Introduction to the benefit of tax shield as a

IntroductionThe report contains a review of 5 research papers oncapital structures.

First we look at the factors and composition of capitalstructures of Public Ltd companies in India.It is then followed by analysis ofcapital structure across various industries in India. PublicLtd Companies and their capital structureCapital structure refers to what frames the capitalemployed,which simply is the composition or mixture of debt and capital.Animportant and basic aim of a firm is to strengthen shareholder`s wealth andcapital structure decisions aim at achieving this fundamental.There are certaintheories associated with capital structure such as the MMapproach,Operating,Net Operating and traditional approach.

Best services for writing your paper according to Trustpilot

Premium Partner
From $18.00 per page
4,8 / 5
4,80
Writers Experience
4,80
Delivery
4,90
Support
4,70
Price
Recommended Service
From $13.90 per page
4,6 / 5
4,70
Writers Experience
4,70
Delivery
4,60
Support
4,60
Price
From $20.00 per page
4,5 / 5
4,80
Writers Experience
4,50
Delivery
4,40
Support
4,10
Price
* All Partners were chosen among 50+ writing services by our Customer Satisfaction Team

All theories holdcertain assumptions and merits and demerits since any country or the real wordhas factors such as bankruptcy and agency costs and also the presence oftaxes.In today`s India,firms usually follow the given order to raise finance-internal,externalborrowed finance and finally external equity finace,this is known as peckingtheory.Firms might also go ahead with the signalling theory to send positivemessages about themselves or to maintain their flexibility when it comes toraising debt.Calls related to capital structure have bearing on both risk andreturn associated with a share,which in turn affects the market price of ashare and thus these decisions are of mammoth relevance.Using interest bearingitems,increases the financial leverage which increases the EPS due to thebenefit of tax shield as a reason of interest.At the same time financialleverage means fixed payments which makes it more risky.Therefore it has a twofold counterveiling impact.

A general notion states a high DFL should beaccompanies by a low DOL and vice versa.The profits which a firm makes,scale atwhich they operate,the size of their assets play a major role in determing theleverage structure of a firm.A number of factors determine the capital structurewhich include cost of funds,cost required to raise such funds,the control orownership pattern,the threat associated with that source,agency cost and taxadvantage.

Usually debt turns to be cheaper due to tax advantage and the aid ofgearing which it provides.However,lenders might keep in mind variousdeterminants before subscribing to debt such as firm`s credit rating,number ofdefaults if any,interest rate offered,interest-coverage and debt-equityratio,gross profit margins and cashflows which the firm has,which means thatfirms having good financial statements not only enjoy ease of raising loans butalso enjoy flexibility as well.In India,it has been observed that after the1990`s the firms have also started to pay focus on raising money through equityas compared to previous years where a major source of finance used to bedebt.This is attributed to development of new financial products,awarenessamong consumers,advancements in financial markets and certain other legalrequirements and compliances.

It has also been observed that large firms havinga huge pool of assets and high credit ratings are in a better position tonegotiate with banks which helps them crack better deals when it comes to debtfinancing.Thus,we see a wide array of factors affecting capital structure of afirm.Capitalstructure of the FMCG Sector in IndiaOver the years,the fmcgsector has grown with a huge boom across the world and specially in India.Thecompanies undertaken for the study include P and G,Emami Ltd,ColgatePalmolive(India),United Spirits Ltd.Though the FMCG sector has grown withleaps,the studies suggest that there is still a need to improve the wayoperations are conducted to achieve effectual usage of resources which in turnwill ensure optimisation of resources and increase overall effectiveness andproductivity leading to a growth which is sustainable.One more thing which hasbeen noticed is that these companies have been able to maintain a very gooddebtor turnover ratio which clearly indicates that their receivable managementhas been absolutely to the mark.One striking fact was observed was thatfinancial leverage showcased adversarial effect when it came down to valuationor performance of the company due to Eva and Roa indicators and thus thebenefit of increased EPS was set off from the firm`s perspective.

Thedebt-equity ratio which was initially high has now seen a downward trend sincefirms have made considerable profits in the recent past,and have made debtrepayments and used internal as well as equity source of financing.Theincreased profits also meant higher interest coverage ratio,thus providing asecure environment to lenders.Due to decreased debt,the debt-asset ratio alsogives a positive signal,giving firms further flexibility to raise additionalfunds in the form of bonds and debentures.The GPR and NPR have also beenincreasing since operations have gone up and sales have increased.We see thatcolgate and emami were able to fetch higher returns on long term fundsshowcasing that disbursement of funds in these two companies was much betterthan other companies.

We see that profitability has had a positive impact inColgate even when the firms uses very less amount of debt.All in all we seethat capital structure has played an important role in FMCG sector,howeverdifferent firms within the industry have used varying strategies keeping inmind their strengths and weaknesses.CapitalStructure Of Automobile Industries(2010-14)This review contains an overlook of capitalstructure of Automobile industries with the examples of Tata Motors,MarutiSuzuki and Mahindra and Mahindra.

