Background of the company

The company celebrates its centenary in 1997. In 1897 a young man named Ardeshir godrej gave up law turned to lock making. Ardeshir went on to make safes and security equipments of the highest order and then stunned the world by creating toilet soap from vegetable oil. His brother Pirojsha godrej carried Ardeshirs dream forward leading godrej towards becoming a vibrant, multi-business enterprise. Pirojsha laid the foundation for the sprawling industrial garden township now called Pirojshanagar in the suburbs of Mumbai. Godrej touches the lives of millions of Indians everyday. To them, it is a symbol of enduring ideals in a changing world. Godrej Malaysia, godrej Singapore and godrej Vietnam are closely held constituents of godrej group, a conglomeration established and operative for over one hundred years with extensive international ramifications and connections the group has a total consolidated turnover of US $ 875 million. Godrej Malaysia, Singapore, and Vietnam are companies that are export oriented and derive a preponderant portion of their revenue from the export of their product range of steel office equipment. Godrej Malaysia, Singapore, and Vietnam have been in existence for nearly 30 years and have been exporting to the following countries. 1. Australia and Newzeland 2. Papua and New guinea 3. Fiji 4. Male and Mauritius 5. Oman, Bahrain, Saudi Arabia, Kuwait, Qatar, UAE & Yemen 6. Tanzania 7. Sweden 8. Bangladesh These companies have developed a reputation in the quality of their product assembly, the adequacy of their service and the proven satisfaction of the end user.

Godrej group:
Godrej Industries Limited Godrej Agrovet Godrej & Boyce Godrej consumer products Godrej hicare Godrej InfoTech Godrej properties Godrej Sara lee Godrej Efacec Geometric limited

Time line:
j 1897 Godrej & Boyce mfg.company established. j 1918 Godrej soaps limited incorporated. j 1961 Godrej started manufacturing forklifts trucks in India. j 1971 Godrej Agrovet limited began as an animal feeds division of godrej soaps. j 1974 Vegetable oil division in India in wadala, Mumbai acquired. j 1990 Godrej properties limited, another subsidiary, established. j 1991 Foods business started. j 1994 Transelektra domestic products acquired. j 1995 Transelektra forged a strategic alliance with Sara lee USA. j 1999 Transelektra renamed Godrej Sara Lee limited. j 2001 Godrej consumer a product was formed as a result of a demerger of Godrej soaps ltd. Godrej Soaps renamed GIL. j 2002 Godrej tea limited setup. j 2003 Entered the BPO solution and service space with Godrej Global Solution limited. j 2004 Godrej hicare limited setup to provide a safe healthy environment to customer by providing professional past management service. j 2004 Godrej Fashion Hair Color (GFHC) was launched in the light of growing fashion-consciousness in India. j 2006 Food business was merged with Godrej Tea & Godrej Tea renamed Godrej Beverages & Foods limited. j 2007 Godrej Beverages & Foods limited formed a JV with the Hershey company of north America & the company was renamed Godrej Hershey Foods & Beverages limited. j 2008 Godrej relaunched itself with new colorful logo & fresh identity music.

Detailed about Godrej Industries Limited

Godrej Industries Limited is Indias leading manufacturer of oleo chemicals & makes more than hundred chemicals for use in over two dozen industries. It also operates business in medical diagnostics and real estate. GIL is a member of the Godrej group, which was established in 1897 and has since grown into a US$1.875 billion conglomerate with a workforce of 18,000. The companys business was originally part of Godrej soaps limited, which had a consumer products division. That division was emerged, and Godrej soaps limited renamed as Godrej Industries Limited, on 1st April, 2001.This led to the formation of two separate corporate entities: 1. Godrej Consumer Product 2. Godrej Industries Limited Godrej Industries Limited has three divisions the chemical, the food division, and the medical division. Besides its three businesses, Godrej Industries also runs four divisions Corporate Finance, Corporate HR, Corporate Audit and Assurance and Research and Development which operate on behalf of the entire Godrej Group. The Chemicals division of Godrej Industries Ltd. is a leading manufacturer of oleo chemicals like fatty acids, glycerin, and fatty alcohols, and surfactants like alpha olefin sulphonate. The chemicals division has a strong distribution network in India and abroad and it caters to a wide range of industries, among them detergents, cosmetics, pharmaceuticals, and plastics. The division has a strong and committed management, and its continuous effort to enhance customer satisfaction levels has resulted in it undertaking a comprehensive e-CRM initiative. The Food division of godrej Industries Limited is leading manufacture and marketer of processed foods and oils. It makes wide range of cooking oils, such as refined sunflower oil; micro-filter groundnut oil refined palmolein and vanaspati and refined blended oil. The company also produces a range of fruit beverages, under the jumpin

and Xsbrand names, as well as Godrej tomato purees. The division has two factories; at Wadala in Mumbai and at Mandideep near Bhopal. The Medical division of Godrej Industries Limited was established in 1992and used to be known as the biotechnology division. It is in the business of distributing equipment and consumable to the medical community. The medical diagnostic division has tie-ups with Becton Dickinson (USA). GIL has built a strong manufacturing base capable of delivering international quality product at competitive price. It operates two parts, one at Valia in Gujarat and second Vikhroli in the suburban Mumbai. The companys products are exported to 40 countries in north & South America, Asia, Europe, Australia, & Africa and it leads the Indias market in production of fatty acid, fatty alcohol, & AOS. (Alpha Olefin Sulphonate). Godrej Industries has a modern, integrated factory at Valia in the Indian state of Gujarat where vegetable oils are converted into fatty acids, glycerin, fatty alcohols, alpha olefins, and alpha olefin sulphonates. The plant has an installed capacity of 30,000 tones per annum for making natural fatty alcohols from feedstock such as palm stearine and palm kernel oil, both renewable vegetable-based raw materials. Godrej Industries Limited, Valia which formally used to be known as Gujarat Godrej Innovative Chemicals Limited (GGICL) was, incorporated in the year 1989? In the year 1994 Godrej Soap Ltd. (GSL) was merged with GGICL and named Godrej Soap Ltd valia. In the year 2001 the chemical business of godrej soaps ltd valia was merged and named as Godrej Industries Limited (GIL). The plant started its operation in 1990. The plant is controlled with Tata Honeywell TDS 3000 distributed controlled system lyric, Germany designs. The plant based on its fatty acid hydrogen process and engineered by Davy power India limited. At GIL valia, vegetable oils are converted in to fatty alcohols and glycerin. Varieties of fatty alcohols are exported to the industry and for industrial application around the world. The grades of fatty alcohols manufactured include lauryl alcohol, stearyl alcohol,

