Babu KPCL Final Project

A STUDY ON CAPITAL STRUCTURE AT CPCL
CHAPTER 1
INTRODUCTION
THEORETICAL BACKGROUND OF THE TOPIC:
. Among all the sources of finance, cost of equity capital is considered to be 1.1
INTRODUCTION :
Finance is the study of funds and management. Its general areas are business finance,
personal finance, and public finance. It also deals with the concepts of time, money,
risk, and the interrelation between the given factors. It is basically focused on how the
money is spent and budgeted. It is one of the most important aspects in handling
business. Finance addresses the methods wherein business entities used their financial
resources on a certain period of time. It is the application of a set of techniques used
by organizations in managing their financial affairs. The income and expenditure are
emphasized in finance and its differences can easily be indicated.
Nowadays, loans have been packaged for resale. This means that the debt has been
bought by an investor from the bank. These bonds are sold to investors by financial
corporations who have exceeded beyond their expenditures. The investor can now
collect all the interests and be sold again through a secondary market. Banks serve as
facilitators to companies in the provision of credit and mutual funds. Investments are
managed carefully under a financial risk management to control gambling chances of
these financial assets. Financial instruments are also used to secure these assets on
securities exchanges such as stock exchanges and bonds. A bank provokes the
activities of both borrowers and lenders. Lenders pay deposits to banks on which it
pays the interest rates. The central banks are the last resorts that handle the monetary
funds. These banks affect the interest rates being charged such as an increase in the
money supply will result to a decrease in the interest rates.
Financial capital is a monetary resource allows businesses to purchase items that will
create goods for production and other services. The budget is the documentation of the
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entire entrepreneurship. The outline includes the objectives of the business, the target
sets, resulting costs, required investment, planned sales, growth, financing source, and
financial results. It can be directed on long term or on a short term basis. The capital
budget is mainly concerned with the proposed fixed asset requirements. The financing
of the expenditure is also indicated in the capital budget. A detailed plan of all the
sources and cash usage is emphasized in the cash budget. It has six main sections such
as the beginning cash balance, cash collections, cash disbursements, cash excess, cash
deficiencies, financing, the ending cash balance, and the management of current
assets.
1.2 FINANCIAL MANAGEMENT
Financial Management means planning, organizing, directing and controlling the
financial activities such as procurement and utilization of funds of the enterprise. It
means applying general management principles to financial resources of the
enterprise.
Financial management is defined as the management of flow of funds in a firm and it
deals with financial decision making of the firm. Financial management includes any
decision made by an investor that affects his finances. In financial management the
emphasis is laid on optimum utilization of funds. Financial management is important
to all levels of human existence as every entity has to look after its finances. Financial
management is also referred as planning, organizing and controlling the monetary
resources of an organization. Financial management helps in improving the allocations
of working capital within business operations. It reviews the financial health of the
company by using tools like ratio analysis.
OBJECTIVES OF FINANCIAL MANAGEMENT

The financial management is generally concerned with procurement, allocation and
control of financial resources of a concern. The objectives can be-
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1. To ensure regular and adequate supply of funds to the concern.
2. To ensure adequate returns to the shareholders this will depend upon the
earning capacity, market price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should
be utilized in maximum possible way at least cost.
4. To ensure safety on investment, i.e., funds should be invested in safe ventures
so that adequate rate of return can be achieved.
5. To plan a sound capital structure-There should be sound and fair composition
of capital so that a balance is maintained between debt and equity capital.
FUNCTIONS OF FINANCIAL MANAGEMENT

1. Estimation of capital requirements:
A finance manager has to make estimation with regards to capital requirements
of the company. This will depend upon expected costs and profits and future
programmes and policies of a concern. Estimations have to be made in an
adequate manner which increases earning capacity of enterprise.
2. Determination of capital composition:
Once the estimation has been made, the capital structure have to be decided.
This involves short- term and long- term debt equity analysis. This will depend
upon the proportion of equity capital a company is possessing and additional
funds which have to be raised from outside parties.
3. Choice of sources of funds:
For additional funds to be procured, a company has many choices likea. Issue of shares and debentures
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b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.
Choice of factor will depend on relative merits and demerits of each source and
period of financing.
4. Investment of funds:
The finance manager has to decide to allocate funds into profitable ventures so that
there is safety on investment and regular returns is possible.
5. Disposal of surplus:
The net profits decision has to be made by the finance manager. This can be done
in two ways:
a. Dividend declaration - It includes identifying the rate of dividends and
other benefits like bonus.
b. Retained profits - The volume has to be decided which will depend
upon expansion, innovation, diversification plans of the company.
6. Management of cash:
Finance manager has to make decisions with regards to cash management. Cash is
required for many purposes like payment of wages and salaries, payment of
electricity and water bills, payment to creditors, meeting current liabilities,
maintenance of enough stock, purchase of raw materials, etc.
7. Financial controls:
The finance manager has not only to plan, procure and utilize the funds but he
also has to exercise control over finances. This can be done through many
techniques like ratio analysis, financial forecasting, cost and profit control, etc.
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CAPITAL BUDGETING
The first question concerns the firms long-term investments. The process of planning
and managing a firm's long-term investments is called capital budgeting. In capital
budgeting, the financial manager tries to identify investment opportunities that are
worth more to the firm than they cost to acquire. Financial managers must be
concerned with how much cash they expect to receive, when they expect to receive it,
and how likely they are to receive it. Evaluating the size , timing , and risk of future
cash flows is the essence of capital budgeting.
.
CAPITAL STRUCTURE
The term capital structure refers to the percentage of capital (money) at work in a
business by type. Broadly speaking, there are two forms of capital: equity capital and
debt capital. Each has its own benefits and drawbacks and a substantial part of wise
corporate stewardship and management is attempting to find the perfect capital
structure in terms of risk / reward payoff for shareholders. This is true for Fortune 500
companies and for small business owners trying to determine how much of their startup money should come from a bank loan without endangering the business.
Let's look at 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
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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 - 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 15% or more in exchange
for debt capital.
Other Forms of Capital: There are actually other forms of capital, such as
vendor financing 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 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
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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.
MEANING OF CAPITAL STRUCTURE

Capital Structure is referred to as the ratio of different kinds of securities raised by a
firm as long-term finance. The capital structure involves two decisionsa. Types of securities to be issued are equity shares, preference shares and long
term borrowings (Debentures).
b. Relative ratio of securities can be determined by process of capital gearing.
On this basis, the companies are divided into twoi.
Highly geared companies - Those companies whose proportion of

equity capitalization is small.
ii.
Low geared companies - Those companies whose equity capital

dominates total capitalization.
For instance - There are two companies A and B. Total capitalization amounts to be
USD 200,000 in each case. The ratio of equity capital to total capitalization in
company A is USD 50,000, while in company B, ratio of equity capital is USD
150,000 to total capitalization, i.e, in Company A, proportion is 25% and in company
B, proportion is 75%. In such cases, company A is considered to be a highly geared
company and company B is low geared company.
FACTORS DETERMINING CAPITAL STRUCTURE

1. Trading on EquityEWCM/RNG/RSB
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The word equity denotes the ownership of the company. Trading on equity
means taking advantage of equity share capital to borrowed funds on
reasonable basis. It refers to additional profits that equity shareholders earn
because of issuance of debentures and preference shares. It is based on the
thought that if the rate of dividend on preference capital and the rate of interest
on borrowed capital is lower than the general rate of companys earnings,
equity shareholders are at advantage which means a company should go for a
judicious blend of preference shares, equity shares as well as debentures.
Trading on equity becomes more important when expectations of shareholders
are high.
2. Degree of controlIn a company, it is the directors who are so called elected representatives of
equity shareholders. These members have got maximum voting rights in a
concern as compared to the preference shareholders and debenture holders.
Preference shareholders have reasonably less voting rights while debenture
holders have no voting rights. If the companys management policies are such
that they want to retain their voting rights in their hands, the capital structure
consists of debenture holders and loans rather than equity shares.
3. Choice of investorsThe companys policy generally is to have different categories of investors for
securities. Therefore, a capital structure should give enough choice to all kind
of investors to invest. Bold and adventurous investors generally go for equity
shares and loans and debentures are generally raised keeping into mind
conscious investors.
4. Capital market conditionIn the lifetime of the company, the market price of the shares has got an
important influence. During the depression period, the companys capital
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structure generally consists of debentures and loans. While in period of boons
and inflation, the companys capital should consist of share capital generally
equity shares.
5. Period of financingWhen company wants to raise finance for short period, it goes for loans from
banks and other institutions; while for long period it goes for issue of shares
and debentures.
6. Cost of financingIn a capital structure, the company has to look to the factor of cost when
securities are raised. It is seen that debentures at the time of profit earning of
company prove to be a cheaper source of finance as compared to equity shares
where equity shareholders demand an extra share in profits.
7. Stability of salesAn established business which has a growing market and high sales turnover,
the company is in position to meet fixed commitments. Interest on debentures
has to be paid regardless of profit. Therefore, when sales are high, thereby the
profits are high and company is in better position to meet such fixed
commitments like interest on debentures and dividends on preference shares. If
company is having unstable sales, then the company is not in position to meet
fixed obligations. So, equity capital proves to be safe in such cases.
8. Sizes of a company-
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Small size business firms capital structure generally consists of loans from
banks and retained profits. While on the other hand, big companies having
goodwill, stability and an established profit can easily go for issuance of shares
and debentures as well as loans and borrowings from financial institutions. The
bigger the size, the wider is total capitalization.
MEANING OF CAPITAL STRUCTURE

