the potential investors. Different classes of investors go for different types of securities. Investors who are interested in the stability and safety and regularity of income prefer debentures and preference shares. On the contrary, investors who prefer to take risk so as to have higher income and also to take part in the management prefer shares or stocks. Elasticity of Capital Structure:-The capital structure of a business enterprise should be quite elastic so as to meet the future requirements of the capital also. For this purpose the amount of authorized capital should be fixed at a higher level as compared to present needs. Money Market Conditions:-Money market conditions also influence the capital structure of a business enterprise. In case of boom period it is advisable to issue shares which can fetch higher premium due to large profits. On the contrary, during the depression period it is advisable to issue debentures on account of lower rate of interest. Miscellaneous:-(i) Liquidity, (ii) Simplicity, (iii) Mutual rights, (iv) Policy of the business enterprises, (v) Capital gearing, (vi) Age of business enterprises.
When we make capital structure before actual getting money from money supplier, we can do many adjustments for reducing our overall risk. Suppose, we have made capital structure in which we add three sources of fund, one is equity share, and other is debenture and last is pref. shares. Because we know that we have to pay debt at its maturity at any cost and its interest at fixed rate. So, we try to get minimum debt in new business because in new business our rate of return will be less than rate of interest and for getting more loan means taking high risk of return more amount of interest even there is no profit. But, if our business will be succeeded, at that time, we can increase estimated amount of debt by just changing the value of debt in capital structure (written just for planning) in excel sheet. We can easily pay the interest because our ROI is very high. At that, Time Company can enjoy the trading on equity. But finance manager should also careful watch whether shareholders are more expected regarding dividend or not. Because high expectation will also against the development of our company. 2. To do adjustment according to Business Environment Company also adjusts different sources expected amount according to business environment. Suppose in future, if government of India cuts off his relation with China, from where our company is getting fund, it will definitely tough for us to get more money from China. But proper planning of capital structure of future sources will be helpful for us to enlarge our area for getting money. In finance, it is called manoeuvrability. It means to create mobility of sources of fund by including maximum alternatives in planned capital structure. Suppose, if RBI increases the interest rate, it means your cost for getting debt will be high, at that time, you can choose any other cheap source of fund. 3. Idea generation of new source of fund Good planning of capital structure will make versatile to finance manager for getting money from new sources. If you have studied Wikipedias page of venture capital or private sources, you would precisely understand that how finance managers of company are generating new and new idea for getting money from public at low risk. Promoters or managers do 10 minutes meeting with investors and motivate them by showing the special event which they have made in PPT.
High debt content mixture of equity debt mix ratio is also called financial leverage. Increasing of financial leverage will be helpful to for maximize the firm's value. 2nd Theory of Capital Structure Name of Theory = Net Operating income Theory of Capital Structure Net operating income theory or approach does not accept the idea of increasing the financial leverage under NI approach. It means to change the capital structure does not affect overall cost of capital and market value of firm. At each and every level of capital structure, market value of firm will be same. 3rd Theory of Capital Structure Name of Theory = Traditional Theory of Capital Structure This theory or approach of capital structure is mix of net income approach and net operating income approach of capital structure. It has three stages which you should understand:
Ist Stage In the first stage which is also initial stage, company should increase debt contents in its equity debt mix for increasing the market value of firm. 2nd Stage
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In second stage, after increasing debt in equity debt mix, company gets the position of optimum capital structure, where weighted cost of capital is minimum and market value of firm is maximum. So, no need to further increase in debt in capital structure.
3rd Stage
Company can gets loss in its market value because increasing the amount of debt in capital structure after its optimum level will definitely increase the cost of debt and overall cost of capital.
