An Internship Project Report

On
“Financial Leverage And Capital Structure”
(By Acmegrade Private Limited Company)

Submitted to
Dr. Harisingh Gour Central University for the award
of the degree of

Bachelor of Business Administration (Hon’s)

By
Preeti Ghosh
(Y21180532)

Under the guidance and supervision of

Meghwant Singh Thakur
(Research Scholar)

Department Of Business Management, School Of

Commerce Management
Dr. Harisingh Gour Vishwavidhyalaya , Sagar (M.P.)

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 DECLARATION BY THE CANDIDATE

I hereby declare that this project entitled “An Internship Project Report
On Financial Leverage And Capital Structure” is my own work conducted under the
guidance and supervision of Meghwant Singh Thakur , in Department of Business
Management, Dr. Hari Singh Gour Vishwavidyalaya, Sagar (M.P.).

I further declare that, to the best of my knowledge, the thesis does not contain any part of any
work which has been submitted for award of any degree wither in this university or in any other
university. I further declare that I have faithfully acknowledged, given credit to and referred
whenever the works of others have been cited in the text and body of thesis. I, further, certify
that I have not reproduced from other’s works reported in journals, books, magazines, reports,
dissertations, theses etc. or available at websites, and included them in thesis and indicated as my
own work.

Date:

Place:

(Preeti Ghosh)

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 CERTIFICATE BY THE SUPERVISOR

This is certify that the Internship entitled “An Internship Project Report
On Financial Leverage And Capital Structure” submitted by Preeti Ghosh (Y21180532) is a
record of bonafied work carried out by them, in the partial fulfillment of the requirement for the
award of Degree of Bachelor of Business Administration (Hon’s) in Department of Business
Management at Dr. Harisingh Gour University , Sagar (M.P.). This work is done during year
2023-24, under my guidance.

Dr. Meghwant Singh Thakur

(Project Coordinator)
Department of Business Management,
Dr. Harisingh Gour University, Sagar, (M.P.)
Signature :

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 TABLE OF CONTENTS
S.NO. TITLE PAGE NO.

1. Introduction Of Company 5

2. Directors Of Company 5

3. Aim & Accomplish 6

4. Training Details 6

5. Introduction Of Financial Leverage 7 – 11

6. Introduction Of Capital Structure 11 – 15

7. Project Details 15 – 22

8. Literature Review 23

9. Objective Of The Study 23

10. Research Methodology 24

11. Limitation Of The Study 24

12. Financial Report Of Company 24 – 25

13. Conclusion 26

14. Recommendations 26

15. References 27

16. Internship Training Certificate 28

17. Internship Certificate 29

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 Introduction Of Company
Acmegrade Private Limited (APL) is a registered startup operating as a Private Limited Indian
Non-Government Company incorporated in India on 05 August 2021 (Two years and six months
0 days old ). Its registered office is in Bangalore, Karnataka, India.

The Company is engaged in the Information Technology Industry.

The Company's status is Active, and it has filed its Annual Returns and Financial Statements up
until 31 March 2023. It's a company limited by shares with an authorized capital of Rs 1.00 Lakh
and a paid-up capital of Rs 0.50 Lakh, as per the Ministry of Corporate Affairs (MCA) records.

Rahul Kumar and Vybhav serve as directors at the Company.

Directors Of Company
The company has 2 directors and no reported key management personnel.

The longest serving directors currently on board are Rahul Kumar and Vybhav who were
appointed on 05 August, 2021. They have been on the board for 2 years and 6 months.
Rahul Kumar has the largest number of other directorships with a seat at a total of 1 companies.
In total, the company is connected to 0 other companies through its directors.

05 August,
05 August,
2021
2021
RAHUL
VYBHAV
KUMAR
Director
Director

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Aim & Accomplish

Vision
Our Vision is to empower the youth today, broaden their horizons, develop them as individuals,
and give them the work experience that they need to join the workforce and immediately make a
difference.

At Acmegrade we envision brighter future driven by a well-rounded youth of today. With

Acmegrade, the only way to go is forward!

Mission
Our Mission is to give the youth of today the chance to learn and upskill themselves.

Our supervised internships and creative industry relevant projects make sure that they walk into
the workforce equipped with everything they need to be successful. Our mission is to re-define
the concept of education. To bring it back to what the essence of education really.

Aim
Our Aim to remove the association between marks and success and instead put an emphasis on
the association between skills and success.

Our goal is to revolutionise the educational landscape. We hope to teaching a practice were
students are taught the practical skills.

Training Details

Topic : Financial Leverage

Mode of Training: Online
Platform: Acmegrade
Start Date: 12th October 2023
End Date: 11th November 2023
Durations: 4 Weeks

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 Introduction Of Financial Leverage

Financial leverage is the use of borrowed money (debt) to finance the purchase of assets with the
expectation that the income or capital gain from the new asset will exceed the cost of borrowing.