Capital structure is that part of financial structure, which represents long-term
sources. The term capital structure is generally defined to include only long-term debt
and total stockholders investment. It is the mix of long-term sources of funds, such as
equity share, reserve and surplus, debenture, long-term debt from outside sources and
preference share capital. To Bogen, Capital Structure may consist of a single class of
stock, the characteristics of which may vary considerably, i.e.., to the proportion
between debt and equity that make up capitalization. Capital structure indicated by the
following equation.
Capital structure= long-term debt+ Preferred Stock+ Net Worth (or)
Capital structure= Total Assets-Current Liabilities.
Capital structure represents the relationship among different kinds of long-term
capital. Normally, a firm raises long term capital and capital through the issue of
shares common shares, sometimes accompanied by preference shares. The share
capital is often supplemented by debenture capital and other long term capital
borrowed. The term capital structure refers to the relationship between the various
long-term form of financing such as debenture, preference shares capital and equity
share capital. Financing the firm assets is a very crucial problem in every business and
as a general rule there should be a proper mix of debt and equity share capital in
financing the firm assets.
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Thus, the capital structure of a firm consists of shareholders funds and debt. The
inherent financial stability of an enterprise and risk of insolvency to which it is
exposed are primarily dependent on the sources of its funds as well as the type of
assets it holds and relative magnitude of such assets categories
DEFINITION
According to John J. Hampton, capital structure is the combination of debt and
equity securities that comprises a firms financing of its assets.
According to Gerstenberg, capital structure of a company refers to the composition
or make up of its capitalisation and it includes all long-term capital resources, viz.,
loans, reserves, shares and bonds.
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CAPITAL STRUCTURE
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OPTIMUM CAPITAL STRUCTURE
The best debt-toequity 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
ranges 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. A
company's ratio of short and long-term debt should also be considered when
examining its capital structure. Capital structure is most often referred to as a firm's
debt-to-equity ratio, which provides insight into how risky a company is for potential
investors. Determining an optimal capital is a chief requirement of any firm's
corporate finance department. Optimal capital structure indicates the best debt-toequity ratio for a firm that maximizes its value. Putting it simple, the optimal capital
structure for a company is the one which proffers a balance between the idyllic debtto-equity ranges thus minimizing the firms cost of capital. Theoretically, debt
financing usually proffers the lowest cost of capital because of its tax deductibility.
However, it is seldom the optimal structure for as debt increases, it increases the
companys risk.
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PROCESS OF CAPITAL STRUCTURE
Replacement
Modernisation
Expansion
Capital Budgeting
Decision
Need to Raise
Funds
Capital Structure
Decision
Existing Capital
Structure
Diversification
Internal Fund
Debt
External Equity
Desired Debt-Equity Mix
Effect on Return
Payout Policy
Effect on Risk
Effect on Cost of
Capital
Optimum Capital
Structure
Value of the Firm
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BOARD OF DIRECTORS
Shri. Siddaramaiah
Hon. Chief Minister, Govt. of Karnataka
& Chairman, KPC Limited
Shri. MR Kamble, IAS
Managing Director, KPC Limited
Shri. P Bhaskar
Technical Director, KPC Limited
Shri. R Nagaraja
Finance Director, KPC Limited
Dr. Amita Prasad, IAS
Principal Secretary, Energy Dept., Govt. of Karnataka
& Director KPC Limited
Shri. D Narasimha Raju, IAS
Principal Secretary-I to the Hon. Chief Minister,
Govt. of Karnataka & Director KPC Limited
Shri. ISN Prasad, IAS
Principal Secretary (Finance Dept.), Govt. of Karnataka
Shri. D Satya Murty, IAS
Principal Secretary, Water Resources Dept.
Dr. H Basker, IAS
Principal Secretary, DPE,
Shri. G Kumara Naik, IAS
Managing Director, KPTCL
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FRAMEWORK FOR CAPITAL STRUCTURE
The flexibility, Risk, Income, Control, Timing Analysis (FRICT).
A financial structure may be evaluated from various perspectives from owners point
of view; return risk and value are important consideration. From the strategic point of
view, flexibility is an important concern and flexibility assumes great significance. A
sound capital structure will be achieved by balancing all these consideration.
Flexibility: the capital structure should be determined within the debt capacity
of the company and this capacity should be flexible. It should be possible for a
company to adapt its capital structure within a minimum cost and delay if
warranted by a changed situation.
Risk: Risk depends on the variability in the firm operation. It may be caused by
macroeconomic factor and industry and firms specific factors. The excessive
use of debt magnifies the variability of shareholders earning and threatens the
solvency of the company.
Income: The capital structure of the company should be most advantage to the
owners of the firm. It should create value; subject to other consideration. It
should generate maximum return to the shareholders with minimum additional
cost.
Control: The capital structure should involve the minimum risk of loss of
control of the company. The owner of closely held companies is particularly
concerned about dilution of control.
Timing: The capital structure should be feasible to implement given the current
and future condition of the capital market. The sequencing of source of
financing is important. The current decision influences the future option of
raising capital. The FRICT Analysis provides the general framework for
evaluating firms Capital Structure.
PATTERN OF THE CAPITAL STRUCTURE
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Firms capital structure may be arrived by use of equity shares capital or preference
shares capital or debt capital (debenture or loans) or combination of them. Use of any
one of these sources does not help to come up an optimal capital structure.
Construction of optimum capital structure is possible only when there is an
appropriate mix of the above sources (debt and equity). Following are the form of
capital structure.
Capital structure with equity shares only.

Capital structure with equity and preference shares.
Capital structure with equity and debentures.
Capital structure with equity, preference shares and debentures.
ELEMENTS OF CAPITAL STRUCTURE

A company formulating its long-term financial policy should, first of all, analyze its
current financial structure. The following are the important elements of the companys
financial structure the need proper scrutiny and analysis.
Capital mix
Firms have to decide about the mix of debt and equity capital. Debt capital can be
mobilized from a variety of sources. The firms and analysis use debt ratio, debtservice coverage ratios, and the fund flow statements to analyze the capital mix.
Maturity and Priority
The maturity of security used in the capital mix may differ. Equity is the most
permanent capital. Within debt, commercial paper has the shortest maturity and public
debt longest. Similarly, the priorities of the lenders point of view and the value of
assets backing the debt provide the protection to the lenders.
Terms and Condition
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Firms have choice with regard to the basis of interest payment. They may obtain loans
either at fixed or floating rates of interest. In case of equity, the firm may like to return
income either in the form of large dividends and large capital gains. The financial
manager can protect the firm against interest rates fluctuation through the interest rates
derivatives. There are other important terms and condition that the firm should
consider. Most loan agreements include what the firm can do and what it cant do.
Currency
Firms in a number of countries have the choice of raising fund from the overseas
markets. Overseas financial markets provide opportunities to raise large amount of
funds. Accessing capital internationally also helps company to globalize its operation
fast.
Financial Innovation
Firms may raise either through the issue of simple securities or through the issue
innovation securities. Financial innovations are intended to make the security issue
attractive to investors and reduce cost of capital. A further innovation could be that the
company may offer higher simple interest on debenture and offer to covert interest
amount equity.
Financial Market Segments
There are several segments of financial markets from where the firm can tap capital.
The firm can raise short-term debt either from banks or by issuing commercial papers
or certificate of deposits in the money market.
COMPONENTS OF CAPITAL STRUCTURE
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The long-term funds can broadly be divided into two categories:
1. Owners capital
2. Borrowed capital
Owners capital:
Equity shares: Equity share are fundamental and basic source for financing
the activities of a business. They own the company and bear the ultimate risk
associated with ownership the highest, as its holders bear the maximum risk of
the business. The residual remaining after paying claims all the other investors
belongs to equity shareholders.
Preference shares: Those shares which carry following preferential right are
termed as preference share:
A preferential right as to the payment of dividend during lifetime of a
company.
A preferential right as to the return of capital when the company is woundup.
These shares carry a right of dividend at a fixed rate prior to any dividend paid to
equity shareholders. They do not normally enjoy voting rights. The preference shares
are similar to equity shares as their holders are also owner of the company. The
dividend on preference shares is not a charge against profit but it is an appropriate of
profit and thus is not a tax deductible payment. The preference share can cumulative
or non cumulative, redeemable or irredeemable, participating or non-participating and
convertible or non-convertible.
Retained earnings: Retained earnings or ploughing back of profits are
considered to be the best sources of internal financing. This type of required to
raise such finance.
This increase net worth without diluting the control of equity shareholders and
does not create a fixed charge and obligation of repayments.
Borrowed capital: Borrowed capital comprise the following:

Debenture: A debenture is an acknowledgement of debt or loan raised by a
company. Company has to pay interest to debenture holders at an agreed rate
under convertible or non-convertible, registered or bearer, first debenture or
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second debenture. Interest paid on debenture is a changed against profit and thus
tax deductible which makes this source of finance more popular during boom
period.
Term Loan: Term loan are loans provided by banks and other financial
institution which carry a fixed rates of interest for a simple. Several financial
institution are IFCI, SIDBI, SFCS etc.., Including IDBI Bank, ICICI Bank, LIC,
GIC, etc.., are engaged presently in the field of providing term loans to the
companies. They provide loans after satisfying regarding the technical,
commercial, financial, economic and managerial feasibility of the project for
which funds are required.
FEATURES OF APPROPRIATE CAPITAL STRUCTURE

Profitability:
The capital structure of the company should be most profitable. The most profitable
capital structure is one that tends to minimize earning per equity shares.
Solvency:
The use of excessive debt threatens the solvency of the company. In a high interest rate
environment, Indian companies are beginning to realise the advantage of low debt;
companies are now launching public issue with the sole purpose of reducing debt. The
recent equity issue of more than Rs. 30 crores by Ballarpur industries were purely
aimed at repaying term loans and retiring debentures.
Flexibility:
The capital structure should be such that it can be easily manoeuvred to meet the
requirement of changing condition.
Conservation:
The capital structure should be conservative in the sense that the debt content in the
total capital structure does not exceed the limit which the company can bear.
Control:
The capital structure should be so devised that involves minimum risk of loss of control
of the company.
CAPITAL STRUCTURE THEORIES
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Capital structure is the major part of the firms financial decision which effect the
value of the firm and its leads to change EBIT and market value of the shares. There is
a relationship among the capital structure, cost of capital and value of the firm and to
reduce the cost of capital.
In order to achieve the goal of identifying an optimum debt-equity mix, it is necessary
for the finance manager to be conversant with the basic theories underlying the
relationship between capital structure, cost of capital and value of the firm.
Capital Structure Theories
Net Income
Approach
Traditional
Approach
Net Operating Income

approach
Modigliani and Miller Approach
INTRODUCTION TO EQUITY
Equity is the term commonly used to describe the ordinary share capital of a
business.
Ordinary shares in the equity capital of a business entitle the holder to all
distributed profit after the holder of debentures and preference share have been
paid.
EARNING PER SHARE (EPS)
Total earning divided by the number of outstanding shares, companies often use a
weighted average of share outstanding over the reporting term. Earning peer share
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(EPS) are a way to relate income to ownership on a per share basis, and are used in
evaluating share price.
EPS= Net Earning / Outstanding Shares.
SOURCES OF FUNDS
Security financing:
This includes financing through shares including equity shares, preference shares
and debentures.
Internal financing:
This includes financing through depreciation fund and retained earnings.
Loan financing:
This includes both long term and short term loans.
INDUSTRY PROFILE:
The power sector has registered significant progress since process of planned
development of the economy began in 1950. Hydro-power and cost based thermal
power has been the main sources of generating electricity. Nuclear power development
is at slower pace, which was introduced, in late sixties. The concept of operating
power systems on a regional basis crossing the political boundaries of state was
introduced in the early sixties. In spite of the overall development that has taken place,
the power supply industry has been under constant pressure to bridge the gap between
supply and demand.
The gears of enterprise in Karnataka powered nascent industrial activity as early as the
year 1800, when the first sugar unit was set up. In 1902, Karnataka recorded another
mega watt sized project first - Asias first Hydro Electric Power Station in
Shivanasamudram, on the banks of river Cauvery
In fact, Karnatakas pioneering spirit in the field of power has been translated into
several major milestones. Karnataka was the first to embark on Alternating current,
when Bangalore Citys lighting scheme was completed.
Karnataka had the longest transmission line in the world in 1902, from
Shivanasamudram to KGF, covering a distance of 147 km. and Karnataka was the first
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state in the country to conceive and set up a professionally managed Corporation to
plan, construct, operate and maintain power generation projects in the state. Thats the
legacy that KPCL started with and built on
HISTORY
Although electricity had been known to be produced as a result of the chemical
reactions that take place in an electrolytic cell since Alessandro Volta developed the
voltaic pile in 1800, its production by this means was, and still is, expensive. In 1831,
Michael Faraday devised a machine that generated electricity from rotary motion, but
it took almost 50 years for the technology to reach at commercially viable stage.
In 1878, in the US, Thomas Edison developed and sold a commercially viable
replacement for gas lighting and heating using locally generated and distributed direct
current electricity.
The worlds first public electricity supply was produced in late 1881, when the streets
of the Surrey Town of Godalming in the UK were lit with electric light. This system
was powered from a water wheel on the River Way, which drove a Siemens alternator
that supplied a number of arc lamps within the town. This supply scheme also
provided electricity to a number of shops and premises.
Coinciding with this, in early 1882, Edison opened the worlds first steam powered
electricity generating station at Holborn Viaduct in London, where he had entered into
an agreement with an agreement with the City Corporation for a period of three
months to provide street lighting. In time he had supplied a number of local consumers
with electric light. The method of supply was direct current (DC).
It was later on in the year in September 1882 that Edison opened the Pearl Street
Power Station in New York City and again it was a DC supply. It was for this reason
that the generation was close to or on the consumers premises as Edison had no
means of voltage conversation. The voltage chosen for any electrical system is a
compromise. Increasing the voltage reduces the current and therefore reduces resistive
EWCM/RNG/RSB
Page 23