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Hindalco Industries Limited, established in 1958, is the metals flagship company of the Aditya Birla Group. Hindalco is one of the leading producers of aluminium and copper. Our aluminium units across the globe encompass the entire gamut of operations, from bauxite mining, alumina refining and aluminium smelting to extrusions, foils, along with captive power plants and coal mines. downstream rolling,
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Our units are ISO 9001:2000, ISO 14001:2004 and OHSAS 18001 certified. Several units have gone a step further with an integrated management system (IMS), combining ISO 9001, ISO 14001 and OHSAS 18001 into one business excellence model. We have been accorded the Star Trading House status in India. Hindalco's aluminium metal is accepted for delivery under the High Grade Aluminium Contract on the London Metal Exchange (LME). Our copper quality standards are also internationally recognised and registered on the LME with Grade A accreditation.
Aluminium
Hindalco's major products include standard and specialty grade aluminas and hydrates, aluminium ingots, billets, wire rods, flat rolled products, extrusions and foil. The integrated facility at Renukoot houses an alumina refinery and an aluminium smelter, along with facilities for the production of semi-fabricated products, namely, redraw rods, flat rolled products and extrusions. The plant is backed by a co- generation power unit and a 742 MW captive power plant at Renusagar to ensure the continuous supply of power for smelter and other operations. A strong presence across the value chain and synergies between operations has given us a dominant share in the value-added products market. As a step towards expanding the market for value-added products and services, we have launched various brands in recent years Everlast roofing sheets, Freshwrapp kitchen foil and Freshpakk semi- rigid containers.
Copper
Birla Copper, Hindalcos copper unit, is located at Dahej in Gujarat, India. The unit has the unique distinction of being the largest single-location copper smelter in the world. The smelter uses state-of-the-art technology and has a capacity of 500,000 tpa. Birla Copper also produces precious metals, fertilisers and sulphuric and phosphoric acid. The unit has captive power plants for continuous power generation and a captive jetty logistics and transportation. to facilitate
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Birla Copper upholds its longstanding reputation for quality copper cathodes and continuous cast copper rods by assuring its management processes meet the highest standards. It has acquired certifications such as ISO-9001:2000 (Quality Management Systems), 18001:2007 ISO-14001:2004 (Occupational (Environmental Health and Management Safety System) and OHSAS-
Management
Systems).
Mines
Hindalco acquired two Australian copper mines, Nifty and Mt. Gordon, in 2003. The Birla Nifty copper mine consists of an underground mine, heap leach pads and a solvent extraction and electrowinning (SXEW) processing plant, which produces copper
cathode.The Mt. Gordon copper operation consists of an underground mine and a copper concentrate plant. Until recently, the operation produced copper cathode through the ferric leach process. In 2004, a copper concentrator was commissioned to provide concentrate for use at Hindalco's operations in Dahej. Both Nifty and Mt. Gordon have a long-term life of mine off-take agreement with Hindalco for supply of copper concentrate to the copper smelter at Dahej.
Cornerstones Of Growth
Our well-crafted growth and integration hinges on the three cornerstones of cost competitiveness, quality and global reach. We are also committed to the triple bottom line accountability of economic, environment and social factors. Care for the community around our operating units is best exemplified by our deep-rooted social commitment.
HINDALCO PROFILE
Hindalco Industries Ltd
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Type Traded as
Industry Founded Headquarters Area served Key people Products Revenue Operating income Net income Total assets Employees
Metals 1958 Mumbai, Maharashtra, India Worldwide Kumar Mangalam Birla (Chairman) Aluminum and copper products 720.77 billion (US$13.05 billion) (2011) 56.82 billion (US$1.03 billion) (2011) 28.79 billion (US$521.1 million) (2011)[3] 589.32 billion (US$10.67 billion) (2011) 19,341 (2011)
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Vision
To be a premium metals major, global in size and reach, excelling in everything we do, and creating value for its stakeholders
Mission
To relentlessly pursue the creation of superior shareholder value, by exceeding customer expectation profitably, unleashing employee potential, while being a corporate citizen, adhering to our values GOALS OF HINDALCO INDUSTRIES LTD
The development of new business opportunities. To increase the company's role in relations to social responsibility. To
responsible
provide
excellent
customer
service.