and biphenyl alcohol. There are exported through agents to U.S., European, Asian, Australian, and African countries. The valia plant is ISO 9001-14001 certified. Products from the plant are exported to North and South America, Asia, Europe, Australia and Africa. The Valia plant has a workforce of 350 people. It is ISO 9002 certified and has been Kosher certified for manufacturing fatty alcohols and glycerin.

VISION AND MISSION STATEMENT

 VISION To become a global force in field of oleo-chemicals and surfactants, growing profitability through customize solution and innovation through out the value chain.  MISSION Godrej Industries Limited is in the business of oleo chemicals and surfactants. Our objectives are: y y y To maintain leadership in our business in India. To constantly improve our economic value addition To keep increasing our exports.

The company will achieve these objectives through excellence in areas of: y y y Customer satisfaction Quality Cost reduction

y y y y y y y y y

Corporate value: Commitment to quality Customer orientation Dedication and commitment Discipline Honesty and integrity learning organization Openness and transparency Respect, care and concern for people &Trust

Milestones since inception

Godrej group has won international PI audit sustained performance and received prestigious awards. 1. GIL valia is the first in India to manufacture alcohol from fatty acid. 2. Godrej has received several awards from WWF. 3. Nisarga Mitra Award from rotary. 4. Man of the tree award. 5. Lok shree award for social commitment. 6. India Gandhi paryavaran praskar of the government of India. 7. President K.P.Narayan released a postage sample. 8. In 1995, TQM (Total Quality Maintenance) was launched. 9. In 2003 GIL valia is awarded ISO14001 certificate. This certificate is given for the better environment. 10. Kalzen technology was launched in 1993. 11. TPM (Total Productivity Maintenance) was launched in 2000. 12. The company was awarded best quality circle award of QCFF in oct-2000. 13. In 1996 GIL valia awarded ISO (International Standard Organization) -9002 certificate.

Investment in plant & machinery

Investment in plant & machinery : Rs. 182, 28, 76, 715 Written down value : Rs. 93, 41, 05, 667 Investment in setting up new EOU plant : Gross amount=Rs. 55, 34, 31, 834 Net amount= Rs. 55, 30, 49, 778 Investment in domestic tariff area : Gross amount= Rs. 2, 25, 33, 43, 322 Net amount= Rs. 96, 84, 59, 765 Future expansion plan The year ahead seems to be very interesting and challenging. The world economy curve is on upward moving and hence the outlook for the various product categories of the chemicals division remains positive. 1. The expansions of international markets-coupled with tightness in the supply position of some of the finished product predict well for the business and also open up opportunity for growth in position of markets. 2. Retaining competitiveness in sourcing is major challenging in the coming year. 3. Enhancement of production capacities & improve its supply chain management. EOU being set up at valia would enable enhancement of production capacity. 4. Focus on adding value to some of companys by-product, in order to get niche position in the market. 5. Collaborative research along with a customer value addition to develop a new chemical for the paper industry. 6. Customization of raw material and manufacturing process to suit the needs of a single high volume customer.

Present man power status

Manpower is divided in to two parts: 1. Management staff 2. Non-management staff Classification of management staff:  Vice president  Deputy general manager  Assistant manager & executive Classification of non management staff:  S1= senior assistant/senior operator/senior technician  S2= assistant/plant operator/technician  S3= junior assistant/junior plant operator/junior technician  W1= skilled workman  W2= unskilled workman  W3= trainee operator/chemist/workman Manpower status as on June 1, 2009 Category Management staff Non management staff Total Number of employees 106 321 427

MAN POWER STATUS

SR.NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 TOTAL

DEPARTMENT EVP-valia fact. Production Boiler Utility Civil Electrical Instrumentation Mechanical Quality control Purchase Logistic. & excise Stores Accounts P&A ISD Security Safety Task force -

MGMT. STAFF 1 41 0 0 1 5 7 14 12 2 5 2 4 3 1 1 4 3 106

NON MGMT.STAFF 0 125 14 7 2 25 14 40 36 3 23 3 2 2 1 12 12 0 321

TOTAL 1 166 14 7 3 30 21 54 48 5 28 5 6 5 2 13 16 3 427

ORGANISATIONAL STRUCTURE:

Types of communication channel

Communication is a core of information in GIL following are the major channels of communication 1. Vertical channel: vertical channel of communication in GIL is used to pass instruction orders and message from both top to bottom and bottom to top level. Thus both upward &downward channels are active. 2. Horizontal channel: horizontal channel is used to pass the information at the same level.

Modes of communication used

j Meetings j Internet (mail) j Telephone j Circulars GIL follows open door policy for communication i.e. employees are free to present their views suggestions and queries before superior.

Present product mix

Fatty acid Fatty alcohol Alpha olefin sulphonate Stearic acid Glycerin

Competitive scenario
There are no regional competitors of the company. In India AGIES company is only the competitor. In global market the companies like HENKEL, PROCTOR & GSMBLE, SALIM, KAO, and KOGNIS. The global market share of the company is 2% for solid AOS the market share in the world are 16%.

Overall organizational culture

Organization is a group of individual coming to gather with a view to fulfillment of common objectives of organization. All employees of godrej group share common values. GIL believes that excellence is not produced by machines but by people. Employee grievance is zero here at GIL. It is an achievement of the company. Organization is continuously working on improvement of human skills and empowerment of employees. The organizations framework is designed in such a way that it can train people quickly and effectively. It helps to empower them to take bold and independent decisions.