losses in the cable. Unfortunately it increases the danger from direct contact and also
increases the required insulation thickness. Furthermore some load types were difficult
or impossible to make for higher voltages.
Additionally, Robert Hammond, in December 1881, demonstrated the new electric
light in the Sussex town of Brighton in the UK for a trial period. The ensuing success
of this installation enabled Hammond to put this venture on both a commercial and
legal footing, as a number of shop owners wanted to use the new electric light. Thus
the Hammond Electricity Supply Co. was launched. Whilst the Godalming and
Holborn Viaduct Schemes closed after a few years the Brighton Scheme continued on,
and supply was in 1887 made available for 24 hours per day.
Nikola Tesla, who had worked for Edison for a short time and appreciated the
electrical theory in a way that Edison did not, devised an alternative system using
alternating current. Tesla realized that while doubling the voltage would halve the
current and reduce losses by three- quarters, only an alternating current system
allowed the transformation between voltage levels in different parts of the system.
This allowed efficient high voltages for distribution where their risks could easily be
mitigated by good design while still allowing fairly safe voltages to be supplied to the
loads. He went on to develop the overall theory of his system, devising theoretical and
practical alternatives for all of the direct current appliances then in use, and patented
his novel ideas in 1887, in thirty separate patents.
In 1888, Teslas work came to the attention of George Westinghouse, who owned a
patent for a type of transformer that could deal with high power and was easy to make.
Westinghouse had been operating an alternating current lighting plant in Grea
Barrington, Massachusetts since 1886. While Westinghouses system could use
Edisons lights and had heaters, it did not have a motor. With Tesla and his patents,
Westinghouse built a power system for a gold mine in Telluride, Colorado in 1891,
with a water driven 100 horsepower (75kw) generator powering a 100 horsepower
(75kw) motor over a 2.5-mile (4 km) power line. Almarian Decker finally invented the
whole system of three-phase generating in Redlands, California in 1893. Then ,in a
deal with General Electric, which Edison had been forced to sell, Westinghouses
EWCM/RNG/RSB
Page 24

company went on to construct a power station at the Niagara Falls, with three 5000
horsepower (3.7 MW) Tesla generators supplying electricity to an aluminium smelter
at Niagara and the town of Buffalo 22 miles (35 km) away. The Niagara power station
commenced operation on April 20, 1895.
Teslas alternating current system remains the primary means of delivering electrical
energy to consumers throughout the world. While high-voltage direct current (HVDC)
is increasingly being used to transmit large quantities of electricity over long distances
or to connect adjacent asynchronous power systems, the bulk of electricity generation,
transmission, distribution and retailing takes place using alternating current Growth of
Indian Power Sector, power development is the key to the economic development. The
power sector has been receiving adequate priority ever since the process of planned
development began in 1959.
The power sector has been getting 18-20% of the total public sector outlay in initial
plan periods. Remarkable growth and progress have led to extensive use of electricity
in all the sectors of economy in the successive five years plans. Over the years (since
1950) the installed capacity of power plants (utilities) has increased to 109092 MW
(2004-05) from 1713 MW in 1959, registering a 63 fold increase in 54 years.
Similarly, the electricity generation increased from about 5.1 billion to 440 billion
units -86 fold increases. The per capita consumption electricity in the country also
increased from 15 KWH in 1950 to about 395 KWH in 2004-05, which is about 26
times. In the field of rural electrification and pump set energization, country has made
a tremendous progress, 88% of the village have been electrified except far flung areas
in North Easter states, where it is difficult to extend the grid supply.
`
INDUSTRY SCENARIO
EWCM/RNG/RSB
Page 25

It is a process of analyzing possible future events by considering alternative possible
outcomes (sometimes called "alternative worlds"). Thus, the scenario analysis, which
is a main method of projections, does not try to show one exact picture of the future.
Instead, it presents consciously several alternative future developments. Consequently,
a scope of possible future outcomes is observable. Not only are the outcomes
observable, also the development paths leading to the outcomes. In contrast to
prognoses, the scenario analysis is not using extrapolation of the past. It does not rely
on historical data and does not expect past observations to be still valid in the future.
Instead, it tries to consider possible developments and turning points, which may only
be connected to the past. In short, several scenarios are demonstrated in a scenario
analysis to show possible future outcomes. It is useful to generate a combination of an
optimistic, a pessimistic, and a most likely scenario. Although highly discussed,
experience has shown that around three scenarios are most appropriate for further
discussion and selection. More scenarios could make the analysis unclear
MACRO AND MICRO RELATING TO THE INDUSTRY OF THE DISSERTATION:
MACRO
KPCL come out with new power generation plants like wind mills around Karnataka
in hill forest areas and as well as they gain lots of shares compare to previous financial
year with a huge profit margin.
MICRO
KPCL encouraging young entrepreneurs in engineering colleges by offering them to
do projects with their own ideas to develop the company example how better we can
use our solar energy.
EWCM/RNG/RSB
Page 26

CHAPTER 2
PROFILE OF THE ORGANIZATION
INDUSTRY PROFILE:
The power sector has registered significant progress since process of planned
development of the economy began in 1950. Hydro-power and cost based thermal
power has been the main sources of generating electricity. Nuclear power development
is at slower pace, which was introduced, in late sixties. The concept of operating
power systems on a regional basis crossing the political boundaries of state was
introduced in the early sixties. In spite of the overall development that has taken place,
the power supply industry has been under constant pressure to bridge the gap between
supply and demand.
Shivanasamudram, on the banks of river Cauvery
when Bangalore Citys lighting scheme was completed.
legacy that KPCL started with and built on
HISTORY
EWCM/RNG/RSB
Page 27

Although electricity had been known to be produced as a result of the chemical
reactions that take place in an electrolytic cell since Alessandro Volta developed the
voltaic pile in 1800, its production by this means was, and still is, expensive. In 1831,
Michael Faraday devised a machine that generated electricity from rotary motion, but
it took almost 50 years for the technology to reach at commercially viable stage.
In 1878, in the US, Thomas Edison developed and sold a commercially viable
replacement for gas lighting and heating using locally generated and distributed direct
current electricity.
The worlds first public electricity supply was produced in late 1881, when the streets
of the Surrey Town of Godalming in the UK were lit with electric light. This system
was powered from a water wheel on the River Way, which drove a Siemens alternator
that supplied a number of arc lamps within the town. This supply scheme also
provided electricity to a number of shops and premises.
Coinciding with this, in early 1882, Edison opened the worlds first steam powered
electricity generating station at Holborn Viaduct in London, where he had entered into
an agreement with an agreement with the City Corporation for a period of three
months to provide street lighting. In time he had supplied a number of local consumers
with electric light. The method of supply was direct current (DC).
It was later on in the year in September 1882 that Edison opened the Pearl Street
Power Station in New York City and again it was a DC supply. It was for this reason
that the generation was close to or on the consumers premises as Edison had no
means of voltage conversation. The voltage chosen for any electrical system is a
compromise. Increasing the voltage reduces the current and therefore reduces resistive
losses in the cable. Unfortunately it increases the danger from direct contact and also
increases the required insulation thickness. Furthermore some load types were difficult
or impossible to make for higher voltages.
Additionally, Robert Hammond, in December 1881, demonstrated the new electric
light in the Sussex town of Brighton in the UK for a trial period. The ensuing success
of this installation enabled Hammond to put this venture on both a commercial and
EWCM/RNG/RSB
Page 28

legal footing, as a number of shop owners wanted to use the new electric light. Thus
the Hammond Electricity Supply Co. was launched. Whilst the Godalming and
Holborn Viaduct Schemes closed after a few years the Brighton Scheme continued on,
and supply was in 1887 made available for 24 hours per day.
Nikola Tesla, who had worked for Edison for a short time and appreciated the
electrical theory in a way that Edison did not, devised an alternative system using
alternating current. Tesla realized that while doubling the voltage would halve the
current and reduce losses by three- quarters, only an alternating current system
allowed the transformation between voltage levels in different parts of the system.
This allowed efficient high voltages for distribution where their risks could easily be
mitigated by good design while still allowing fairly safe voltages to be supplied to the
loads. He went on to develop the overall theory of his system, devising theoretical and
practical alternatives for all of the direct current appliances then in use, and patented
his novel ideas in 1887, in thirty separate patents.
In 1888, Teslas work came to the attention of George Westinghouse, who owned a
patent for a type of transformer that could deal with high power and was easy to make.
Westinghouse had been operating an alternating current lighting plant in Grea
Barrington, Massachusetts since 1886. While Westinghouses system could use
Edisons lights and had heaters, it did not have a motor. With Tesla and his patents,
Westinghouse built a power system for a gold mine in Telluride, Colorado in 1891,
with a water driven 100 horsepower (75kw) generator powering a 100 horsepower
(75kw) motor over a 2.5-mile (4 km) power line. Almarian Decker finally invented the
whole system of three-phase generating in Redlands, California in 1893. Then ,in a
deal with General Electric, which Edison had been forced to sell, Westinghouses
company went on to construct a power station at the Niagara Falls, with three 5000
horsepower (3.7 MW) Tesla generators supplying electricity to an aluminium smelter
at Niagara and the town of Buffalo 22 miles (35 km) away. The Niagara power station
commenced operation on April 20, 1895.
Teslas alternating current system remains the primary means of delivering electrical
energy to consumers throughout the world. While high-voltage direct current (HVDC)
EWCM/RNG/RSB
Page 29

is increasingly being used to transmit large quantities of electricity over long distances
or to connect adjacent asynchronous power systems, the bulk of electricity generation,
transmission, distribution and retailing takes place using alternating current Growth of
Indian Power Sector, power development is the key to the economic development. The
power sector has been receiving adequate priority ever since the process of planned
development began in 1959.
The power sector has been getting 18-20% of the total public sector outlay in initial
plan periods. Remarkable growth and progress have led to extensive use of electricity
in all the sectors of economy in the successive five years plans. Over the years (since
1950) the installed capacity of power plants (utilities) has increased to 109092 MW
(2004-05) from 1713 MW in 1959, registering a 63 fold increase in 54 years.
Similarly, the electricity generation increased from about 5.1 billion to 440 billion
units -86 fold increases. The per capita consumption electricity in the country also
increased from 15 KWH in 1950 to about 395 KWH in 2004-05, which is about 26
times. In the field of rural electrification and pump set energization, country has made
a tremendous progress, 88% of the village have been electrified except far flung areas
in North Easter states, where it is difficult to extend the grid supply.
EWCM/RNG/RSB
Page 30

`
COMPANY PROFILE:
Since Independence the Power Sector in India has shown a significant rise. However,
with the growth in power demands the Indian power sector is required to produce
more electricity to meet the consumer requirements. Over the years, it has been
observed that the power generation of India is considerably lower that the
premeditated targets set by the government, chiefly due to the lack of availability of
fuel.
Indian Power Sector witnessed power deficit in the year 2009-2010 which increased to
12.6% from 11.9% in 2008-09. The power requirement in India for the years 2010-11
and 2011-12 is expected to be 906316GWh and 968659GWh respectively. While on
the other hand, the Central Electricity Authority has anticipated peak energy scarcity
of 14.98 GW in the FY 2009-10.To cope up with the energy requirements India is
EWCM/RNG/RSB
Page 31

setting mega power projects which would not only elevate power supply but would
also increased per capita consumption by 1000 units. Each plant will have a yearly
competence of 4 GW and would infuse 12GW extra captive energy into the network.
Shivanasamudram, on the banks of river Cauvery.
when
Bangalore
Citys
lighting
scheme
was
completed.
legacy that KPCL started with and built on.
EWCM/RNG/RSB
Page 32
The Karnataka power Corporation is mainly involved in the generation of power and
is the sole administrator for the power generation in the state. It was formed on 20 th
July 1970 as a sister concern to Karnataka Electricity Board (KEB) in order to
eradicate the power famine of the state. From the Mysore Power corporation Limited
of 1970 (A successor of the Hydro Electric Construction Department of Mysore state)
to Karnataka Power Corporation Limited of 21 st century it has been a long, rewarding
journey of three decades.
For over three decades, the Karnataka Power Corporation has been a prime mover and
catalyst behind key power sector reforms in the state - measures that have spiralled
steady growth witnessed in both industrial and economic areas.
Right from the year of inception, in 1970, KPCL set its sights on growth from
within meeting growing industry needs and reaching out to touch the lives of the
common
man,
in
more
ways
than
one
KPCL today has an installed capacity of 5509.82 MW of hydel, thermal and wind
energy, with 4000 MW in the pipeline. The 1470 MW Raichur Thermal Power Station
located in Raichur dist is accredited with ISO 14001-2004 certification for its
environment protection measures. From an industry vantage point, KPCL has raised
the bar on the quality of deliverables and is constantly working at lowering the cost
per megawatt - a commendable cost-value equation that has become a benchmark on
the national grid. KPCLs stock in trade is industry proven - well-established
infrastructure & modern, progressive management concepts and a commitment to
excel, helping it meet the challenges of the rising energy demands of Karnataka.
The leverage point of KPCL initiatives are its resource management strengths right
across planning, financing and project engineering. KPCL also has a high rating in
terms of project completion and commissioning within the implementation calendar.
EWCM/RNG/RSB
Page 33
VISION
Ensuring energy security for Karnataka through diversified energy portfolio.
MISSION
Identifying and developing opportunities in power generation.
Establishing and operating power plants.
Constant up gradation of technical competence and systems.
Developing human resource capabilities and empowerment.
To become a world class organization emphasizing efficiency, cost effectiveness and
harmony with environment.
Products & Services