In most cases, the provider of the debt will put a limit on how much risk it is ready to take and
indicate a limit on the extent of the leverage it will allow. In the case of asset-backed lending, the
financial provider uses the assets as collateral until the borrower repays the loan. In the case of a
cash flow loan, the general creditworthiness of the company is used to back the loan.

This guide will outline how financial leverage works, how it’s measured, and the risks associated
with using it.

 How does Financial Leverage Works?

Financial leverage is an investment strategy where businesses borrow money to buy assets and
increase capital to expand their venture. The firms opt for this option only when they know that
their investment has the potential to generate profits that could easily help them pay back
their debt.

When a company is highly leveraged, it indicates that it has more debt than equity. In the
process, companies borrow finances instead of issuing stocks to investors to raise capital.
Though companies can also use equity to build assets, they prefer taking debts as the cost of
borrowing is less than the cost of equity. As a result, the cost of capital gets reduced for

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 companies. However, while debt gives a huge relief to businesses for a time being, it is quite
risky. In the event of default, it might lead to bankruptcies.

The Degree of Financial Leverage or DFL is a ratio that indicates how likely is the EPS to be
affected by the fluctuations in the gains that occur with the changing capital structure. DFL is
measured and calculated using the following formula.

DFL = Change in EPS (%)/ Change in EBIT (%)

Here,

EBIT is the Earnings before Interest and Taxes

 Formula
The financial leverage formula, on the other hand, with regards to a company’s capital structure
is as follows:

Financial leverage = Total Debt / Shareholder’s Equity

Here,

Total Debt = Short Term Debt + Long Term Debt

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 Examples
Let us consider the following financial leverage examples to understand the concept better:

 Example #1

Company A has purchased assets and resources for the latest order to be completed. The order
received was likely to bring them a profit of $50,000. Thus, it decided to apply for a loan instead
of issuing shares to investors. The company applied for a loan of $20,000 as it knew the capital
built would help it earn more than what was to be repaid.

 Example #2

Here is a real-life scenario where the debt and EPS of Nestle for two consecutive years – 2014
and 2015 – have been mentioned. In addition, the leverage is calculated using the formula above
with respect to their debt to equity ratio.

In millions of CHF 2015 2014

Total Debt (1) 21230 21206

Total Shareholder’s Equity (2) 62,338 70,130

Total Debt to Shareholder’s Equity 34.05% 30.23%

The financial leverage, in this case, has increased from 30.23% in 2014 to 34.05% in 2015.

 How Financial Leverage is Measured?

 Debt-to-Equity Ratio

The debt-to-equity ratio is used to determine the amount of financial leverage of an entity, and it
shows the proportion of debt to the company’s equity. It helps the company’s management,
lenders, shareholders, and other stakeholders understand the level of risk in the
company’s capital structure. It shows the likelihood of the borrowing entity facing difficulties in

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 meeting its debt obligations or if its levels of leverage are at healthy levels. The debt-to-equity
ratio is calculated as follows:

Total debt, in this case, refers to the company’s current liabilities (debts that the company intends
to pay within one year or less) and long-term liabilities (debts with a maturity of more than one
year).

Equity refers to the shareholder’s equity (the amount that shareholders have invested in the
company) plus the amount of retained earnings (the amount that the company retained from its
profits).

Companies in the manufacturing sector typically report a higher debt to equity ratio than
companies in the service industry, reflecting the higher amount of the former’s investment in
machinery and other assets. Usually, the ratio exceeds the US average debt to equity ratio of
54.62%.

 Other Leverage Ratios

Other common leverage ratios used to measure financial leverage include:

 Debt to Capital Ratio

 Debt to EBITDA Ratio
 Interest Coverage Ratio

While the Debt to Equity Ratio is the most commonly used leverage ratio, the above three ratios
are also used frequently in corporate finance to measure a company’s leverage.

 How does Financial Leverage Affect a Business?

 Leverage means borrowing funds to finance inventory, equipment, or other assets. Industry uses
leverages to purchase the asset, instead of using its equity.
 When business owners need to acquire an asset and do not have cash, they either opt for debt or
equity to finance the purchase.
 When debt increases, the risk of being bankrupt increases, but here an advantage is that if the
leverages are managed well, it will increase its profit and efficiency.

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 Importance of Financial Leverage for a Business
 Financial leverage is increased when a firm borrows capital after issuing fixed-income securities
to money lenders. In some cases of asset-backed lending, the moneylender uses the assets as a
collateral until the borrower pays it back.
 The primary objective of introducing leverage is for shareholders/ investors to achieve maximum
wealth.
 The introduction of debt into the capital structure does not affect the sales and operating profit.
However, it will affect the equity, return on equity, and the shareholders.

Introduction Of Capital Structure

The most crucial component of starting a business is capital. It acts as the foundation of the
company. Debt and Equity are the two primary types of capital sources for a business. Capital
structure is defined as the combination of equity and debt that is put into use by a company in
order to finance the overall operations of the company and for its growth.