Strategies for the future growth, development & Benchmarking

Strategic planning to develop new product Value addition in the product Forward integration i.e. going a step more value for the finished goods Up gradation of skill of the employees

The benchmarking of the company includes getting a notable place in the world market.

Important statistical information

159.24 144 160 140 120 100 80 60 40 20 0 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 net profit 54.9 89.6 121.3

FY 2007-08 consolidated Net Profit Increaes by 11% from 144 crore to 159.2 crore

1200 1000 800 600 400 200 0 FY 03-04 FY 04-05 FY 05-06 FY 06-07 562.7 489.6 953.2

1102.6

699.7

FY 07-08

FY 2007-08 consolidated Sales Revenue Improve by 16% from 951.5 cr to 1102.6 cr.

Departmental structure

Mr. Jitendra (Manager)

Mr. R.S.Gavi (Executive-DTA)

Mr. P.R.Shah (Executive-EOU)

Mrs. Sathe (Assistant)

Mr. M.S.Shah (Assistant)

Mr. M.D.Pandya (Assistant)

Budgetary control system

The budget is prepared for the year. Budget is prepared based on sales and marketing plan. Based on this plan, production plant is prepared with respect to capacity in quantity mutually by the marketing (HO) & Production (Valia). The budged prepared is volume based budged. Taking into account these plans, budget expense are estimated which includes following items. Administration expenses Salary Repair & Maintenance etc. This budget then estimated the cost of production.

Budget manually
The capital budget id prepared here at GIL, Valia. It deals with the proposed expenses, Which will be incurred during the year.

Budget period
Budget period is the period for which budget is prepared. Here at Godrej Industries Ltd. budget are prepared for finical year I. e. 1st April to 31st March

Budget center
Budget centers are either department wise here, in GIL is taken as department-wise. The company considers each department as its cost center and accordingly prepares the final budget. Here the finance department has separated the budget centers in to production and services centers.

Accounting method / system

The financial statement are prepared ones the historical cost convection, on the accrual basis of accounting principles (GAAP) in India and the accounting standards issued by the institute of chartered accounts of India.

Costing of the product

The particular product passes through many sections for getting the final product. The cost of each section-fixed cost and variable cost is calculated and added. The total cost of all section is added then to the cost of raw materials. Cost is valued as under. Finished product : At lower cost or Market Value Work in process : At cost.

Responsibility account &responsibility centers

The company has considered responsibility center to the cozen to the plant as a profit center. In GIL the output of the raw material are transferred to one section to another so this is the process industry and the profit are taking in to the market price, such transfer will gave some profit to the responsibility centers.

Long term fund sources:

GIL, Valia uses the long term finance sources like. A) Share capital as the sources of 6, 17, 10,218 equity shares of Rs. 6 each fully paid. B) Reserves and surplus funds securities account, capital investment, subsidy reserve, general reserves. C) Secured loans as the term loans from financial institutes term loans from banks, overdraft, sales tax department loan from MPSIDC.

Short term finance sources:

GIL, Valia uses the short term finance like, A) Safe deposits account for taking amount more than the deposited. B) Unsecured loans as fixed deposits, inner corporate deposits, short term loans from banks.

Other information about the sources of finance.

1) Choosing the proper types of finance. 2) Adjustment of quantum of funds raised. 3) Procedure for the raising finance. All are managed by the H. O. Mumbai branch of GIL

Working capital management

Working capital management refers to the management of current asset such that the firm has a greater degree of flexibility in managing current assets. Working capital has two main concept that is gross working capital and net working capital the earlier refers to the total investment in current assets and later is the difference current asset and current liabilities. To manage current assets means to have current assets in such a proportion that is lead profitable to the firm. The main objective of working capital is to manage the current assets of the firm for smooth running of firm that is managing day to day requirements.

Operating cycle
the GIL operating cycle fluctuate into the duration of 45 to 55 days.

Estimation of working capital requirement

The estimation of working capital is not done in same systematic procedure. As and when the requirement arises it is conveyed to the head office at Mumbai.

Working capital include three major aspects

Cash management Receiver management Inventory management here a deep study of working capital management done by the GIL which has been leading to smooth running and increasing profit of the company.

Cash management
Cash is important current asset for the operation of the business. Cash is basic input needed to keep the business running on the continuous basis. it is the ultimate output expected to be release by selling the service or product manufacture by firm. The firm should keep sufficient cash neither more nor less. Cash shortage will disrupt the firms manufacturing operation why excessive cash will simple remains idle, without contributing anything towards the firm profitability. Cash Planning Optimum Cash Level Managing the Cash Investing Surplus Cash

Cash Planning:
A firm needs cash to invest in inventories receivable and fixed assets and to make payment for operating expenses in order to maintain growth and earnings. Cash planning at GIL is required to cash planning as they have enough cash as and when required. They have their slaves on cash term as well as credit terms and no problems of cash shortage.

Cash Budget:
GIL to individual prepare cash budget Cash management is done by finance and accounts department and excess is keep with bank.

Budget includes :
Receipts Payments Control issues Advance payment Salary advance Tour advance Salary disbursement Purchase bill passing Branch transfer from vikhroli Brokerage payment Capital goods payment Service / job work / related payments This budget is sent to the head office Mumbai and then the head office approve for the fund to the Valia company. the Valia GIL is also having the safe account which allows them to take the any kind of required amount which let company and check does not bounds inspect of the company have less balance at HDFC.

Cash inflow & cash outflow

The cash inflow are mostly meet by the Mumbai branch providing the fund for meeting all expenses so almost there is no need to manage case inflow. Cash outflow are given as per the requirement occurs.

Remaining cash investment

Remaining Cash investment is no need to control because company does not invest surplus money. They just deposit their money with HDFC Bank.

Taxes
Type of taxes
The company has to pay following types of taxes : Tax on salary of employees Tax on payment made by GIL Tax in received by GIL Sales Tax Income Tax

Rate of taxes
TDS on salary is deducted at 2% surcharge and the common charges is 2% TDS income received by GIL is deduced at 2% other compliances are done by finance department at Mumbai.