Besides producing electricity KPCL is engaged in other activities also . KPCL today
has the capability to undertake large scale power projects from concept to
commissioning. It can also operate the plant on an EPC basis, with a host of exclusive
auxiliary services.
KPCLs Consultancy and Engineering Services Division, an offshoot of its core
competency, offers its clients a wide spectrum of consultancy inputs across the
complete cycle of power project development. It has the expertise in analysis and
design of structures using STADPRO 2006, NISA Finite Element package,
AUTOCAD 2006, micro station and in-house developed software packages for
reservoir operation, Stability of Dams etc.
These include:
EWCM/RNG/RSB
Page 34
Feasibility studies / evaluation and the compilation of detailed project reports
Design, Engineering, procurement and construction services
Consultancy on both Thermal and Hydel Power Stations, including handling of

international competitive bids
Project Management from project scheduling to preparation of final invoice

and certification.
Supervision of erection, commissioning and operation of civil, electrical,

mechanical systems and equipment.
Operation and maintenance services,
Rehabilitation of dams in distress
Renovation, modernization and updating of hydro stations
Overall project and performance management.
The year 2008 09 was also an important year for KPCL - CESD as it obtained the
consultancy service for Upper Bhandra Project of Karnataka Neeravari Nigama
Limited @ a Consultancy cost of Rs. 50.00 million. Previously i.e. during the year
2007-08 KPCL CESD had bagged the consultancy works for 3 * 40 MWcapacity
Rammam Stage III Hydro Electric Project of NTPC Ltd. , with consultancy charges
being Rs. 85.50 Million.
During the present year KPCL CESD achieved a turnover of Rs.179.49 Lakhs. The
consultancy work in progress during the year 2009 10 are as follows:
NTPC Rammam Stage III HEP in West Bengal State,
Upper Bhandara Project of Karnataka Neeravari Nigama Limited,
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Various Lift Irrigation Schemes of Krishna Bhagya Jala Nigama Limited,
Kalasa & Bandur Nala Diversion Schemes of Karnataka Neeravari Nigama

Limited,
Bangalore Water Supply & Sewerage Board Stability analysis of Chamaraja

Sagar Dam,
Badanvalu Lift Irrigation Scheme of Cauvery Neeravari Nigama Limited.
Projects under KPCL
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Page 36
KPCL currently has 34 dams & 25 power stations across the State with profiles that
range from 0.35 MW to 1035 MW.
The total installed capacity logged by KPCL is 5509 MW across a project canvas that
covers expansions, renovations and upgrading of existing plants.
GENERATION PERFORMANCE
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Page 37

During the year there were several challenges to be met by the Karnataka Power
Corporation Limited due to difficult coal supply position on the domestic front and the
low hydel inflows into the reservoirs. Despite all these odds, the Corporation could
achieve high performance in both hydel and thermal generation.
A generation of 25080.36 MU against target of 22035 MU.

Highest thermal generation of 11717.45 MU as against target of 10302 MU.
Highest ever annual capital expenditure Rs.1238 crores.
Hydel generation of 12897.84 MU as against target of 11479 MU.
Wind Power generation of 13.89 MU.
Generation from Diesel plant 451.18 MU as against target of 240 MU.
Plant Load Factor (PLF) of 81.68% at Raichur Thermal Power Station with
availability of 89.38%.
Highest capacity addition of 600 MW.
Highest ever Annual Turnover of Rs.4148 Crores,
Commissioning of Unit - 7 at RTPS in 25 Months - A National record,
Sharavathi Generating station has achieved a record generation of 23.264 MUs

which is highest generation so far in a single day,
Sharavathi Generating station has achieved highest annual generation of

5825.434 MUs against previous highest generation of 5732.080 MU,
Varahi Underground Power House has achieved a record annual generation of

1401.021 MU surpassing the previous highest annual generation of 1340.343
MUs,
Mani Dam Power House made a record annual generation of 41.873 MU

surpassing the previous highest annual generation of 37.697 MUs,
Almatti Dam Power House has achieved a record generation of 664.21 MUs
surpassing the previous annual generation of 630.23 MUs
EWCM/RNG/RSB
Page 38

SOCIAL CONTRIBUTION
Maintaining aesthetic gardens at Kidwani oncology Hospital, project locations,

corporate office and park with an attractive water fountain in front of Vidhana
Soudha,
Passing on the benefit of cost cutting in construction, finance and operations to

the consumers,
High performance levels to reduce cost and ensure reliable power supply,
Making available corporation-run schools, hospital and community centres for

the general public in the project area,
Maintaining interior roads near project locations,
Strict compliance to environmental laws, regulations and norms.
ENVIRONMENTAL MANAGEMENT
KPCLs power generation blueprint has a clear-cut policy on environment
management. Building in green-mapping concepts such as sustainable development ,
which creates the framework for improving the quality of life. sustainable
development goes hand-in-hand with 'environment protection. KPCL has a
comprehensive action plan in place that enables environment management, pollution
monitoring and the implementation of specific environment projects.
All KPCL projects have the assurance of a comprehensive Environmental Impact
Study to evaluate the impact of the project on the environment. It also prepares an
Environmental Management Plan complying with all the conditions stipulated by
KSPCB/MOEF. KPCL's Raichur Thermal Power Station has been accredited with ISO
14001 -2004 for its efforts towards environment protection management.
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Page 39

The following innovative and new measures to aid the process of environment control
have been put in place.
A unique Ayurvedic greenhouse has been developed at Kadra Project.
Fish fingerlings in power generation reservoirs to maintain aqua-balance.
Eco-friendly control measures adopted such as controlled blasting.
Construction of colonies with least destruction to ecology.
Installation of Electro Static Precipitators in Thermal Plants.
Measures across the board to minimize pollution.
Fuel supply agreement with collieries to ensure high grade coal supplies.
Monitoring measures for ash minimisation, ash emission control, ash

utilisation and ash disposal.
Recycling of water from ash ponds for alternative use.
Modernization of sewerage treatment plant.
Continuous monitoring of air quality in work environments & environment

management measures.
AFFORESTATION AND GREENBELT DEVELOPMENT

The project concerning afforestation and green belt development around the Bellary
Thermal Plant has been entrusted to UAS Dharward. The afforestation work was
planned ahead of the project commencement and of the entire 220 hectare landscape,
EWCM/RNG/RSB
Page 40

close to 50 % has already been covered under the programme. This affirms KPCL's
commitment for protecting the surrounding environment.
COMPETITORS
National Thermal Power Corporation (NTPC)
Reliance Energy
Tata Power
Torrent Power
Magnum Power Generation Limited
GMR Energy
CHAPTER 3
RESEARCH DESIGN
INTRODUCTION
A research design is a method and procedure for acquiring information needed to solve
the problem. A research design is the basic plan that helps in the data collection or
analysis. It specifies the type of information to be collected the sources and collection
procedure.
Research in common parlance refers to a search for knowledge. Research can also be
defined as a scientific and systematic search for pertinent information on specific
topic. We can also say that research as an art of scientific investigation.
EWCM/RNG/RSB
Page 41

In analytical research, the researcher has to use facts or information already available
and analyze these to make a critical evaluation of the material.
Research starts with the researcher, the position where you stand, the world around
you, your ethics, etc. The conceptions of the researcher influence the research topic
and the methodology with which it is approached. Research is not just a matter of
technique or methods.
What is specific to social-science research, as compared to say journalism, is the quest
to examine and understand social reality in a systematic way. What is observed is as
important as how it is observed.
General outline of a research: theory, conceptualization of theoretical constructs into
concepts, formalization of relationships, operationalization, measurement or
observation, data analysis or interpretation, report.
3.2 REVIEW OF LITERATURE

The ultimate objective of every company is to increase firms performance which in
fact, associated with firms strategic decisions. Decisions regarding choice
of leverage are one of the strategic decisions; firms often take this type of decisions to
increase their performance.
Capital structure is the composition of the liability of a firm or particularly is the
proportional participation of the numerous financing sources. Such as the equity, and
debt it included the short term and long term debt Brealey and Myers (1992), Weston
& Brigham (2000) and Gitman (1997).
Modigliani and Miller (1958) argued that capital structure its theories and relationship
with firms performance has been creating issue in accounting and corporate
finance literature. They further argued that under preventive assumptions of capital
market capital structure is unsuitable in determining firm performance or value.
EWCM/RNG/RSB
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According to this intention, firm value is not the combination of the securities it issue
but it is determined by real assets.
1. According to Franco Modigliani and Merton Miller:
"Forms the basis for modern thinking on capital structure, though it is generally
viewed as a purely theoretical result since it disregards many important factors in the
capital structure process. The theorem states that, in a perfect market, how a firm is
financed is irrelevant to its value. This result provides the base with which to examine
real world reasons why capital structure is relevant, that is, a company's value is
affected by the capital structure it employs. Some other reasons include agency
costs, taxes, and information asymmetry. This analysis can then be extended to look
at whether there is in fact an optimal capital structure: the one which maximizes the
value of the firm.
2. According to James c. Van Horse:
"The mix of a firm's permanent long term financing represented by debt, preferred
stock, and common stock equity".
3. According to Prasanna Chandra:
"The composition of a firm's financing consists of equity, preference, and debt".
4. According to Gerstenbeg:
"Capital structure of a company refers to the composition or make-up of its
capitalization and it includes all long-term capital resources viz: loans, reserves,
shares and bonds".
5. According to Jean Murray:
The capital structure of a business is the mix of types of debt and equity the company
has on its balance sheet. The capital or ownership of a business can be evaluated by
knowing how much of the ownership is in debt and how much in equity. The
company's debt might include both short-term debt and long-term debt (such as
mortgages), and equity, including common stock, preferred shares, and retained
earnings.
Review 1:
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Page 43

