CHAPTER-I
INTRODUCTION
1 Background of the Study
Every business needs capital basically for two purposes. The first requires
for long term purpose which is called Fixed Capital. Such funds are required
to create production facility. Investment in plants, machinery, land, building
etc. comes under production activity. Investment in these assets represents
that part of firm’s capital which is block on a permanent or fixed basis. Such
assets are not purchased with the objective of resale.
To operate business, a firm also needs another type of capital which is
known as Short Term Capital or Working Capital. The funds required for
purchased of raw material, payment of wages and another day to day
expenses etc. is called as Working Capital. Similarly, the investment
required for work-in-progress, raw material, finished goods, sundry debtors,
bills receivable etc. also comes under working capital.
Capital structure in corporate finance is the mix of various forms of
external funds, known as capital, used to finance a business. It consists
of shareholders' equity, debt (borrowed funds), and preferred stock, and is
detailed in the company's balance sheet. The larger the debt component is in
relation to the other sources of capital, the greater financial leverage (or
gearing, in the United Kingdom) the firm is said to have. Too much debt can
increase the risk of the company and reduce its financial flexibility, which at
some point creates concern among investors and results in a greater cost of
capital. Company management is responsible for establishing a capital
structure for the corporation that makes optimal use of financial leverage and
holds the cost of capital as low as possible.
Capital structure is an important issue in setting rates charged to customers
by regulated utilities in the United States. The utility company has the right
to choose any capital structure it deems appropriate, but regulators determine
an appropriate capital structure and cost of capital for ratemaking purposes.
Various leverage or gearing ratios are closely watched by financial analysts
to assess the amount of debt in a company's capital structure.
The Miller and Modigliani theorem argues that the market value of a firm is
unaffected by a change in its capital structure. This school of thought is
generally viewed as a purely theoretical result, since it assumes a perfect
market and disregards factors such as fluctuations and uncertain situations
that may arise in financing a firm. In academia, much attention has been
given to debating and relaxing the assumptions made by Miller and
Modigliani to explain why a firm's capital structure is relevant to its value in
the real world.
Capital structure refers to the amount of debt and/or equity employed by a
firm to fund its operations and finance its assets. A firm’s capital structure is
typically expressed as a debt-to-equity or debt-to-capital ratio.
Debt and equity capital are used to fund a business’s operations, capital
expenditures, acquisitions, and other investments. There are tradeoffs firms
have to make when they decide whether to use debt or equity to finance
operations, and managers will balance the two to find the optimal capital
structure.
1.2 Profile of the Garima Bikas Bank
Garima Bikas Bank Ltd. was established by a group of enthusiastic,
dedicated and successful professionals and entrepreneurs from different
fields including business, teaching, engineering, doctors, banking,
accounting, management etc. We are multicultural, multilingual members of
our communities. Our rich diversity is our strength.
Garima Bikas Bank employees are approachable, personable and
knowledgeable. We encompass an ever expanding range of business
expertise and personal experience. We have a long history and our ability to
adapt and grow has enabled us to respond to changing markets, explore new
technologies, and engage new communities. Throughout each change, our
unwavering commitment to customer service has been our guiding principle.
Deliver wonderful banking service to its customers through state of the art
technology.
Satisfy all the stakeholders with healthy and sustainable value creation.
To make our vision come true through professional integrity, corporate
governance and regulating compliance.
The bank was incorporated under Company Act on Shrawan 22, 2064 and
acquired license from Nepal Rastra Bank to perform its financial
transactions on Ashwin 24, 2064. The bank started its formal operations on
Kartik 18, 2064 from Waling 3, Syangja. After the successful merger
between Garima Bikas Bank Limited and the then Nilgiri Bikas Bank
Limited, the bank upgraded to National Level on Ashadh 29, 2072.
1.3 Problem of the Statement
Banking sector provides investor good investment opportunity with fair
return and instant liquidity with minimum risk. It helps mobilize financial
resources for the investment development projects and thereby helps to
economic development, in turn future development the banking. Among
various studies, Capital Structure management play vital role to success
banking program.
When firms execute mergers and acquisitions, Capital structure of the
combined entities can often undergo a major change. Their resulting
structure will depend on many factors, including the form of the
consideration provided to the target (cash vs shares) and whether existing
debt for both companies is left in place or not.