Income tax
Income Rate 1 to 150000 10 % 150001 to 250000 20 % 250001 to 1000000 30 %

Time of payment
The payment of the salary is paid before 7th of next month.

Financial incentives given by government

The company has got tax exemption of rupees 88 core or till the year 2005.

Financial
Basically the MIS is prepared for the findings of the difference between monthly budget and actual budget which is generated by the vouchers, purchase order bills, case register prepared on system and it is thus reported to the HOD though computer system.

Computer software used o assist in financial management

The software used for assisting financial management in GIL in manufacturing is developed by QAD Inc. of USA, Basically the MGF_PRO is used as computer software.

RESEARCH OBJECTIVE
 Primary objective:   To examine effectiveness of capital structure with help of net income approach & traditional approach. To identify the effect of debt & equity on the value of the firm

 Secondary objective:  The theory is helpful or not in practical life.

RESEARCH DESIGN:  It is the type of descriptive because the topic & the purpose are decided well in advanced.

SOURCES:  Secondary Data: - The data which have been already collected & comprised for another Purpose.  The secondary data provide a starting point for research and offer advantage of low cost and ready availability.  Annual reports, Charts, management information systems, various books, and internet are sources of secondary data.

DATA COLLECTION METHOD:  Sampling Method has been used for gathering Secondary data.

DATA COLLECTION TOOLS:  To make this research study successful internet Tables & charts are used as data collection tools. TYPE OF STUDY  The type study is sample study because I take past five year data from the balance sheet.

SAMPLING  SAMPLING SIZE: There are Last five years balance sheets samples are used as sample size  SAMPLING UNIT: LTD, valia.  SAMPLING METHOD: In this study Probability sampling method has been used. LIMITATIONS The research is conducted on the Godrej industry

y y

This study is conducted within a short period. The study is limited 4 years from 2005 to 2009 performance of the company. The data used in this study have been taken from published annual report only.

PROJECT PERIOD  Project period of the study is 2 months.

An introduction to capital structure

MEANING: Capital structure of a firm is a reflection of the overall investment and financing strategy of the firm. Capital structure can be of various kinds as described below:
y y Horizontal capital structure: the firm has zero debt component in the structure mix. Expansion of the firm takes through equity or retained earnings only. Vertical capital structure: the base of the structure is formed by a small amount of equity share capital. This base serves as the Foundation on which the super structure of preference shares Capital and debt is built. Pyramid shaped capital structure: this has a large proportion Consisting of equity capital; and retained earnings. Inverted pyramid shaped capital structure: this has a small component of equity capital, reasonable level of retained earnings but an ever-increasing component of debt.

y y

PLANNING AND DESIGNING OF CAPITAL STRUCTURE: - Attributes of a well planned capital structure - Designing a capital structure - Design should be functional - Design should be flexible - Design should be confirming statutory guidelines DETERMINANTS OF CAPITAL STRUCTURE: - Minimization of risk - Maximization of profit - Nature of the project - Control of the firm COST OF CAPITAL: Factors determining cost of capital: - General economic conditions: fluctuations in interest rates occur as a result of changes in the demand supply equilibrium of ingestible funds. - Risk profile of the project: a project considered risky would attract capital at a higher cost than a project in the same industry having lesser risk. COST OF DEBT: - Concerned essentially with the long-term debt of the firm. - The long-term debt has been used to finance long-term projects. - We denote cost of debt by the symbol k (d). It is calculated in different ways

depending upon whether the debt is a rolling or a term debt redeemable at the expiry of the term.

Cost of preference share capital : - The preference dividend is akin to the interest payment and redemption of
Preference capital is equivalent to redemption of debt. - Its inclusion in the share capital component is primarily done to bring down The borrowings of the firm in the balance sheet. - Cost of preference share capital is arrived at by equating the aggregate of Present value of the periodic dividend payments and the redemption amount

Features of An Appropriate Capital Structure

y y y y y y y y capital structure is that capital structure at that level of debt equity proportion where the market value per share is maximum and the cost of capital is minimum. Appropriate capital structure should have the following features Profitability / Return Solvency / Risk Flexibility Conservation / Capacity Control

Determinants of Capital Structure

y y y y y y y y y y y y Seasonal Variations Tax benefit of Debt Flexibility Control Industry Leverage Ratios Agency Costs Industry Life Cycle Degree of Competition Company Characteristics Requirements of Investors Timing of Public Issue Legal Requirements

Patterns / Forms of Capital Structure

y y y Following are the forms of capital structure: Complete equity share capital; Different proportions of equity and preference share capital;

y y

Different proportions of equity and debenture (debt) capital and Different proportions of equity, preference and debenture (debt) capital.

Assumption of Capital Structure Theories

There are only two sources of funds i.e.: debt and equity.
y y y y y y y y y y The total assets of the company are given and do no change. The total financing remains constant. The firm can change the degree of leverage either by selling the shares and retiring debt or by issuing debt and redeeming equity. Operating profits (EBIT) are not expected to grow. All the investors are assumed to have the same expectation about the future profits. Business risk is constant over time and assumed to be independent of its capital structure and financial risk. Corporate tax does not exit. The company has infinite life. Dividend payout ratio = 100%

Net Income (NI) Approach

y The essence of net income approach suggested by Durand is that when there is a change in capital structure, there takes place a change in overall cost of capital & total value of the firm. y To be more precise, if financial leverage is increased by raising the ratio of debt to equity, there will be a decrease in weighted average cost of capital and increase in the market value of its shares. y Conversely, if financial leverage is reduced by lowering the ratio of debt to equity there will be an increase in weighted average cost of capital and decrease in the market value of its shares.

ASSUMPTIONS OF NET INCOME APPROACH

 There are no taxes on companies.  The cost of debt is less than the cost of equity.  A change in the ratio of debts to equity does not affect the degree of risk that the investors bear

LIMITATION OF NET INCOME APPROACH

 The assumption that rate of interest on debentures will remain constant is also not realistic.  Their basic assumptions are not realistic. With the increase of leverage in its capital structure, its risk increases & equity shareholders expect higher return that is, cost of its equity capital (Ke) increase.