CAPITAL STRUCTURE IN A PERFECT MARKET
Consider a perfect capital market (no transaction or bankruptcy costs; perfect
information); firms and individuals can borrow at the same interest rate; no taxes; and
investment decisions are not affected by financing decisions. Modigliani and Miller
made two findings under these conditions. Their first 'proposition' was that the value
of a company is independent of its capital structure. Their second 'proposition' stated
that the cost of equity for a leveraged firm is equal to the cost of equity for an
unleveraged firm, plus an added premium for financial risk. That is, as leverage
increases, while the burden of individual risks is shifted between different investor
classes, total risk is conserved and hence no extra value created.
Their analysis was extended to include the effect of taxes and risky debt. Under a
classical tax system, the tax deductibility of interest makes debt financing valuable;
that is, the cost of capital decreases as the proportion of debt in the capital structure
increases. The optimal structure, then would be to have virtually no equity at all, i.e. a
capital structure consisting of 99.99% debt.
Review 2:
CAPITAL STRUCTURE'SLONG-TERMIMPACT
Capital structure affects a company's overall value through its impact on operating
cash flows and the cost of capital. Since the interest expense on debt is tax deductible
in most countries, a company can reduce its after-tax cost of capital by increasing debt
relative to equity, thereby directly increasing its intrinsic value. While finance
textbooks often show how the tax benefits of debt have a wide-ranging impact on
value, they often use too low a discount rate for those benefits. In practice, the impact
is much less significant for large investment-grade companies (which have a small
relevant range of capital structures). Overall, the value of tax benefits is quite small
over the relevant levels of interest coverage. For a typical investment-grade company,
the change in value over the range of interest coverage is less than 5 percent.
EWCM/RNG/RSB
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The effect of debt on cash flow is less direct but more significant. Carrying some debt
increases a company's intrinsic value because debt imposes discipline; a company
must make regular interest and principal payments, so it is less likely to pursue
frivolous investments or acquisitions that don't create value. Having too much debt,
however, can reduce a company's intrinsic value by limiting its flexibility to make
value-creating investments of all kinds, including capital expenditures, acquisitions,
and, just as important, investments in intangibles such as business building, R&D, and
sales and marketing.
Managing capital structure thus becomes a balancing act. In our view, the trade-off a
company makes between financial flexibility and fiscal discipline is the most
important consideration in determining its capital structure and far outweighs any tax
benefits, which are negligible for most large companies unless they have extremely
low debt.
Mature companies with stable and predictable cash flows as well as limited investment
opportunities should include more debt in their capital structure, since the discipline
that debt often brings outweighs the need for flexibility. Companies that face high
uncertainty because of vigorous growth or the cyclical nature of their industries should
carry less debt, so that they have enough flexibility to take advantage of investment
opportunities or to deal with negative events.
Not that a company's underlying capital structure never creates intrinsic value;
sometimes it does. When executives have good reason to believe that a company's
shares are under- or overvalued, for example, they might change the company's
underlying capital structure to create value either by buying back undervalued shares
or by using overvalued shares instead of cash to pay for acquisitions.
Other examples can be found in cyclical industries, such as commodity chemicals,
where investment spending typically follows profits. Companies invest in new
manufacturing capacity when their profits are high and they have cash. Unfortunately,
the chemical industry's historical pattern has been that all players invest at the same
EWCM/RNG/RSB
Page 45

time, which leads to excess capacity when all of the plants come on line
simultaneously. Over the cycle, a company could earn substantially more than its
competitors if it developed a countercyclical strategic capital structure and maintained
less debt than might otherwise be optimal. During bad times, it would then have the
ability to make investments when its competitors couldn't.
Review 3:
IMPORTANCE OF CAPITAL STRUCTURE

One of the most important topics in the finance literature is the determination of an
optimal capital structure. For an equity investor, a strong balance sheet is an important
consideration for investing in a companys stock and capital structure is one of the
important measures of evaluating the strength of the balance sheet which reflects the
important of capital structure.
Capital structure of the company basically shows the composition of companys long
term capital which consists of mixture of debt and equity. Its very necessary that
companies should have optimal capital structure that can maximize the price of the
companys stocks. Companies can choose a mix of financing options to finance its
assets but it is very necessary that they are choose the financing options that maximize
its overall value. This is called the optimal capital structure of the company.
When companies dont have debt in their capital structure, then they are unlevered
while on the other hand if the company have debt in their capital structure then they
are called leveraged firm. So we can say that in unlevered company total assets are
always equal to total equity and it is the total value of the company there are also
deferent factor that influenced capital structure decision of the company such as
companys business risk, financial flexibility, managerial attitude, companys tax
position etc
Review 4:
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3.2.4 Capital structure
Capital structure is a combination of a firms long-term debt, its specific short-term
debt, its common equity and preferred equity. It is used to determine how an
origination finances its overall operation and growth, by using different source of
funds. The debt part of the structure comes in the form of bond issues or long-term
notes payable, while equity is classified as retained earnings, common or preferred
stock. Stock-term debt, which includes working capital requirements, is also
considered to be part of the capital structure.
The optimal corporate structure involves the combination of the following factors:
Debt ratio
Cost of equity
Bond rating
Interest rate on deposits
After-tax debt
Firm value
Review 5:
3.2.5 The capital structure Decision of new firms
Contrary to widely held beliefs that startup companies rely heavily on funding from
family and friends, a Kauffman Foundation research paper released today reported that
external debt financing such as bank loan are the more common source of funding of
many companies during their first year of operation. According to the study , nearly 75
percent of most firm startup capital is made up in equal part of owner equity and bank
loan and/or credit card debt, understanding the importance of liquid credit market to
the formation and success of new firms.
Interestingly, the capital structure paper also found that high-tech firms are more likely
to get outside equity investment in their first year of operation than any other type of
company. According to the data, high tech firms received an average of $31,216 in this
EWCM/RNG/RSB
Page 47

type of financing, compared with firms overall, which received only $7000 on
average.
Review 6:
3.2.6 An Empirical Model of optimal capital structure
The authors provide a reasonably user friendly and intuitive model for arriving at a
companys optimal, or value maximizing, leverage ratio that is based on the estimation
of company specific cost and benefits function for debt financing, The benefit function
are downward sloping , reflecting the drop in the incremental value of debt with
increase In the amount used. The cost function are upward sloping, reflecting the
increase in costs associated with increased in leverage. The cost function very among
companies in ways that differences in corporate characteristics such as size,
profitability ,dividend policy, book-to-market ratio, and assets collateral and redeploy
ability.
The authors use those cost and benefits function to produce an estimate of a
companys optimal amount of debt. Just as equilibrium in economics textbooks occurs
where supply equals demand, optimal capital structure occurs at the point where the
marginal benefit of debt equals the marginal cost. The articles illustrate optimal debt
chaises for companies such as Barnes & Noble, coca-cola, six Flags, and performance
Food Group. The author also estimate the net benefit of debt usage (in terms of the
increase in firm or enterprise value) for companies that are optimally levered , as well
as the net cost of being underleveraged for companies with too little debt, and the cost
of overleveraging for companies with too much. One critical insight of the model is
that costs associated with overleveraging appear to be significantly higher, at least for
some companies, then the cost of being underleveraged.
STATEMENT OF PROBLEM:
EWCM/RNG/RSB
Page 48

The project has been dealing with an empirical study on capital
structure and its management" of Karnataka Power Corporation
Limited based on the historical data for evaluating its contribution
towards wealth maximization.
OBJECTIVE OF THE STUDY:
To analyze, capital structure of KPCL Limited.

To analyze the working capital and earnings per share of KPCL
Limited.
To find out the optimal capital structure of the company.
To know the profitability of the company.
To know about the capital efficiency of the company.
HYPOTHESIS:
Hypothesis test on earning per share of KPCL.

H1-There is no effective from earning per share of KPCL.
Hypothesis test on profitability of the company.
H0-There is a more profitability of the company.
SCOPE OF STUDY:
EWCM/RNG/RSB
Page 49

The study is confined to understand and analyze the changes in earning per share,
dividend policy, and managerial decisions due to the changes in capital structure of
KARNATAKA POWER CORPORATION LIMITED
OPERATIONAL DEFINITIONS OF CONCEPT
1. Equity Share: Equity shares are those shares which are ordinary in the course
of companys business. They are also called as ordinary shares. These shares
holders do not enjoy preference regarding payment of dividend and repayment
of capital. Equity shareholders are paid dividend out of the profit made by a
company. Higher the profits, higher will be the dividend and lower the profit,
lower will be the dividend.
2.
DEBENTURES: A type of debt instrument that is not secured by physical

assets or collateral. Debentures are backed only by the general creditworthiness
and reputation of the issuer. Both corporations and governments frequently
issue this type of bond in order to secure capital. Like other types of bonds,
debentures are documented in an indenture.

3. DIVIDENDS: A distribution of a portion of a companys earnings, decided by
the board of directors, to a class of its shareholders. The dividends is most
often quoted in terms of the rupees amount each share receives (dividends per
share). It can also be quoted in terms of a percent of the current market price,
referred to as dividend yield.
4. SHARE HOLDERS: Any person, company, or other institution that owns at
least one share in a company
5. EARNINGS BEFORE INTEREST AND TAX: An indicator of a companys
profitability calculated as revenue minus expenses, excluding tax and interest.
EBIT is also referred to as operating earnings, operating profit and
operating income,
EWCM/RNG/RSB
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6. OUTSTANDING SHARE: Stock currently held by investors, including
restricted shares owned by the companys officers and insiders, as well as those
held by the public. Shares that have been repurchased by the company are not
considered outstanding stock.
7. SALES: total amount collected for goods and services provided. While
payment is not necessary for recognition of sales on companys financial
statements. There are strict accounting guidelines stating when sales can be
recognized.
The basic principle is that a sale can only be recognized when the transaction is
already realized, or can be quite easily realized. This means that the company
should have already received a payment, or the chances of receiving a payment
are high. In addition, delivery of the good or service should have taken place
for the sale to be recognized.
6 RESRARCH METHODOLOGY
TYPES OF STUDY
The nature of the study of this project will be Descriptive study. In Descriptive study,
one has to use facts or informations which are already available and analyze these to
make critical evaluation of the material. The objective of this research is to generate
new ideas.
SOURCES OF DATA
Secondary data: published data and the data collected in the past is called secondary
data.
By using company journals, reports and documents.
EWCM/RNG/RSB
Page 51
By using the Annual reports of the company.
By using company website.
TOOLS AND TECHNIQUES USED FOR ANALYSIS

Various tools and techniques used for the analysis are as follows.
Financial analysis to know the company strength and weakness.
Interpret financial statements and ratios.
Calculation of earnings per share at least for 5 financial plans.
Estimation of working capital.
DATA ANALYSIS
The data collected will be classified and tabulated for the purpose of the study.
The analyzed data will be represented in the form of tables, charts and graphs.
Making use of financial tools such as averages and percentages for the better
understanding of the study.
LIMITATION OF THE STUDY
Optimal capital structure can be confined to stipulated combinations.