For example, if Elephant Inc. decides to acquire Squirrel Co. using its own
shares as the form of consideration, it will increase the value of equity
capital on its balance sheet. If, however, Elephant Inc. uses cash (which is
financed with debt) to acquire Squirrel Co., it will have increased the
amount of debt on its balance sheet.
Determining the pro forma Capital structure of the combined entity is a
major part of M&A financial modeling. The screenshot below shows how
two companies are combined and recapitalized to produce an entirely new
balance sheet.
Therefore, Capital Structure should be determined in such way that total cost
i.e. cost of liquidity and cost of non-liquidity is minimum.
This research attempts to focus on following problems.
(1) What are the components of Capital Structure, which affects the
operating income of Garima Bikash Bank?
(2) What are the major factor affecting the management of Capital
Structure in Garima Bikash Bank?
1.4 Objectives of the Study
The mandatory objective is to study Capital structure and also to measure
the social performance of the selected corporate concept. The objective of
the study is to analyze of the Capital Structure of Garima Bikash Bank.
These researches have been conducted considering following objectives.
To find out the Components of Capital Structure, which operating
income of Garima Bikash bank limited.
To analyze the major factor affecting the management of capital
structure in Garima Bikash Bank limited.
1.5 Significance of the Study
Capital Structure is regarded as the lifeblood and nerve of a business
concern and is essential to accommodate the smooth operations of any
organizations. Under and over allocation of Capital Structure is harmful to
an enterprise to achieve its primary objectives. Inadequate investment in
Capital Structure threatens the solvency of enterprise as well as affects its
growth. On the other hand, excessive investment in capital yields nothing.
Nepalese commercial banks are operating in the competitive environment. In
this situation, banks have to adopt suitable strategies for their existence.
They should balance and coordinate the different functional areas of
business concern. The success or failure of any organization depends on its
strategy, which is affected by Capital structure. Capital structure is the crux
of problem to prepare the proper strategy on its favors. So the study might be
helpful for the structure of the concerned bank as well as it might be
valuable for the researcher, scholars, student who wants to study into the
Capital structure of the Commercial bank.
1.6 Limitations of the Study
For the completion of this study, some facts are to be considered as the
limitations. These are presented as below.
a) This study is based on secondary data. The data collected and provided
by the banks.
b) Individual knowledge & judgment abilities & on the basis of data
provided, & other published & unpublished sources. So, it may lack
the professional standard of analysis and interpretation.
c) The study focus only on Capital Structure.
d) Time constraints.
e) The data are collected from year 2074/ 75 to 2077/78.
1.7 Project Report Structure
The report on the study of fixed deposit of Garima Bikash Bank as per the
requirement of the thesis for Bachelor of Business Studies (BBS) 4 th year
programme. The study has three pillar supported by five years of data. Each
chapter centers of specific objectives. They are as follows:
Chapter – I: Introduction
This chapter describes the background of the study, Statement of the
problem, Objectives of the study, rationale of the study, review, and research
methodology, limitations of the study and Organization of the Study.
Chapter – II: Results and Analysis
This chapter analyses the data related with study and presents the findings of
the study and also command briefly on them. Data processing, data analysis
and interpretation are given in this chapter and there is use of diagram.
Chapter – III: Summary and Conclusions
This chapter is devoted to the conclusions of the research, conclusion
derived on the basis of data analyzed.
TABLE OF CONTENTS
Chapter – I
INTRODUCTION
1. Back ground of the Study 1
2. Profile of Garima Bikash Bank 2
3. Statement of the problem 4
4. Objectives of the study 4
5. Rationale of a study 5
6. Literature Review 5
7. Research Methodology 6
8. Limitation of the study 6
9. Project Report Structure 6
A CASE STUDY ON CAPITAL STRUCTURE
MANAGEMENT OF GARIMA BIKASH BANK
A Proposal
Submitted by:
Bikee Kumar Gupta
T.U. Regd No.: 7-2-15-417-2017
College Roll No. :- 455/074
(Finance Group)
Submitted To:
Research Department of T.R.M.C
Tribhuvan University
In partial fulfillment of the requirements for the degree of
BACHELOR OF BUSINESS STUDY (B.B.S.)
Birgunj
December 2021