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STRATEGIES ADOPTED
Where strategy counts high alumina content, less than 2 per cent Boehmite content, a very low reactive silica content and negligible organic content. It has higher liquor purity and productivity, which is more cost efficient. Also, in India, large deposits of bauxite can be found in a single plateau, allowing for more efficient extraction. India also has abundant coal supplies, easy availability of labour and is located in close proximity to the fast-growing markets. Captive bauxite mines that provide the highest quality bauxite and a refinery located near the mine, state-of-the-art technology and economies of scale further enhance our cost advantage. Aluminium is a power intensive industry. One tonne of aluminium requires over 15,000 Kwh of power. Power constitutes almost 40 per cent of the total cost of production. Low cost, uninterrupted power is absolutely vital for the successful aluminium operations. Our smelters fully backed by captive power plants located at the pitheads of the owned coal mines make us one of the lowest cost producers globally
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DOWNSTREAM PRODUCTS
downstream producer. We leverage our strengths further when it comes to downstream strategy. The recent acquisition of downstream producer Novelis gives us a well-diversified geographical market base and enhances our stature in the area of downstream production. Novelis is the world leader in rolled aluminium products; thus, this acquisition extends our reach in the industry. Novelis also has long-standing relationships with leading customers, which Hindalco expects to grow. This combination of strong integrated and downstream production offers us multiple advantages.
Copper
We have one of the world's largest single-location custom smelters at our Dahej facility in Gujarat, India along with a power plant and nearby jetty. In our pursuit of vertical expansion, we extended our presence in copper production across national borders when we acquired the Nifty and the Mt. Gordon mines in Australia. These m i n e s secure partial supply of our concentrate requirement. The efficient handling of logistics and transportation in this business is paramount in keeping costs low, and that is why our ownership of the all-season jetty at Dahej is so financially advantageous. We are also mindful of opportunities related to the production of copper that can benefit the business. Gold and silver have an affinity to copper ore. We extract them, as well as trace amounts of platinum and palladium after copper refining. We ensure that the dispatch of these precious metals is conducted using special armoured vehicles that we contract on a long-term basis through agencies. We use the sulphuric acid employed in copper processing by converting it to phosphoric acid and then using that to produce the fertilisers di-ammonium phosphate and nitrogen phosphorus potassium compound.
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We also import the rock phosphate required to produce phosphoric acid using our jetty, which is capable of handling more than four million tpa of cargo. The jetty is also used to import copper concentrate, ammonia and coal and to export copper products. One and two million tpa of commercial cargo can additionally be handled, depending on captive cargo requirements. Another strong growth catalyst is research and development. We maintain a steady focus on research, which has resulted in advances in the company's operations and commercial strategy as well as an increased focus on foreign trade. All told, we are well positioned for greater value creation.
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STRENGTH
Global brand image. Cost effective producer. Sound financial position. A high degree quality consciousness is the core competence of the company, ISO 9001 and ISO 14001 have added more prestige to the company. Integrated production facility at Renusagar power plant. Company has a well-established distribution network, covering a geographically wide and scattered market. A number of Brownfield & Greenfield projects. Industrial peace as, there has been no major strike in last 22 year. A well focused human resources development. Serve maximum customer satisfaction.
WEAKNESS
Present production capacity is not adequate to meet the rising high demand. Technology is not upgraded to mark as compare to global giants in aluminium industry.
OPPORTUNITY
R & D collabratation with universities and another research organization. More emphasis on downstream production of value added products. Recycling should be adopted as routine production. Raising more finance from marketing for more acquisition and merger for consolidating position in the global market.
THREATS
Strong domestic and global competitors, such as TATA, POSCO, MITTLE, ESSAR . Innovative revolution in plastic and steel industry. Reduce in Exide duty. Fall in price of Al. In neighbor country.