Optimal capital structure decision should be confined by managerial decisions.
Any change in dividend policy and managerial decisions will have major
impact on capital structure which will be difficult to analyze with in a
stipulated time.
CHAPTER SCHEME
Chapter One:
Introduction
Chapter Two:
Profile of the Organizations
Chapter Three:
Research and Design
EWCM/RNG/RSB
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Chapter Four:
Chapter Five:
Data analysis and Interpretation

Summary of Findings, Conclusions and Suggestions.
CHAPTER 4
ANALAYSIS AND INTERPRETATION
INTRODUCTION:
The term Financial Analysis and Interpretation refers to the process the process of
determining financial strengths and weaknesses of the firm by establishing a strategic
relationship between the components of financial statements and other operating data.
The purpose of financial analysis is to diagnose the information contained in financial
statements so as to judge the profitability and soundness of a firm. Financial analysis
means simplifications of financial data by methodical classification of data given in
the financial statements. Interpretation means explaining the meaning of and
significance of data so simplified. The analysis and interpretation of financial
statements is used to determine the financial position and results of operations as well.
The basic objective of capital structure and management is to realize the twin
objective of profitability of the operation and to maintain adequate to meet the
EWCM/RNG/RSB
Page 53

obligation in time. This chapter makes an analysis of capital management in Karnataka
Power Corporation Limited. It includes
Capital Structure And Management

The Overall Efficiency Of Capital Structure I.E., Ratios
Inventory Management
Financial Performance
Cash Management
Reserves And Surplus.
Assets And Liabilities.
The following figures will give an idea regarding the capital structure in KPCL.
Particulars
As at 31st
march
2013
Number
(in Lakhs)
Authorised
Equity Shares of 4,10,00,000 4,10,000
Rs 1000 each
Issued
Equity shares of 3,12,69,686 3,12,,697
Rs 1000 each
Subscribed & Paid
up
Equity Shares of 3,12,69,686 3,12,,697
Rs 1000 each fully
paid
A) Reconciliation of number of
equity shares outstanding
Particulars
Equity Shares
Number
2,28,19,686
Shares
outstanding at the
beginning of the
year
Shares
Issued 84,50,000
EWCM/RNG/RSB
As at 31st
March 2012
Number
(in Lakhs)
3,10,00,000
3,10,000
2,28,19,686
2,28,197
2,28,19,686
2,28,197
Equity Shares
(Rs in Lakhs)
2,28,197
Number
1,74,32,622
(Rs in Lakhs)
1,74,326
84,500
53,87,064
53,871
Page 54

during the year
Shares
3,12,69,686 3,12,697
outstanding at the
end of the year
B) Share Holding
pattern
Name of the Share No.
of % of Holding
Holder
Shares held
Government
of 3,12,69,686 100
Karnataka
Note No.1 : SCHEDULE-A SHARE CAPITAL
2,28,19,686
2,28,197
No. of
Shares held
2,28,19,686
% of Holding
100
Note No. 2 :
SCHEDULE-B RESERVES AND SURPLUS
Particulars
a.Capital Reserves
Opening Balance
(+) Current year transfer
Closing Balance
b. Special Reserve for Replacement of
Plant and Machinery
Opening Balance
(+) current year Transfer from
General Reserve
Closing Balance
c. General Reserves
Opening balance
(+) Net Profit/(net Loss) For the
current year
EWCM/RNG/RSB
As at 31st march 2013
As at 31st March 2012
(Rs in Lakhs)
(Rs in Lakhs)
472
472
472
472
6,489
6
6,202
287
6,495
6,489
3,45,065
233
3,45,533
11,470
Page 55

(-) Proposed Dividends (incl. of
Dividend Taxes)
(-) Special Reserve for Replacement
of Plant and Machinery
Closing Balance
Total
(3,657)
(2,651)
(6)
(287)
3,50,635
3,57,602
3,54,065
3,61,026
ANALYSIS
An appropriation of 2.5% of distributable profits is made to Special
reserve
annually for replacement of machinery and also for the Renovation, Modernization
and up rating schemes of the Corporation including other Capital works that may be
undertaken by the corporation on a contingent basis. An appropriation of `5.83
Lakhs is made towards special Reserve during current year (Prev. year ` 286.75
Lakhs)
CHART SHOWING SHARE CAPITAL
3.5
3
2.5
(Rs in Lakhs)
2013
Column1
1.5
1
0.5
0
EWCM/RNG/RSB
SHARE CAPITAL
Page 56
CHART SHOWING RESERVES AND SURPLUS
3.6
3.58
3.56
2013
3.54
Column1
3.52
3.5
3.48
3.46
3.44
RESERVES AND SURPLUS
Sources: Primary data

INTERPRETATION:
Dividend has been recommended by the directors of KPCL at 1% on share capital
for the year 2012-13 and consequently dividend appropriated from accumulated
profit is at ` 3127 Lakhs (Prev. year `2282 Lakhs) Dividend tax on distributed
profits is at ` 530 lakhs (Prev. year `369 Lakhs)
EWCM/RNG/RSB
Page 57
NOTE 3
SCHEDULE-A SHARE CAPITAL
Particulars
As at 31st
march 2012
Number
(in Lakhs)
Authorised
Equity Shares of Rs 31,000,0000 310000
1000 each
Issued
Equity shares of Rs 22,819,686
228197
1000 each
Subscribed & Paid
up
Equity Shares of Rs 22,819,686
228197
1000 each fully
paid
A) Reconciliation of number of
equity shares outstanding
Particulars
Equity Shares
Number
Shares outstanding 17,432,622
at the beginning of
the year
Shares
Issued 5,387,064
during the year
Shares outstanding 22,819,686
at the end of the
year
B) Share Holding
pattern
Name of the Share No. of Shares
Holder
held
Government
of 3,12,69,686
Karnataka
EWCM/RNG/RSB
As
at
31st
March 2011
Number
(in Lakhs)
20,000,000
200000
17,432,622
174326
17,432,622
174326
Equity Shares
(Rs in Lakhs)
174326
Number
12,432,622
(Rs in Lakhs)
124326
53871
5,000,000
50000
228197
17,432,622
174326
% of Holding
No. of
Shares held
2,28,19,686
% of Holding
100
Page 58
100
NOTE 4
SCHEDULE-B RESERVE AND SURPLUS
Particulars
a.Capital Reserves
Opening Balance
(+) Current year transfer
Closing Balance
b. Special Reserve for Replacement of
Plant and Machinery
Opening Balance
(+) current year Transfer from
General Reserve
Closing Balance
c. General Reserves
Opening balance
(+) Net Profit/(net Loss) For the
current year
(-) Proposed Dividends (incl. of
Dividend Taxes)
(-) Special Reserve for Replacement
of Plant and Machinery
Closing Balance
Total
(Rs in Lakhs)
(Rs in Lakhs)
472
472
472
472
6,202
287
4,890
1,312
6,489
6,202
3,45,065
11,470
3,45,533
11,470
2,651)
(2,651)
(287)
(1,312)
3,54,065
3,61,026
3,45,533
3,52,206
ANALYSIS
1.An appropriation of 2.5% of distributable profits is made to Special reserve
annually for replacement of machinery and also for the Renovation, Modernization
and up rating schemes of the Corporation including other Capital works that may
be undertaken by the corporation on a contingent basis. An appropriation of
`286.75 Lakhs is made towards special Reserve during current year (Prev year
`1312.00 Lakhs)
EWCM/RNG/RSB
Page 59

3.5
3
2.5
2012
2
Column1
1.5
1
0.5
0
SHARE CAPITAL
EWCM/RNG/RSB
Page 60
3.6
3.58
3.56
2012
3.54
Column1
3.52
3.5
3.48
3.46
3.44
RESERVE AND SURPLUS
Sources : Primary data

INTERPRETATION
1. Dividend has been recommended by the directors of KPCL at 1% on share capital
for the year 2011-12 and consequently dividend appropriated from current year
profit is at `2281.96 Lakhs (Prev year `3486.52 Lakhs) Dividend tax on distributed
profits is at `369.13 Lakhs (Prev year `565.60 Lakhs)
2. A balance of `8532.33 Lakhs (Prev year `47116.15 Lakhs) is taken to General
Reserves for retained earnings
NOTE:5
Particulars
EWCM/RNG/RSB
As at 31st As at 31st March

march 2011
2010
Page 61

Authorised
Equity Shares of Rs 1000 each
Issued Subscribed & Paid up
Equity shares of Rs 1000 each
Number
20,000,000
Number
20,000,000
17,432,622
12,432,622
SHARE CAPITAL DEPOSIT:

Share Deposit(Received from 5,387,064
Government Of Karnataka as
Equity for development of power
generating stations)
TOTAL
5,000,000
22,819,686
17,432,622
NOTE:6
Particulars
(Rs
Lakhs)
(Rs
Lakhs)
A.Capital Reserves
Balance as per last Balance 46896
sheet
255
Add. Current year additions
B.
Special
Reserve
for
Replacement of Plant and
Machinery
EWCM/RNG/RSB
in
47151
Page 62
46896
-
in
46896

Balance as per last Balance
sheet
Add: Transferred from P&L
account
C.GENERAL RESERVES
sheet
account
489031
131200
29841645
4711617
TOTAL
620231
379969
109062
489031
34553262
25879145
3962500
29841645
35220644
30377572
DATA ANALYSIS AND INTERPRETATION

During the year 50,00,000 equity shares of Rs.1000/- each have been allotted at par to
the Government of Karnataka.
Capital Reserves Includes:
2,34,49,119 being the difference between assets and liabilities on merger of
Viswaveswaraya Vidyut Nigama limited and to the corporation
Karnataka EMTA Coal Mines Ltd. has issued 13,00,000 shares if Rs 10/-each fully
paid up for consideration other than cash.
Karnataka EMTA Collieries Ltd. has issued 25,500 shares of Rs 10/-each full paid up
for consideration other than cash.
EWCM/RNG/RSB
Page 63
2.5
(Rs in Lakhs)
1.5
2011
Column1
0.5
SHARE CAPITAL
EWCM/RNG/RSB
Page 64
2.5
(Rs in Lakhs)
1.5
2011
Column1
0.5
SHARE CAPITAL
INTERPRETATION
Authorised capital of the company has been enhanced from Rs 2000 crores to 3100
crores on 19.05.2011
NOTE 7.
(Rs.'000)
Particulars
EWCM/RNG/RSB
As at 31st As at 31st March

march 2010
2009
Number
Number
Page 65

Authorised
Equity Shares of Rs 1000 each
20,000,000
20,000,000
Issued Subscribed & Paid up

Equity shares of Rs 1000 each
12,432,622
7,432,622
SHARE CAPITAL DEPOSIT:

Share Deposit(Received from 5,000,000
Government Of Karnataka as
Equity for development of power
generating stations)
TOTAL
5,000,000
17,432,622
12,432,622
NOTE 8.
(Rs.'000)
Particulars
(Rs
Lakhs)
(Rs
Lakhs)
in
in
A.Capital Reserves
sheet
EWCM/RNG/RSB
46896
Page 66
46896

B.
Special
Reserve
for
Replacement of Plant and
Machinery
sheet
109062
account
C.GENERAL RESERVES
sheet
3962500
account
TOTAL
489031
310645
69324
29841645
23349437
2529708
30377572
379969
25879145
26306010
ANALYSIS
During the year 50,00,000 equity shares of Rs 1000/-each have been allotted at par to
the Government of Karnataka.
EWCM/RNG/RSB
Page 67
18
16
14
12
(Rs in Lakhs)
2010
10
Column1
8
6
4
2
0
SHARE CAPITAL
3.1
3
2.9
2010
(Rs in Lakhs)
2.8
Column1
2.7
2.6
2.5
2.4
EWCM/RNG/RSB
Page 68

INTERPRETATION
Capital Reserves include Rs 2,34,49,119 being the difference between assets and
liabilities transferred from the erstwhile KEB to erstwhile VVNL and subsequently to
the corporation w.e.f. 1.04.2006.
REMTA has issued 13,00,000 shares of Rs 10-each fully paid up for consideration
other than cash. This has been accounted as Capital Reserve.
YEAR
NO. OF EQUITY SHARES AMOUNT OF DEBT ( IN

(IN LAKHS)
LAKHS)
2009
115
16,568.07
2010
200
17,522.52
2011
200
22,377.62
EWCM/RNG/RSB
Page 69

2012
310
26,774.84
2013
410
44,765.48
TABLE NO 1: TABLE DEPICTING THE RESULTS FROM THE

SOURCES WITH REGARDS TO CAPITAL STRUCTURE FROM
2009-2013
ANALYSIS:
As it could be observed in table 1, among all the year of Karnataka Power
Corporation Ltd,
the number of equity shares has increased every year and in
Amount of Debt there is a slight increase in every year. In the year 2013 debt is high
(44,765.48) and low in 2009 (16,568.07). In future it is expected to increase more.
GRAPH NO 1: GRAPH REPRESENTING THE EVALUATED VALUES OF

TABLE 1 2009-2013
EWCM/RNG/RSB
Page 70

50000
45000
40000
35000
30000
25000
Column2
20000
15000
10000
5000
0
2009
2010
2011
2012
2013
INTERPRETATION:
As we have seen in the above graph 1, among all the year of Karnataka Power
Corporation Ltd, there is continuous increase in debt. By increasing in the debt value
at moderate levels, the same will depict the enhancement in the long term liabilities
which are repayable in a long duration. This is turn helps the firm in mobilizing the
appropriate funds for the required purpose.
EWCM/RNG/RSB
Page 71