TRADITIONAL APPROACH
In traditional approach, if we change in capital structure of the firm are affect to overall value of the firm and equity capitalization rate. If we decrease debt(D) in capital structure of the firm at that time market value of the firm is decrease and also decrease in capitalization rate of equity(ke). If we increase debt (D) in capital structure of the firm at that time market value of the firm decrease and also increase equity capitalization rate(Ke)

ASSUMPTION OF TRADITIONAL APPROCH

 An optimum capital structure exists.  Market value of the firm can be reduce through a prudent manipulation of leverage.  The cost of debt capital increases if debt (or degree of leverage) is increased beyond a definite limit. This is because the greater the risk of business, the higher the rate of interest the creditors would ask for the rate of equity capitalization will also increase with it, thus there remains no benefit of leverage when debts are increased beyond a certain limit the cost of capital also goes up.  Thus ,at a definite level of mixture of debts to equity capital , average cost of capital also increased the capital structure is optimum at this level of the mix of debt to equity capital The effect of change in capital structure on the overall cost of capital can be divided in to three stages as followes:

First stage:
In the first stage the overall cost of capital falls and the value of the firm increased with the increase in leverage. Thus, the leverage has beneficial effect as debts are less expensive. The cost of equity remains constant or increase negligibility. The proprietors of the risk are less in such a firm.

Second stage:
A stage is reached when increase in leverage has no effect on the value, or the cost of capital of the firm. Neither the cost of capital falls nor the value of the firm rises, this is because the increase in the cost of equity due to the added financial risk offthe advantage of low cost of debt. This is the stage where in the value of the firm is maximum and cost of capital is minimum.

 Third stage: Beyond a definite limit of leverage, the cost of capital increasewith leverage and the value od the firm decrease with leverage, this is because, with the increase In debt, investors begin to realize the degree of financial risk hence they desire to earn a higher rate of return on equity shares. The resultant increase in equity capitalization rate will more than offset the advantage of low cost debt.

0
Degree of leverage X-Axis= degree of leverage. Y-axis = cost of capital.

Ke= cost of equity. Kd =cost of debt.

Net Income (NI) Approach

Particulars
PBDIT LESS: Interest PBDT LESS: Depreciation PBT LESS: TAX PAT (NI) Ke (cots of equity) S = NI/Ke Debt (D) V Ko= EBIT/V
70000.00% 60000.00% 50000.00% 40000.00% 30000.00% 20000.00% 10000.00% 0.00%

2005
113.99 17.45 96.54 21.48 75.06 -0.69 75.77 22.18% 341.61 256.33 597.94 0.1906

2006
133.07 24.31 108.76 22.59 86.17 14.99 71.12 27.73 256.47 327.14 583.61 0.228
694.2

2007
143.79 39.02 104.77 24.26 80.51 2.23 72.33 34.14 226.51 467.69 694.2 0.2071

2008
173.79 38.28 135.59 25.47 110.04 2.22 106.49 46.76 227.74 435.67 663.41 0.262

2009
101.74 88.5 43.23 26.46 16.17 -2.83 18.68 46.77 39.94 600.96 640.9 0.1587

597.94

663.41 583.61 467.69 435.67

640.9 600.96

341.61

Ke (cots of equity) S = NI/Ke

327.14 256.33 256.47 226.51 227.74 46.77 46.76 39.94

Debt (D) Ko= EBIT/V V

22.18% 27.73 2005

34.14

2006

2007

2008

2009

Interpretation
Capital structure or leverage affects the overall value of the firm Change in the leverage is affected the change in overall cost of capital and Change in value of the firm, which change in price of equity and vice-versa. 2005 If we raise funds through debt in Rs 256.33 crore at that time the value of the firm is Rs. in crore 597.94 and equity capitalization rate is 22.18%. 2006 If we raise funds through debt in Rs 327.14 crore at that time the value of the firm is Rs .in crore 583.61 and equity capitalization rate is 27.73%. 2007 If we raise funds through debt in Rs 467.69 crore at that time the value of the firm is Rs. in crore 694.2 and equity capitalization rate is 34.14%. 2008 If we raise funds through debt in Rs 435.67 crore at that time the value of the firm is Rs. in crore 663.41 and equity capitalization rate is 46.76%. 2009 If we raise funds through debt in Rs600.96 crore at that time the value of the firm is Rs. in crore 640.9 and equity capitalization rate is 46.77%.

TRADITIONAL APPROACH
In traditional approach, if we change in capital structure of the firm are affect to overall value of the firm and equity capitalization rate. If we decrease debt (D) in capital structure of the firm at that time market value of the firm is decrease and also decreases in capitalization rate of equity (ke). If we increase debt (D) in capital structure of the firm at that time market value of the firm decrease and also increase equity capitalization rate(Ke) Note: I assume debt(D),capitalization rate of equity(ke),and interest rate of debt approximately For prove the traditional approach in 2005 to 2009 respectively, in which middle column of the calculation table of the 2005 to 2009 respectively is in real term happened.

2005
Particulars
PBDIT LESS: Interest PBDT LESS:Depreciation PBT LESS: TAX PAT (NI) Ke S = NI/Ke Debt (D) V Ko= EBIT/V

0% Debt
113.99 0 113.99 21.48 92.51 -0.69 93.2 20% 466 0 466 24.46%

6.8% Debt
113.99 17.45 96.54 21.48 75.06 -0.69 75.77 22.18% 341.61 256.33 597.94 19.06%

12% Debt
113.99 37.2 76.79 21.48 55.31 -0.69 56 25% 224 310 534 21.35%

2005
600 500 400 300 200 100 0 -100 PBDIT LESS: PBDT LESS: PBT LESS: PAT Intere Depr TAX (NI) st eciati on 113.9 0 113.9 21.48 92.51 -0.69 93.2 56 Ke S = Debt NI/Ke (D) V Ko= EBIT/ V

0% Debt

20% 25%

466 224

0 310

466 24.46 534 21.35

6.8% Debt 113.9 17.45 96.54 21.48 75.06 -0.69 75.77 22.18 341.6 256.3 597.9 19.06 12% Debt 113.9 37.2 76.79 21.48 55.31 -0.69

Interpretation
If I create unleveraged firm through eliminating the debt by the firm at that time overall value of the firm is decrease from 597.94 (In Rs.crore) to 466(In Rs.crore).and equity capitalization rate is also decrease from 22.18% to 20% while increase in debt from256.33(In Rs.crore).to 310(In Rs.crore).at that time decrease in total market value of the firm(v) from 597.94(In Rs.crore) to 534(In Rs.crore) and also increase capitalization rate of equity(ke) from 22.18% to 25%.