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Today, we reach out to millions of people in the villages, of whom more than 60 per cent live below the poverty line. Their needs include: access to water, agriculture and sustainable livelihood, healthcare, and education. These four areas form the focus of our efforts. The company also works to bring about social reform through widow re-marriage and dowerless marriages. We work in partnership with government agencies and the beneficiaries to provide these necessities and encourage social reform.
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Education
Balwadis: Providing for the primary education of underprivileged children. Adult literacy: Providing formal and informal classes and active support to th government's mission to improve rural literacy levels. Merit scholarships / Schemes: Support female students for educational endeavours Educational support: Contributing uniforms, textbooks and classroom equipmen and undertaking school building construction and maintenance. Health facilities: Setting up well-equipped and professionally manned health centres at several locations. Regular health camps: Providing family planning, mother and child care and specialised camps for eye care and for cataract; coordinating regular pulse polio immunisation drives; and promoting the awareness, prevention and treatment of malaria, water-borne diseases, TB, HIV/AIDS, and others diseases.
WOMEN'S EMPOWERMENT
Self-Help Groups (SHG): These programmes involve over 11,000 women from rural communities around Hindalco units. SHG activities: Micro credit and micro finance schemes, entrepreneurship building, oil-processing units, tailoring centres, horticulture and nutrition gardens, diesel and hand pump repair, vermi compost production, mushroom cultivation, food processing, etc.
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Awareness building: Health and sanitation, family planning, literacy drives and microfinance; facilitating government loans for small-scale enterprise and rural insurance schemes, etc. Social causes: Promoting dowerless marriages and widow re-marriages.
AGRICULTURAL SUPPORT
Irrigation schemes: Land brought under irrigation with better yield and multi-cropping methods. Watershed development: Hydel towers, drainage canals, wells, check-dams, pedal pumps and harvest tanks. Training: Field schools train local farmers in modern agricultural techniques for higher crop yield;
introducing lac cultivation, post-harvest technology with safe grain storage through an integrated pestmanagement system, floriculture, horticulture and kitchen gardens; shifting from mono to multi cropping patterns and distribution of high-yield seeds.
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CAPITAL STRUCTURE OF HINDALCO INDUSTRIES LTD Capital Structure (Hindalco Industries) Period From 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1996 1995 1994 1993 1992 1991 1990 1989 1988 1982 1972 1968 1967 1965 1964 1961 1960 1959 To 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1996 1995 1994 1993 1992 1991 1990 1989 1988 1982 1969 1968 1966 1965 1963 1961 1960 Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Equity Share Instrument Authorized Capital (Rs. cr) 210 210 210 195 145 145 145 145 145 145 145 145 145 145 145 70 70 70 45 45 45 21 15 12 10 10 10 10 10 10 10 Issued Capital (Rs. cr) 191.51 191.5 191.47 170.15 122.72 115.93 115.93 92.78 92.48 92.48 74.47 74.47 74.47 74.47 49.65 49.65 45.48 38.77 38.77 38.77 17.85 17.85 13.39 10.05 8.04 8.04 6 6 6 6 0.15 -PAIDUPShares (nos) 1915088557 1914944163 1914008691 1700817056 1227190692 231521031 231521031 92780847 92481325 92481325 74466213 74472020 74472020 74472020 49650030 48012080 43377514 38773864 38773864 38773864 17854700 17848650 13386488 10039866 8031893 7670510 5993950 5993200 5991500 750000 150000 Face Value 1 1 1 1 1 1 0 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 Capital 191.51 191.49 191.4 170.08 122.72 11.58 5.79 92.78 92.48 92.48 74.47 74.47 74.47 74.47 49.65 48.01 43.38 38.77 38.77 38.77 17.85 17.85 13.39 10.04 8.03 7.67 5.99 5.99 5.99 0.75 0.15
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