TABLE NO 2: TABLE DEPICTING THE RESULT FROM THE SOURCE
WITH REGARD TO EARNING PER SHARE BY TAKING EARNING
BEFORE INTEREST AND TAX FROM 2009-2013
YEAR
EPS BASIC FORMULA (RUPEES IN

LAKHS)
2009
373
2010
351
2011
349.76
2012
52.34
2013
41.75
Earnings per share = profit/No of equity shares

2013=17120/410=41.75
2012=16228/310=52.34
2011=69985/200=349.76
2010=70200/200=351
2009=42895/115=373
ANALYSIS:
As it could be observed in table 2, among all the year of Karnataka Power corporation
Ltd, the ratio of Earnings per share by taking Earnings before interest and tax is high
in the year 2009 when compared to all other years. In future either it may increase or
decrease based on the profit.
EWCM/RNG/RSB
Page 72

TABLE 2 FROM THE YEAR 2009-2013
Chart Title
400
350
300
250
RUPEES
200
150
100
50
0
2009
2010
2011
2012
2013
YEAR
INTERPRETATION:
Corporation Ltd, there is fluctuation in the EPS by taking Earnings before interest and
tax. If the Earning per share is a measure and investors will watch carefully and
consider it. While deciding the market value of the Equity share it is assumed that the
company has earned good profit and investors will be ready to invest in the company.
If the EPS decreases than the company is not earning good profits and the company
will have bad reputation among investors and financial institution. In 2012 EPS is low
because paid up capital is more.
EWCM/RNG/RSB
Page 73
TABLE NO 3: TABLE DEPICTING THE RESULT FROM THE SOURCE

WITH REGARD TO EARNING PER SHARE BY TAKING EARNING AFTER
INTEREST AND TAX FROM 2009-2013
YEAR
EPS NET INCOME FORMULA (RUPEES

IN LAKHS)
2009
27.47
2010
19.01
2011
16.98
2012
18.68
2013
12.22
ANALYSIS:
As it could be observed in table 3, among all the year of Karnataka Power Corporation
Ltd, the ratio of EPS by earnings taking after interest and tax is high and high in the
year
2009
(40.46)
and
decreasing
continuously
from
(19.01,16.98,18.68,12.22). In future it is accepted to increase more.
EWCM/RNG/RSB
Page 74
2010
to
2013
GRAPH NO 3 : GRAPH REPRESENTING THE EVALUATED VALUES OF

TABLE 3 FROM THE YEAR 2009-2013
30
25
20
RUPEES
15
Column1
10
5
0
YEAR
INTERPRETATION:
Corporation Ltd, there is decrease in Earnings per share by taking Earnings after
interest and tax in the year 2013. If the EPS decreases due to the economic factors
such as moderate performance and also the political influence in the state due to the
tax rate has been increased so it has major impacts on EPS. If the company pays more
of its income towards tax rate it decreases the EPS. If the Company starts booming
and less interference of political factor then EPS will increase in any financial year.
EWCM/RNG/RSB
Page 75
GRAPH NO 5: REPRESENTING THE EVALUATED VALUES OF TABLE 5

FOR THE YEAR 2010-2011
Capital structure on EPS on 2010-2011

9.8
9.7
9.6
9.5
9.4
RUPEES
Series 3
9.3
9.2
9.1
9
8.9
FINANCIAL PLAN
INTERPRETATION:
As we have seen in the above graph 5, among all the plans of Karnataka power
Corporation Ltd, plan 4 is good because of 100% Equity shares. In this regard to this
plan it can increase the earnings per share and also excess profit can be retained in the
company for the further expansion activities, but the risk increases for the company. If
the company follows plan 2 there is decrease in EPS due to 100% Debt so the
EWCM/RNG/RSB
Page 76

company has to give more interest rate to the investors. Combination of this Equity
and Debentures will be the good option for the company.
TABLE NO 6: TABLE DEPICTING THE EARNING AVAILABLE TO EQUITY

SHAREHOLDERS FOR THE YEAR 2012-2014
FINANCIAL PLANS
EQUITY CAPITAL
DEBT CAPITAL
100
100
50
50
70
30
30
70
ANALYSIS:
As it could be observed in table 6, it shows the various plans which can be utilized by
of Karnataka Power Corporation Ltd to increase the maximum profits and earnings per
share for the long run survival of the company. Based on this projected earnings for
the equity share holders will be made for three years from 2012-2014. By doing this
projected analysis company will be able to select the best plans for future.
EWCM/RNG/RSB
Page 77
GRAPH NO 6: GRAPH REPRESENTING THE VALUES OF TABLE 6 FOR

THE YEAR 2012-2014
capital structure from 2012-2014

120
100
80
PERCENTAGE
EQUITY
60
Column1
40
20
0
FINANCIAL PLAN
INTERPRETATION:
EWCM/RNG/RSB
Page 78

As we have seen in the above graph 6, among all the plans of Karnataka Power
Corporation Ltd, in this regard to plan 1. In regard to plan 2 it is acceptable for the
companies earning greater than the rate of interest which they are paying on the
debentures. In regard to plan 3 earning per share may reduce due to risk involved and
overall cost of capital increase. In regard to plan 4 the management and control of the
company becomes difficult due to majority of equity in the capital structure. Smooth
functioning of organisation is no possible. In regard to plan 5 the earning per share of
the increase due to more debt percentage in the capital and also have great control over
the management.
TABLE NO 7: TABLE DEPICTING THE CALCULATION FOR NUMBER OF

OUTSTANDING SHARE
PLAN 1
PLAN 2
PLAN 3
PLAN 4
PLAN 5
Initial capital
5000000
5000000
5000000
5000000
5000000
+ Addition
450000
NIL
225000
135000
315000
5000000
5225000
5135000
5315000
No. of outstanding 5450000

shares
Sources: working has been performed in MS_EXCEL from the data available in annual reports
of the company concerned.
EWCM/RNG/RSB
Page 79
ANALYSIS
As it could be observed in table 7, it shows the various financial plan with the
additional capital to find out the number of outstanding shares. Based on this
outstanding share the projected analysis for the year 2012 to 2014 will be made, as we
can see from the table 7 plans 1 has got more outstanding shares of (5450000), and
plan 2 has got less outstanding shares (50000000).

TABLE 7 FOR THE YEAR 2012-2014
Capital structure from 2012-2014

5500000
5400000
5300000
5200000
5100000
NO OF OUTSTANDING SHARES 5000000
4900000
4800000
4700000
FINANCIAL PLAN
EWCM/RNG/RSB
Page 80

INTERPRETATION
As we have seen in the above graph 7, among the outstanding shares of the company
of Karnataka Power Corporation Ltd, the increase in outstanding shares of the
company can shift fundamentals position of the stock such as ownership percentage,
voting control, earning per share, or the value of individual shares and it reduce an
investors stock price below the initial purchase price. The decrease in the outstanding
shares the company a magical increase in period-to-period EPS will result. It will
increase the price of the stock, increased floating rate; income tax charged on dividend
is less.
DIRECTORS REPORT
The Board of Directors take immense pleasure in presenting the 43rd Annual Report
on the business and operations of the Corporation with the audited statement of
accounts for the year ended March 31, 2013.
I. Financial Performance
Financial Results
For the year ended For the year ended

March 31. 2013
March 31. 2012
Gross income from sale of energy
(Rs in crores)
5622
(Rs in crores)
5242
Less: Advance against
43
41
Less: Infirm Power
152
------
Net income from sale of energy

Other income
Total income
Operating Expenditure
Operating profit
Finance charges, Dpn., and prior period
5426
967
6393
4857
1537
1366
5201
541
5742
4409
1333
1171
EWCM/RNG/RSB
Page 81

adjustments
Profit before tax
171
162
Analysis and Interpretation

Profit before tax during the year was at Rs 171 crores as against Rs 162 crores during
the previous year. Turnover during the year was 5622 crores as against `5242 crores
during the previous year, due to decrease in energy sales in Thermal and decrease from
Hydro Stations. Generation during the year was 24382 mus as against 28239 mus
during the previous year. A dividend of `10 per share as in previous years has been
proposed. The total dividend outgo will be `31.27 crores.An amount of `0.06 crores,
equivalent to 2.5% of the profit after tax is transferred to a separate reserve to meet the
contingencies in operation and maintenance of the plants. GoK has contributed an
amount of `400 crores during the year towards Equity for setting up power generation
plants by KPCL.
Table 19: Cash flow statement for the year ending 31st march 2013
(in crores)
Sl No
Particular
2012-13
2011-12
CASHFLOWS FROM OPERATING

ACTIVITIES
Net profit before tax & prior period
items
Adjustments for:
17120
Bad debts &expenses written off 3

deferred expenses/other losses
16228
1
05
Depreciation including withdrawals

(net)
Loss on sale/scrapping of assets
Loss on sale of stock
Prior period items(excl depreciation)
Other Adjustments
56618
40467
2
54
0
104
326
(480)
Finance charges
88987
77109
EWCM/RNG/RSB
Page 82

profit on sale of assets
(9)
(144)
interest receipts received in cash.
(357)
(362)
Operating profit before working

capital changes
162418
133353
Adjustments for:
B
Adjustments for inventory

Adjustments for sundry debtors
(8118)
65144
Adjustments for loans & advances

2012-13
Adjustments for other current assets &
Non Current Advances
Adjustments on account of current
liabilities
Adjustments on account of other
liabilities & provisions
288
(5611)
(106302
)
(5659)
(267624
)
207374
(1202)
(40426)
38674
(4138)
7302
(11205
8)
Cash generated from operations
158280
21295
Direct taxes + dues
4382
11617
NET CASH FROM OPERATING

ACTIVITIES (A)
153898
CASHFLOW
FROM
INVESTMENT ACTIVITIES
Interest receipts
356
362
Net additions to fixed assets and (121643

capital WIP
)
79)
Net increase in investment
(730)
Net cash used

activities(B)
in
(815
(1404)
investment
(122691)
(81947
)
CASHFLOWS FROM
FINANCING ACTIVITIES
Receipt from issue of equity share 40000
capital
Receipt from secured loan (net)
5680
EWCM/RNG/RSB
Page 83
62500
53716

Payment of Finance charges (Net)
(88988)
Payment of Dividend
(2282)
Payment of Corporate Dividend Tax () (373)
NET CASH USED IN FINANCING
ACTIVITIES (C)
Net increase/decrease in cash & cash
equivalents( A+B+C)
(77110)
(3487)
(566)
(45963)
35053
(14696)
(36660
)
Cash & cash equivalents