2006
Particulars PBDIT LESS: Interest PBDT LESS: Depreciation PBT LESS: TAX PAT (NI) Ke S = NI/Ke Debt (D) V Ko= EBIT/V 0% Debt 133.07 0 133.07 22.59 110.48 14.99 95.49 20% 477.45 0 477.45 27.87% 7.4% Debt 133.07 24.31 108.76 22.59 86.17 14.99 71.18 27.73% 256.68 327.14 583.82 22.79% 12% Debt 133.07 44.4 88.67 22.59 66.08 14.99 51.09 33% 154.82 370 524.82 25.36%

2006
600 500 400 300 200 100 0 PBDIT LESS: PBDT LESS: PBT LESS: PAT Ke S = Debt V Ko= Inter Depr TAX (NI) NI/Ke (D) EBIT/ est eciati V on 133.0 0 133.0 22.59 110.4 14.99 95.49 20% 477.4 0 477.4 27.87

0% Debt

7.4% Debt 133.0 24.31 108.7 22.59 86.17 14.99 71.18 27.73 256.6 327.1 583.8 22.79 12% Debt 133.0 44.4 88.67 22.59 66.08 14.99 51.09 33% 154.8 370 524.8 25.36

Interpretation
If I create unleveraged firm through eliminating the debt by the firm at that time overall value of the firm is decrease from 583.82 (In Rs.crore) to 477.45 (In Rs.crore).and equity capitalization rate is also decrease from 27.73% to 20% while increase in debt from327.14(In Rs.crore).to 370 (In Rs.crore).at that time decrease in total market value of the firm(v) from 583.8(In Rs.crore) to 477.4 (In Rs.crore) and also increase capitalization rate of equity(ke) from 22.73 % to 33 %.

2007
Particulars PBDIT LESS: Interest PBDT LESS:Depreciation PBT LESS: TAX PAT (NI) Ke S = NI/Ke Debt (D) V Ko= EBIT/V 0% Debt 8.3% Debt 12 %debt 143.79 143.79 143.79 0 39.02 60 143.79 104.77 83.79 24.26 24.26 24.26 119.53 80.51 59.53 2.23 2.23 2.23 117.3 72.33 57.3 30% 34.14% 38% 391 226.51 150.79 0 467.69 500 391 694.2 650.79 36.77% 20.71% 22.09%

2007
700 600 500 400 300 200 100 0 PBDIT LESS: PBDT LESS: PBT LESS: PAT Ke S = Debt Inter Depr TAX (NI) NI/Ke (D) est eciati on 143.7 0 143.7 24.26 119.5 2.23 117.3 30% 391 0 60 83.79 24.26 59.53 2.23 57.3 V Ko= EBIT/ V

0% Debt

391 36.77

8.3% Debt 143.7 39.02 104.7 24.26 80.51 2.23 72.33 34.14 226.5 467.6 694.2 20.71 12 %debt 143.7 38% 150.7 500 650.7 22.09

Interpretation
If I create unleveraged firm through eliminating the debt by the firm at that time overall value of the firm is decrease from 694.2 (In Rs.crore) to 391 (In Rs.crore).and equity capitalization rate is also decrease from 34.14% to 30% while increase in debt from 467.6(In Rs.crore).to 500 (In Rs.crore).at that time decrease in total market value of the firm(v) from 694.2(In Rs.crore) to 650.7 (In Rs.crore) and also increase capitalization rate of equity(ke) from 34.14 % to 38 %.

2008
Particulars PBDIT LESS: Interest PBDT LESS:Depreciation PBT LESS: TAX PAT (NI) Ke S = NI/Ke Debt (D) V Ko= EBIT/V 0% Debt 8.8% Debt 12% Debt 173.79 173.79 0 38.28 173.79 135.59 25.47 25.47 148.32 110.04 2.22 2.22 146.1 106.49 38% 46.76% 384.47 227.74 0 435.67 384.47 663.41 45.20% 26.20% 173.79 60 113.79 25.47 88.32 2.22 86.1 55% 156.55 500 656.55 26.47%

2008
700 600 500 400 300 200 100 0 PBDIT LESS: PBDT LESS: PBT LESS: PAT Ke S = Debt V Ko= Intere Depre TAX (NI) NI/Ke (D) EBIT/ st ciatio V n 173.7 0 173.7 25.47 148.3 2.22 146.1 38% 384.4 0 384.4 45.20 60 113.7 25.47 88.32 2.22 86.1 55% 156.5 500 656.5 26.47

0% Debt

8.8% Debt 173.7 38.28 135.5 25.47 110.0 2.22 106.4 46.76 227.7 435.6 663.4 26.20 12% Debt 173.7

Interpretation
If I create unleveraged firm through eliminating the debt by the firm at that time overall value of the firm is decrease from 663.4 (In Rs.crore) to 384.4 (In Rs.crore).and equity capitalization rate is also decrease from 46,76% to 38% while increase in debt from 435.6(In Rs.crore).to 500 (In Rs.crore).at that time decrease in total market value of the firm(v) from 663.4(In Rs.crore) to 656.5 (In Rs.crore) and also increase capitalization rate of equity(ke) from 46.76 % to 55 %.