There was a specific focus on debt,equity andleverages of these companies during the analysis of capital structure.In theautomobile sector,the firm`s value of productive assets,monopoly franchise hasan impact on the value of capital which in turn determines the value of thefirm and the value of its`s securities.Thus,a chain is involved when we look atthe value of a company specifically in the automobile sector and each componentplays a major determinant.We see that over the years,the equity has gone up in TataMotors majorly due to convertible debentures and since the market price ofshares was very high,the company found it better to raise funds through equityrather than debt.

In the other two companies,the figures have been relativelystable.We see that debt has constantly increased in Mahindra and Mahindra sincethe gearing instrument helped them take the benefit of leverage as well asincrease the EPS,making the shareholders happy.The Debt of Maruti Suzuki hasseen huge fluctuations indicating that proper management was debt was highlyout of the question in this particular case.Tata Motors reduced debt till 2012through huge profits used for redemptions as well as using it`s market price ofshares and the conversion policy to it`s advantage.

We see that all companiessaw fluctuations in the DOL,which can be attributed the market environment aswell as internal positions of the company,however Tata and Suzuki have made aconstant effort in recent years improve their DOL.Tata is the only companywhich was also able to maintain a decent range of DFL as compared to othertwo.The impact of both DOL and DFL has been reflected in DCL for each of thecompanies.Tata Motors and Maruti Suzuki showed a clearrealation between capital indicators and MPS.However,for Tata motors an inverserelation was found between MPS,debt and equity.Capitalstructure of IT sector(special focus on TCS)The following researchis about capital structure of IT sector with a key focus on TCS.

In TCS,we findthat the company has widened its asset base with an arch focus of financingthese through long-term funds.The debt from 2012 to 2014 has gone up,howeverthe debt-equity ratio has seen an insignificant increase,showcasing the factthat equity for raising finance has again been prioritised.Since the amount ofdebt is substantially low(1.9%) the debt to total fund ratio is also verybantam.The interest coverage ratio is 100 times more than the standardindicating that gearing instruments have not been used effectively and that thefirm has a very very low financial risk and follows an extreme form ofconservative policy.

This clearly indicates that the leverage advantage to thefirm as well as investors is highly missing since the tax shield advantage hasnot been used by the company.There is a need for TCSto optimise its capital structure which can be done by proper usage of funds inthe company.Capitalstructure of steel companies in IndiaThe given paper talksabout how capital structure has changed over the years for the steel companiesin India and how various components play an important role in deciding thefirm`s capital structure.Steel industry is one such area where the firm`s owncharacteristics have a hefty role to play when it comes to deciding the mix ofstructure.

We see that before 1990s,steel players used debt as source of financesince it was much cheaper and firms enjoyed protection as well as loans fromsspecific institutions at a lower rate to boost steel production in thecountry.However,with the opening up of the economy after 1991,the number ofinfrastructure projects around the country grew which increased the demand forsteel in the domestic market,also a global increase in demand of steel was seenduring the period because of a favourable market.At the same time entry offoreign firms meant Indian firms which were already debt saturated need morelong term funds and as a result of these 3 factors,the capital structure saw ashift from a heavily debt financed structure to a mix of debt and equity.The characteristics whichare widely used to ascertain and estabilish the capital structure today areinterest coverage,profitability,liquidity,size of the entity,etc.If the firm isin a position where it is constantly able to generate huge profits,the sourceof finance used by the firm is likely to be reserves and hence the debt-equityratio of such fims is likely to be low and the same holds true conversely.

Thereis a need to meet short term obligations in terms of interest and hence a highliquidity ratio might mean a high debt ratio.However,if investments are financethrough the liquid assets then the above conclusion cannot be drawn.Largerfirms are in a better position to negotiate with banks plus the ownershipaspect in these firms suggests that debt here is likely to play a majorrole.

The company size also offers one more benefit of lower financial stresssince they are more likely to be diversified.A higher interest coverage ratioprovides a sense of security to lenders who will be willing to lend if thegiven ratio is relatively high.Thus,we see that howcapital structure in India is different from sector to sector and how thefirm`s own characteristics,basic fundamentals,macro-environment and the marketfactors affect the capital structure of a company and how the firms can use thecapital structure to improve their performance and increase returns forshareholders.References1.    International Journal of Innovative Research andPractices Vol.3, Issue 11, November 2015 ISSN 2321-2926 2.

    IOSRJournal of Business and Management (IOSR-JBM)e-ISSN: 2278-487X, p-ISSN:2319-7668. Volume 19, Issue 9. Ver. IV. (September. 2017), PP 27-31www.iosrjournals.org 3.

   EPRAinternational Journal of Economic and Business Review,Vol-3,Issue-5,May 2015 4.   InternationalJournal of Business Quantitative Economics and Applied Management ResearchISSN:2349-56777,Volume1,Issue 1,April 2015 5.   Galaxy InternationalInterdisciplinary Research Journal ISSN-2347 6915GIIRJ,Vol2(1),January (2014)