(opening balance)
23933
60594
Cash & cash equivalents

(closing balance)
9237
23934
2012-13
2011-12
Notes : 1) Closing Cash and Cash Equivalents consist of the following
2)
a) cash on Hand
b) Imprest
c) Cash at Bank- Scheduled Banks
8733
23665
d) FDR/CDR/NSC as per Contra
430
200
e) Deposit with Bank
68
64
Total
9237
23934
Cash Flow has been prepared under

indirect metod as per accounting
standard -3 pertaining to presentation
on cash Flow Statement
Analysis and interpretation:
Profit before tax during the year was at `171 crores as against `162 crores
during the previous year. Turnover during the year was `5622 crores as
against `5242 crores during the previous year, due to decrease in energy
sales in Thermal and decrease from Hydro Stations. Generation during
the year was 24382 mus as against 28239 mus during the previous year. A
dividend of `10 per share as in previous years has been proposed. The
EWCM/RNG/RSB
Page 84

total dividend outgo will be `31.27 crores. An amount of `0.06 crores,
equivalent to 2.5% of the profit after tax is transferred to a separate
reserve to meet the contingencies in operation and maintenance of the
plants. GoK has contributed an amount of `400 crores during the year
towards Equity for setting up power generation plants by KPCL.
CHAPTER 5
FINDINGS, CONCLUSIONS AND SUGGESTIONS
FINDINGS
The study is undertaken for the purpose of finding out the efficiency of Capital
structure and Management of KPCL. The following are the summary of findings
arrived after analysis.
1. The Net capital has been constantly increasing in all 3 years due to increase in
debtors, loans & advances and decrease in creditors etc.
2. In the year 2012-2013 more than 80% of the current assets are locked up in
sundry debtors which may affect the liquidity position of the company.
3. Current ratio shows an increasing trend which is 9.94 in the year 2010-2011 and
is way more than the standard ratio 2:1. Based on this data it can be said that the
liquidity position of the company is good.
4. Liquid ratio also shows an increasing trend which is 9.43 in the year 2010-2011
and is way more than the standard ratio 1:1. This ratio reflects the financial
soundness of the firm in terms liquidity.
5. As per debtors turnover ratio the liquidity position of the company is poor as it is
less than the standard ratio 1:1. Debtors turnover ratio shows a decreasing trend
from 1:01 to 0.98 and 0.73 in the last 3 years.
6. Working capital turnover ratio shows a decreasing trend over the past 3 years.
The ratio has reduced from 0.93 to 0.61. This clearly shows that the working
capital is under utilized in generating net sales.
7. The sales of the company have been increasing through all 3 years.
8. Stock turnover ratio shows an increasing trend as the sales are constantly
increasing. The ratio has increased from 8.53 to 11.59 over the last 3 years.
EWCM/RNG/RSB
Page 85

9. Investment in inventories has gone down from 486.05 crores to 335.51 in the
year 2009-10 and has slightly increased in the next year to 397.99 crores.
.
RECOMMENDATIONS AND SUGGESTIONS

On the basis of analysis, the recommendations to further improve the
management of capital structure, which would level the company to greater
heights.
KPCL depends on one customer KPTCL, in future it is advisable to
look out for more customers.
The management should take effective measures to recover the
outstanding of KPCL.
Management should take measures to reduce the debtors collection
period.
KPCL depends largely in borrowing to finance its fixed assets. In
future, the company should use its own earnings to reduce the payment
of interest burdens.
KPCL should also revise their old tariff of Hydel and thermal to
increase their profitability.
The cash balance of the company is required to be improved in order
to have immediate liquidity position. But at the same time precautions
should be taken to see that too many funds are not locked up in cash
balance, which ultimately may lead to improper utilization of funds.
The improvement in credit collections and selling will boost their sales
and will record them in cash inflow management. The effective and
efficient cash inflow provides an opportunity to co-ordinate with cash
outflow. Proper co-ordinate cash inflow and outflow management will
help in maintaining sound and better working capital management. If
the company circulates its output and reduces capital expenditure then
the company will be more profitable.
The company should follow Modigliani Miller approach to maximize
the debt to get good ratio between debt and equity.
EWCM/RNG/RSB
Page 86

If the company manages to effective management of materials it can
increase the profitability ratio.
CONCLUSIONS
Based on the study made at KPCL, on capital structure and management, the
following conclusions were made.
Debtors are forming a large part of current assets.
Analysis was made on assets and liabilities of the company to find out the
gross capital. It was found that the capital in good position and was
constantly increasing.
The liquidity position of the company is very good as revealed by the
current ratio. The companys ability to meet their obligations is high.
Debtors turnover ratio shows decreasing trend and the collection period is
very high.
Inventory levels were showing decreasing trend as less investment is made
in inventories.
Cash levels are showing increasing trend.
Debtors form a major part of current assets.
There is considerable scope of improving capital structure at KPCL by
incorporating much effective policies and practice with regard to capital
management.
The company is performing its operations successfully and its overall
performance is very good.
EWCM/RNG/RSB
Page 87
BIBLIOGRAPHY
1. Financial Management- Prasana Chandra
Tata McGraw-Hill
Published co ltd
6th Edition
2. Financial management- Ravi M Kishore
Taxman Publications
7th Edition
WEBSITES
www.karnataka power.com
www.indianpowersector.com
EWCM/RNG/RSB
Page 88

ANNEXURES
Karnataka Power Corporation Limited
Statement of Profit and Loss for the year ended 31st March 2013
(` in Lakhs)
Particulars
I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
XI.
XII.
XIII.
Revenue From operations

Other income
Total Revenue (I + II)
Expenses:
Cost of materials consumed
Royalty
Operation and Maintenance
Expenses
Employee benefits expenses
Finance costs
Depreciation
and
amortization expenses
Other expenses
Total expenses
Profit before exceptional
and extraordinary items and
tax
(III-IV)
Exceptional items
Profit before extraordinary
items and tax (V - VI)
Extraordinary Items
Prior period Items
Note
No.
22
As at 31st
March 2013
5,42,596
As at 31st
March 2012
5,20,130
23
96743
6,39,339
54,098
5,74,228
24
25
3,83,137
4,224
20,333
3,45,337
5,885
19,725
26
27
28
70,644
88,987
56,618
63,093
77,110
40,442
29
7,213
6,31,156
8,183
6,023
5,57,615
16,613
30
60,8,183
46
555
16,058
31
32
(9043)
17,120
286
(456)
Profit before tax (VII- VIII)

Tax expense:
(1) Current tax
(2) Deferred tax
Profit (Loss) for the period
(VII-VIII)
Earnings per equity share:
33
(1) Basic
EWCM/RNG/RSB
16,228
3,448
13,439
233
3,504
1,254
11,470
0.75
50
Page 89

(2) Diluted
0.75
48
Table 1:
Balance Sheet as on 31st March 2013
(in Lakhs )
Particulars
2
3
Ii
1
Note No.
EQUITY AND LIABILITIES

Shareholders funds
(a) Share capital
1
(b) Reserves and surplus
2
Share application money pending 3
As at 31st As
at
March
31sTMarch
2013
2012
3,12,697
3,57,602
18,000
2,28,197
3,61,026
62,500
4
5
6
7
292019
59456
28,057
23,576
2,86,339
46,017
29,354
23,482
8
9
10
11
7,28,250
93,251
59,495
15,264
19,87,667
5,57,884
57,787
56,754
16,381
17,25,681
Total
ASSETS
Non-current assets
(a) Fixed assets
(i) Tangible assets
12
(ii) Intangible assets
12
(iii) Capital work-in-progress-Tangible 13
6,90,213
24
1,55,365
5,32,938
46
2,47,594
Asset
(b) Non-current investments
(d) Long-term loans and advances
35,365
44,317
34,020
14,191
allotment
Non-current liabilities
(a) Long-term borrowings
(b) Deferred tax liabilities (Net)
(c) Other Long term liabilities
(d) Long-term provisions
Current liabilities
(a) Short-term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions
EWCM/RNG/RSB
14
15
Page 90

2
(e) Other non-current assets

Current assets
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short-term loans and advances
f) Other current assets
16
5,26,334
1,72,298
17
18
19
20
21
53,529
4,26,159
9,237
22,066
25,058
19,87,667
45,411
4,91,302
23,934
22,353
1,41,594
17,25,681
Total
Table:2
(`in Lakhs)
Particulars
Note No.
As at 31st As at 31st
March
March
2012
2011
EQUITY AND LIABILITIES

Shareholders funds
(a) Share capital
228,197
174,326
(b) Reserves and surplus
361,026
352,206
62,500
53,871
Share
application
allotment
Non-current liabilities
money
pending 3
(a) Long-term borrowings
789,639
735,923
(b) Deferred tax liabilities (Net)
46,017
44,764
(c) Other Long term liabilities
29,369
29,370
EWCM/RNG/RSB
Page 91

(d) Long-term provisions
4
23,482
10,000
(a) Short-term borrowings
54,490
50,781
(b) Trade payables
57,787
35,811
(c) Other current liabilities
10
56,793
52,747
(d) Short-term provisions
11
16,381
7,439
1,725,681
1,547,244
Current liabilities
Ii
Total
ASSETS
Non-current assets
(a) Fixed assets
(i) Tangible assets
12
532,937
555,951
(ii) Intangible assets
12
46
53
247,,593
182,875
(iii)
Capital
work-in-progress-Tangible 13
Asset
(b) Non-current investments
14
34,020
33,289
(d) Long-term loans and advances
15
14,191
8,977
(e) Other non-current assets
16
174,655
165,232
(b) Inventories
17
45,411
39,800
(c) Trade receivables
18
491,302
385,001
(d) Cash and cash equivalents
19
23,934
60,595
(e) Short-term loans and advances

f) Other current assets
20
21
21,376
140,216
15,681
99,790
1,725,681
1,547,244
Current assets
Total
EWCM/RNG/RSB
Page 92
Table:3
(Rs '000)
EWCM/RNG/RSB
Page 93
Sl
Particulars
no
31.03.2011
31.03.2010
A STUDY ON CAPITALH STRUCTURE AT CPCL

I
Sources of funds
1.
shareholder's
A
funds:
B
a) share capital
b) reserve & surplus
C
2. load funds
D
a)secured loans
b) unsecured loans
3.
Deferred
tax
liability(Net)
4.Advance
2281968
6
3522064
Application of funds:
1.Fixed assets
a)Gross Block
b) Less: Depreciation
3839429
3552012
2. Investments
3. current assets, loans
balance
B. Loans & Advances
EWCM/RNG/RSB
8
3829963
4781019
4
7381976
3
5
4476393
684213
4136721
-
1469510
1257666
24
76
G
H
& advance
A. current Assets
a) inventories
b) sundry debtors
c) cash & bank I
(A)
8375008
1014042
9142444
81
45803911
5
4313903
in F
progress
2
3037757
2
TOTAL
c) Net Block
d) capital work
Depreciation
II
5804033
8
4535579
against
1743262
8
5560037
0
1836543
4828540
7396580
3
7
2041452
6869992
9
2
3328988
63500
3979990
6380187
3355190
5204198
4660594
0
6948310
78
7384134
6234548
2
3588303
0
3219598
Page 94
7742964
6556507
Table:4
BALANCE SHEETS AS ON 31st MARCH 2009, 2010
(Rs.000)
Sl no
I
II
Particulars
Sources of funds
1. shareholders funds
a) share capital
b) reserve & surplus
2. Load Funds
a)secured loans
b) unsecured loans
3. Deferred Tax Liability (Net)
4.Advance
Against
Depreciation
TOTAL
Application of funds
1.Fixed Assets
a) net block
b) capital work in progress
2. Investments
3. Current Assets, Loans &
Adv
A. current assets
a) inventories
b) sundry debtors
c) cash & bank balance
B. loans & advances
Total (A)
2009-2010
2010-2011
1743.26
3037.75
2281.96
3522.06
3552.01
3829.96
413.67
0
3839.42
4535.57
447.63
68.42
12576.65
14695.06
4828.54
2071.45
6.35
5560.03
1836.54
332.89
335.51
5204.19
694.83
291.95
6526.5
398
6380.18
605.94
358.83
7742.96
4. Current Liability & Provisions

a) current liabilities
b) provisions
Total (B)
792.44
NET CURRENT ASSETS (A- 66.76
859.2
B)
1. miscellaneous
expenditure
EWCM/RNG/RSB
TOTAL
5667.3
3.02
Page 95
12576.66
683.75
94.63
778.38
6964.57
1.04
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PATTERN OF THE CAPITAL STRUCTURE

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Borrowed capital: Borrowed capital comprise the following:

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Net Operating Income

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Feasibility studies / evaluation and the compilation of detailed project reports

Design, Engineering, procurement and construction services

Consultancy on both Thermal and Hydel Power Stations, including handling of

Project Management from project scheduling to preparation of final invoice

Supervision of erection, commissioning and operation of civil, electrical,

Operation and maintenance services,

Rehabilitation of dams in distress

Renovation, modernization and updating of hydro stations

Overall project and performance management.

NTPC Rammam Stage III HEP in West Bengal State,