Capital Structure Analysis of Hero Honda

Capital structure analysis of Hero Honda, for the year 2005 to 2010.

Name – suvin shetty

Reg no-09pg048 sec- A

Submitted toPr of- Dr Janaki Ramudu

Capital structure analysisCapital structure-In finance, capital structure refers to the way a corporation finances its assets through some combination of  •

equity

•

debt

•

hybrid securities

capital structure is most likely used for referring a companys debt equity ratio . A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt . Levered companyA company that uses borrowed money to help finance its assets. Leveraged companies often have more volatile earnings than firms that rely solely on equity financing. Mostly companies having huge capital investment will for levered company. The cost of capital is less compared to unlevered company as they don’t have to share the profit with the shareholders .shareholders expect a high return as a risk premium. Eg-Manufacturing companies raises money for buying machineries.

Unlevered companyA company that takes money from public to raise their capital .unlevered company cost of capital is high and in this case profit has to be shared and the return will be volatile to the lenders i.e. the shareholders .whereas in levered company the rate of interest will be fixed as decided with the lender. Generally a unlevered company has less of capital investment .

For eg-most of the IT sector companies are unlevered as this business does not involve purchase of machinery it is service oriented industry.

Debt equity ratioA measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

Cost of capital-

The cost of capital is the rate of return that capital could be expected to earn in an alternative investment of equivalent risk..

Weighted average cost of capital-

Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt

V=E+D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate

Businesses often discount cash flows at WACC to determine the Net Present Value (NPV) of a project, using the formula:

NPV = Present Value (PV) of the Cash Flows discounted at WACC. Analysis and interpretation (R.S in Cr) year equity

2006 2007 2008 2009 2010 39.94 39.94 39.94 39.94 39.94

Equity The equity in al the 5 years has been the same .that means the company hasn’t issued any fresh issue of stock in 5yrs. Debt

year Total Debt

2006

185.78

2007

165.17

2008

132.00

2009

78.49

2010

66.03

As we can easily see the company is trying to reduces it liability and one of  the intresting finding in hero Honda balance sheet all the debt are unsecured no secured debt it shows that company has a good credit rating and it enjoys good reputation amongst its debtor .here company has no legal obligation to pay first to the debtors during time of liquidation. Inspite of they reducing there debt and keeping there euity same from last 5 years hero handa is been doing considerable investment in assest which can seen in the below graph.

year  Total assests

2006

2,195.11

2007

2,635.23

2008

3,118.24

2009

3,879.24

2010

3,531.05

The investment in asset is not done through raising the capital it means it is using its reserve for purchase of new assets or investment ,use of internal resrerve reduces the burden of paying interest as against loan .

Capital structure of hero Honda motors-

 The company has raised more of debt than equity issue it’s a levered company.

Here we can see every year they have drastically tried to reduce their debt thus trying to make it debt free. The reason for the same is increase in net profit as sales of hero Honda has grown in past years.

Sales turnover 2006 10,097

2007

2008

2009

2010

11,553

12,048

13,553

16,856

Conclusion The company in past years have reduced their debt component keeping the equity same .therefore decreasing the cost of capital and utilizing its profits for expansion.

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