2009
Particulars PBDIT LESS: Interest PBDT LESS:Depreciation PBT LESS: TAX PAT (NI) Ke S = NI/Ke Debt (D) V Ko= EBIT/V 0% Debt 101.74 0 101.74 26.46 75.28 -2.83 78.11 38% 205.55 0 205.55 49.50% 9.7% Debt 101.74 88.5 43.23 26.46 16.17 -2.83 18.68 46.77% 39.94 600.96 640.9 15.87% 12% Debt 101.74 78 23.74 26.46 -2.72 -2.83 0.11 55% 0.2 650 650.2 15.65%

2009
700 600 500 400 300 200 100 0 -100 PBDIT LESS: PBDT LESS: PBT LESS: PAT Ke S = Debt V Ko= Intere Depre TAX (NI) NI/Ke (D) EBIT/ st ciatio V n 101.7 0 101.7 26.46 75.28 -2.83 78.11 38% 205.5 0 205.5 49.50 78 23.74 26.46 -2.72 -2.83 0.11 55% 0.2 650 650.2 15.65

0% Debt

9.7% Debt 101.7 88.5 43.23 26.46 16.17 -2.83 18.68 46.77 39.94 600.9 640.9 15.87 12% Debt 101.7

Interpretation
If I create unleveraged firm through eliminating the debt by the firm at that time overall value of the firm is decrease from 640.9 (In Rs.crore) to 205.5 (In Rs.crore).and equity capitalization rate is also decrease from 46,77% to 38% while increase in debt from 600.9(In Rs.crore).to 650 (In Rs.crore).at that time increase in total market value of the firm(v) from 640.9(In Rs.crore) to 650.2 (In Rs.crore) and also increase capitalization rate of equity(ke) from 46.76 % to 55 %.

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Balance Sheet of Godrej Industries ltd.

Rs in crore

Sources Of Funds
Total Share Capital cost of equity capital (Ke) Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans cost of debt (Kd) Total Debt Total Liabilities

Mar '05
29.19 22.18 29.19 0 0 275.86 30.32 335.37 220.76 35.57 6.8 256.33 591.7

Mar '06
29.19 27.73 29.19 0 0 319.25 22.91 371.35 249.11 78.03 7.4 327.14 698.49

Mar '07
29.19 34.14 29.19 0 0 363.17 18.26 410.62 330.92 136.77 8.3 467.69 878.31

Mar '08
31.98 46.76 31.98 0 0 1,009.73 16.71 1,058.42 249.48 186.19 8.8 435.67 1,494.09

Mar '09
31.98 46.77 31.98 0 0 981.05 14.1 1,027.13 232.82 368.14 9.1 600.96 1,628.09

Application Of Funds
Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs)

Mar '05
497.29 261.92 235.37 15.63 335.77 107.52 86.04 6.41 199.97 54.73 7.37 262.07 0 208.93 49.48 258.41 3.66 1.26 591.69 143.35 62.71

Mar '06
536.4 255.68 280.72 5.22 371.35 118.92 58.07 4.06 181.05 84.79 8.54 274.38 0 203.34 52.02 255.36 19.02 22.19 698.5 91.25 71.63

Mar '07
542.58 273.03 269.55 17.49 485.67 155.15 92.53 5.29 252.97 111.23 20.08 384.28 0 228.26 66.44 294.7 89.58 16.02 878.31 111.03 13.44

Mar '08
558.22 291.74 266.48 4.94 775.48 197.71 156.4 3.11 357.22 167.35 291.18 815.75 0 293.72 85.53 379.25 436.5 10.68 1,494.08 124.54 32.58

Mar '09
578.55 314.68 263.87 24.84 1,148.08 93.56 161 2.42 256.98 167.6 26.1 450.68 0 185.28 77.95 263.23 187.45 3.86 1,628.10 106.28 31.68

Profit & Loss account of Godrej Industries Income

Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalized Total Expenses

Mar '05 (Rs.in crore)

Mar '06 Rs. in crore)

Mar '07 Rs. in crore)

Mar '08 Rs. in crore)

Mar '09 Rs. in crore)

821.99 58.13 763.86 37.98 8.82 810.66 516.09 35.7 68.72 16.57 48.81 16.56 -5.78 696.67 Mar '05 76.01

800.54 57.91 742.63 82.38 11.96 836.97 508.61 41.65 67.35 9.63 60.25 21.79 -5.38 703.9 Mar '06 50.69 133.07 24.31 108.76 22.59 0 86.17 -0.08 86.09 14.99 71.12 195.28 0 24.32 3.41

714.26 58.87 655.39 120.85 28.78 805.02 472.03 49.63 62.66 7.43 54.2 22.01 -6.73 661.23 Mar '07 22.94 143.79 39.02 104.77 24.26 0 80.51 -0.22 80.29 2.23 77.33 189.2 0 29.19 4.96

796.02 71.37 724.65 91.76 -5.4 811.01 403.95 58.69 79.58 7.58 69.88 25.03 -7.49 637.22 Mar '08 82.03 173.79 38.28 135.51 25.47 0 110.04 1 111.04 2.22 106.49 233.28 0 39.97 6.79

873.47 61.53 811.94 131.25 -22.54 920.65 555.22 68.2 82.93 9.95 82.94 25.93 -6.26 818.91 Mar '09 -29.51 101.74 58.51 43.23 26.46 0 16.77 -1.51 15.26 -2.83 18.68 263.71 0 39.97 6.79

Operating Profit
PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualized) 113.99 17.45 96.54 21.48 0 75.06 0.02 75.08 -0.69 75.77 180.58 0 19.46 2.73

Shares in issue (laths) Earnings Per Share (Rs) Equity Dividend (%) Book Value (Rs)

486.42 15.58 66.66 62.71

486.42 14.62 83.33 71.63

2,918.52 2.65 100 13.44

3,197.59 3.33 125 32.58

3,197.59 0.58 125 31.68

Mar '05 Cash Flow of Godrej Industries Particular Net Profit Before Tax Net Cash From Operating Activities Net Cash (used in)/from Investing Activities Net Cash (used in)/from Financing Activities Net (decrease)/increase In Cash and Cash Equivalents Opening Cash & Cash Equivalents Closing Cash & Cash Equivalents

