BUSINESS IDEA - An E-commerce fashion site

NAME OF THE COMPANY - Polka Ltd.

INDUSTRY - Fashion E-commerce

INTRODUCTION TO THE BUSINESS

Polka Ltd. is an Indian fashion e-commerce company that mainly sells personalized T-shirts,
handbags, footwear, and other clothing items. It has its own website and mobile app that lets
people purchase items from anywhere in the country since it provides shipping pan-India. The
motto of this new business is to ‘provide affordable and trendy clothing to the younger
generation’. One of the benefits of Polka’s website is that it lets customers provide genuine
reviews with pictures of the products after their purchase so that other potential customers can
have an easier experience. This feature is not available in some of its counterparts like AJIO.

The website also lets other sellers sell some thrift products at a cheaper price to make the world
of fashion more sustainable. Polka’s portfolio includes about 1,50,000 products of over 500+
brands. It receives its funding from various investors like Mumbai Angels, Accel Partners, and
IDG Ventures. It has a good range of R&D teams, logistics staff, and marketing teams. The
major shareholders of the company are Tiger Global and Accel Partners.
 VARIOUS SOURCES OF FINANCE

1. Retained earnings- Companies exist to make a profit by selling a product or service for a
higher price than it costs to manufacture. This is a corporation's most fundamental source
of funds and, preferably, the main method of bringing money into the company. Retained
earnings are the funds left over after expenses and obligations have been met.
2. Equity Capital- A business can raise money by selling ownership rights in the form of
stock to investors who become stockholders. This is referred to as equity funding. The
advantage of this strategy is that, unlike bondholders, investors do not have to pay
interest, therefore this type of capital can be raised even if the first is not productive yet.
3. Debt Capital: A company uses bank loans to seek financing for private debt. They can
also raise funds by issuing bonds to the public. Issuers issue debt securities such as
corporate bonds or bills in debt financing.

CAPITAL STRUCTURE OF POLKA Ltd.

The capital structure of a company refers to how it finances its operations and growth through
different sources of financing, such as the issuance of bonds, long-term notes, common shares,
preference shares, or retained earnings.
Capital structure is sometimes referred to as "financial leverage" because each company must
consider the best debt-to-equity ratio to conduct business. Corporate executives must consider
the capital structure to try to maximize shareholder wealth or increase the value of the company
since it is one of the major determinants of the value of the firm. The form of capital structure of
Polka Ltd. is ‘Equity and debentures only.’

EQUITY CAPITAL

Period Instrument Authorized Paid-up capital Number of

capital shares

2020-2021 Equity shares 80 cr 75 cr 93,75,000 of

 face value Rs. 20

Polka Ltd. had an authorized share capital of Rs. 80 crores. It sold 93,75,000 of face value Rs.
20 at an issue price of Rs. 80. Thus, the paid-up equity share capital of Polka Ltd. is Rs.75
crores.
Since it is a new business, it had a lesser authorized share capital compared to its competitors in
the same industry. But due to the better ideas and innovations of this venture, the investors were
convinced to buy the shares at a share premium of Rs. 60.

DEBT CAPITAL

Total Debt = Long Term Liabilities (or Long Term Debt) + Current Liabilities
Which implies,
Total Debt = [Debenture + Long Term Loans from Banks and Financial Institutions + Mortgaged
Loans …]
Let’s assume that the total current liabilities of our new business = Rs. 15 cr.
The total long-term liabilities = Rs. 30 cr.
(Including various loans like mortgaged loans, bank loans, debentures, etc.)
Thus,
Total Debt Capital = Rs. 45 cr.

DEBT-TO-EQUITY RATIO

The ratio of the total long-term debt and equity capital in the business is called the debt-equity
ratio.