Mar '06

Mar '07

Mar '08

Mar '09

12 Months 75.06 46 -40.61 2.8 8.2 5.58 13.78

12 Months 55.13 15.29 -33.06 18.99 1.21 11.38 12.6

12 Months 79.56 -8.99 -51.52 73.28 12.77 12.6 25.36

12 Months 107.72 50.3 -262.61 481.24 268.93 25.36 294.29

12 Months 16.5 44.5 -367.59 57.32 -265.78 294.29 28.51

Key Financial Ratios of Godrej Industries Investment Valuation Ratios Face Value Dividend Per Share Operating Profit Per Share (Rs) Net Operating Profit Per Share (Rs) Free Reserves Per Share (Rs) Bonus in Equity Capital Profitability Ratios Operating Profit Margin(%) Profit Before Interest And Tax Margin(%) Gross Profit Margin(%) Cash Profit Margin(%) Adjusted Cash Margin(%) Net Profit Margin(%) Adjusted Net Profit Margin(%) Return On Capital Employed(%) Return On Net Worth(%) Adjusted Return on Net Worth(%) Return on Assets Excluding Revaluations Return on Assets Including Revaluations Return on Long Term Funds(%) Liquidity And Solvency Ratios Current Ratio Quick Ratio Debt Equity Ratio Long Term Debt Equity Ratio Debt Coverage Ratios Interest Cover Total Debt to Owners Fund Financial Charges Coverage Ratio Financial Charges Coverage Ratio Post Tax Management Efficiency Ratios Inventory Turnover Ratio Debtors Turnover Ratio Investments Turnover Ratio Fixed Assets Turnover Ratio Total Assets Turnover Ratio Asset Turnover Ratio Average Raw Material Holding Average Finished Goods Held Number of Days In Working Capital

Mar '05

Mar '06

Mar '07

Mar '08

Mar '09

6 6 1 4 5 1 15.63 10.42 0.79 157.04 152.67 22.46 49.98 54.59 10.82 32.79 32.79 32.79 9.95 6.9 11.13 12.31 10.81 9.59 8.09 14.37 24.84 21.04 8.91 9.24 15.79 0.81 0.55 0.84 0.68 5.67 0.84 5.86 6.57 7.35 9.73 8.04 3.56 1.38 1.56 46.76 20.24 1.72 6.82 3.49 3.62 -0.18 3.78 -0.2 5.73 6.9 5.73 6.9 9.16 10.68 9.16 10.68 9.05 7.78 21.8 20.54 6.71 6.82 7.46 6.59 7.64 6.7 10.15 9.88 0.8 0.58 0.94 0.73 3 0.94 3.45 4.86 0.72 0.75 1.19 0.73 1.95 1.19 2.34 3.6

1 1.25 2.57 22.66 30.26 29.93 11.31 7.43 7.8 10.12 10.12 14 14 6.22 10.32 4.99 5.68 5.74 7.43 1.18 1.6 0.42 0.19 2.73 0.42 3.07 4.45

1 1.25 -0.92 25.39 29.58 29.93 -3.63 -6.29 -6.89 -0.8 -0.8 2.09 2.09 1.36 1.85 -3.33 0.99 1 1.75 0.67 1.31 0.59 0.24 0.44 0.59 0.83 1.77 10.89 5.12 10.89 1.44 0.51 1.44 17.99 11.7 83.11

7.46 5.05 4.39 10.31 8.7 5.82 7.46 5.05 4.39 1.4 1.24 1.33 1.11 0.77 0.5 1.4 1.24 1.33 52.05 56.38 106.56 17.89 18.8 18.9 9.22 49.2 216.85

Profit & Loss Account Ratios Material Cost Composition Imported Composition of Raw Materials Consumed Selling Distribution Cost Composition Expenses as Composition of Total Sales Cash Flow Indicator Ratios Dividend Payout Ratio Net Profit Dividend Payout Ratio Cash Profit Earning Retention Ratio Cash Earning Retention Ratio AdjustedCash Flow Times

67.56 63.13 4.21 20.12 29.27 22.81 65.31 74.03 3 Mar '05 15.58 62.71

68.48 72.02 64.89 47.85 5.6 6.08 20.39 34.02 38.99 44.15 29.59 33.6 -26.63 32.91 37.68 31.65 7.35 9.36 Mar Mar '06 '07 14.62 2.65 71.63 13.44

55.74 72.21 6.77 41.71 43.91 35.43 9.25 39.27 5.66 Mar '08 3.33 32.58

68.38 62.91 7.02 39.89 250.36 103.59 238.89 -2.11 13.12 Mar '09 0.58 31.68

Earnings Per Share Book Value

CAPITAL STRUCTURE OF GODREJ INDUSTRY LTD.

Year DPS(Rs) Book Value(Rs.) Payout(%) Retention Ratio PBT Tax PAT Preference Dividend Equity Reserves P & L Account(Dr Balance) Equity Shareholder Fund ROE Growth Rate(%) Cost of Equity(%) Interest Total Debt Cost of Debt(%) PBIT Capital Employed ROI(%) 2005
1.25 62.71 29.27 70.73 75.01 -0.69 75.77 0 29.19 275.86 0 61671 0.12 8.5 22.18 17.45 256.33 6.8 113.99 561 20

2006
1.25 71.63 38.99 61.01 86.09 14.99 71.12 0 28.19 319.25 0 73667 0.097 5.9 27.73 24.31 327.14 7.4 133.07 675 17

2007
1.25 13.44 44.15 55.85 80.29 2.23 77.33 0 31.98 363.17 0 91811 0.084 4.7 34.14 39.02 467.69 8.3 143.79 860 20

2008
1.25 32.58 43.91 56.09 111.04 2.22 106.49 0 31.98 1,009.73 0 153028 0.07 3.9 46.76 38.28 435.67 8.8 173.79 1477 20