As we know,
Total debt capital = Rs. 45 cr.
Total equity capital = Rs. 75 cr.
Thus, the debt-equity ratio of Polka Ltd. = 45 / 75 = 0.6

INTERPRETATION OF THE FACTORS CONSIDERED WHILE BUILDING CAPITAL

STRUCTURE

In order for Polka Ltd. to be a successful business venture in the long term, the following factors
were considered while building the capital structure:

1. Debt to equity ratio - A company's optimal capital structure is the best combination of
debt and equity financing that maximizes the company's market value and minimizes the
cost of capital. Therefore, the company must find the best point where the marginal
benefit of debt equals the marginal cost.
Since the debt-to-equity ratio of Polka Ltd. is 0.6, it signifies that the capital structure is
optimal since any ratio below 1 is considered good and above 2 is considered bad.
2. Leverage- It is the basic and important factor that affects the capital structure. The more
debt financing a firm uses in its capital structure, the more financial leverage it employs.
High debt means higher leverage, which involves greater risk. This is why the debt
capital of Polka Ltd. is lesser than the equity capital.
3. Cost of capital- It is the required rate of return necessary to make a capital budgeting
project. Greater returns signify a higher cost of capital, which increases the value of the
firm.

CALCULATION OF COST OF CAPITAL

Polka Ltd. Amount After-tax cost Weights Weighted cost

(1) (2) (capital/total
cost) (3) (4)= (2)*(3)

Equity share 80,00,00,000 0.16 0.64 0.1024

capital

Debt Capital 45,00,00,000 0.09 0.36 0.0324

Total 1,25,00,00,000 0.1348

 Thus, the weighted cost of capital here is 0.13 * 100 = 13 %
A good cost of capital falls anywhere between 10-13%. Since Polka Ltd’s cost of capital
is 13%, it has a greater return and hence, the value of the business is good.

COMPARISON BETWEEN CAPITAL STRUCTURE OF MYNTRA AND

POLKA LTD.

Myntra is another fashion e-commerce company that is one of the major competitors in
this industry. It is headquartered in Bangalore, Karnataka, and was founded in the year
2007.

BALANCE SHEET OF MYNTRA

CAPITAL STRUCTURE OF MYNTRA

Period Instrument Authorized Capital Issued Capital -PAIDUP-

Capital (Rs.
From To (Rs. cr) (Rs. cr) Shares (nos) Face Value
Cr)

2020 2021 Equity Share 880.0 .0 309711 1.0 .0

Equity Capital - Since Myntra is a much larger business which was founded in the year 2007,
compared to our new business Polka Ltd. which only started in the year 2020, it has a much
larger capital of 880cr.
The face value of their shares is Rs. 1 and the number of paid-up shares is 3,09,711.

Debt Capital - From the balance sheet, we can observe that the total debt capital for the year
2021 is Long Term Liabilities (or Long Term Debt) + Current Liabilities
= 454 cr + 538 cr = 992 cr

● Debt-to-equity ratio = 992/ 880

= 1.13

● EBITDA = Total operating income + depreciation & amortization

= 1713 cr + 128.87 = 1841.87 cr.

INFERENCE- It can be inferred that Myntra uses more creditor financing compared to investor
financing. The debt to equity ratio of Myntra is 1.13 whereas the debt to equity ratio of Polka
Limited is 0.6 since it has a higher equity capital.
Any debt to equity ratio that is above 2 signifies that the capital structure isn’t formulated well,
Whereas a debt to equity ratio below 1 makes up an optimal capital structure.
 CONCLUSION

From this assignment, I gained a better understanding and insight into how a capital structure
should be constructed. Various factors like debt-to-equity ratio, use of debt as leverage, sources
of funding, and cost of capital are important factors that a financial manager of any company
should always consider while building a capital structure. Any debt-to-equity ratio lesser than 1
is considered optimal and leverage should always be lower since it involves a rate of risk. New
businesses should mainly rely on retained earnings and loans as their sources of finance.

REFERENCES

● CFI. “Debt to Equity Ratio - How to Calculate Leverage, Formula, Examples.”

Corporate Finance Institute, 2019,

corporatefinanceinstitute.com/resources/knowledge/finance/debt-to-equity-ratio-formula/.

● “How to Calculate Total Debt (with Example).” Indeed Career Guide,

www.indeed.com/career-advice/career-development/how-to-calculate-total-debt.

● Seth, Shobhit. “What Is the Formula for Weighted Average Cost of Capital (WACC)?”

Investopedia, 2019, www.investopedia.com/ask/answers/063014/what-formula-

calculating-weighted-average-cost-capital-wacc.asp

● www.tofler.in. “HOW to DOWNLOAD MYNTRA DESIGNS PRIVATE LIMITED

REPORT.” Tofler, Mar. 2013,

www.tofler.in/myntra-designs-private-limited/company/U72300KA2007PTC041799.

Accessed 16 Aug. 2021.