 Types of Capital Structure

The meaning of Capital structure can be described as the arrangement of capital by using
different sources of long term funds which consists of two broad types, equity and debt. The
different types of funds that are raised by a firm include preference shares, equity shares,
retained earnings, long-term loans etc. These funds are raised for running the business.

 Equity Capital
Equity capital is the money owned by the shareholders or owners. It consists of two different
types

a) Retained earnings: Retained earnings are part of the profit that has been kept separately by
the organization and which will help in strengthening the business.

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 b) Contributed Capital: Contributed capital is the amount of money which the company owners
have invested at the time of opening the company or received from shareholders as a price for
ownership of the company.

 Debt Capital
Debt capital is referred to as the borrowed money that is utilized in business. There are different
forms of debt capital.

1. Long Term Bonds: These types of bonds are considered the safest of the debts as they have an
extended repayment period, and only interest needs to be repaid while the principal needs to be
paid at maturity.
2. Short Term Commercial Paper: This is a type of short term debt instrument that is used by
companies to raise capital for a short period of time.

 Optimal Capital Structure

Optimal capital structure is referred to as the perfect mix of debt and equity financing that helps
in maximizing the value of a company in the market while at the same time minimizes its cost of
capital.

Capital structure varies across industries. For a company involved in mining or petroleum and oil
extraction, a high debt ratio is not suitable, but some industries like insurance or banking have a
high amount of debt as part of their capital structure.

 How the Capital Structure Works

The capital structure is the allocation of debt, preferred stock, and common stock by a company
used to finance working capital needs and acquire fixed assets (PP&E).
Often referred to as the “capitalization”, the capital structure of a company is determined by
management’s discretionary decision pertaining to how to fund operations and the purchase of
fixed assets, or capital expenditures (Capex).

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 In short, the capital structure is the mixture of debt and equity that firms utilize to finance
their near-term and long-term growth strategies.
For most companies that reach a certain size, raising outside capital is frequently a necessity to
reach the next stage of growth and to continue their efforts to expand their operations.

Using the proceeds from debt and equity issuances, a company can finance operations, day-to-
day working capital needs, capital expenditures (Capex), business acquisitions, and more.

 Formula
The formula to determine a company’s capital structure, expressed in percentage form, is as
follows.

Capital Structure (%) = Common Equity Weight (%) + Debt Weight (%) + Preferred
Stock Weight (%)

Where:

 Common Equity Weight (%) = Common Equity ÷ Total Capitalization

 Debt Weight (%) = Total Debt ÷ Total Capitalization

 Preferred Stock Weight (%) = Preferred Stock ÷ Total Capitalization

Combined, the resulting percentage contribution per capital source must equal 1.0, or 100%.

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 What are the Capital Structure Components?

Corporations can choose to raise outside capital in the form of either debt or equity.

 Debt → The capital borrowed from creditors as part of a contractual agreement, where the
borrower agrees to pay interest and return the original principal on the date of maturity.
 Common Equity → The capital provided from investors in the company in exchange for
partial ownership in future earnings and assets of the company.
 Preferred Stock → The capital provided by investors with priority over common equity but
lower priority than all debt instruments, with features that blend debt and equity (i.e. “hybrid”
securities).

 Importance of Capital Structure

Capital structure is vital for a firm as it determines the overall stability of a firm. Here are some
of the other factors that highlight the importance of capital structure

1. A firm having a sound capital structure has a higher chance of increasing the market price of
the shares and securities that it possesses. It will lead to a higher valuation in the market.
2. A good capital structure ensures that the available funds are used effectively. It prevents over
or under capitalization.
3. It helps the company in increasing its profits in the form of higher returns to stakeholders.
4. A proper capital structure helps in maximizing shareholder’s capital while minimizing the
overall cost of the capital.

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5. A good capital structure provides firms with the flexibility of increasing or decreasing the debt
capital as per the situation.

 Factors Determining Capital Structure

Following are the factors that play an important role in determining the capital structure:

1. Costs of capital: It is the cost that is incurred in raising capital from different fund sources. A
firm or a business should generate sufficient revenue so that the cost of capital can be met and
growth can be financed.
2. Degree of Control: The equity shareholders have more rights in a company than the
preference shareholders or the debenture shareholders. The capital structure of a firm will be
determined by the type of shareholders and the limit of their voting rights.
3. Trading on Equity: For a firm which uses more equity as a source of finance to borrow new
funds to increase returns. Trading on equity is said to occur when the rate of return on total
capital is more than the rate of interest paid on debentures or rate of interest on the new debt
borrowed.
4. Government Policies: The capital structure is also impacted by the rules and policies set by
the government. Changes in monetary and fiscal policies result in bringing about changes in
capital structure decisions.

Project Details

Case 14.1 – Capital Structure / Financial Leverage

CENTRAL EQUIPMENT COMPANY

In the beginning of January 2020, Mr. L.C Tandon, Director of Finance of Central Equipment
Company (CEC), was evaluating the pros and cons of debt and equity financing for the
purpose of expansion of CEC’s existing production facilities. At a recent board of directors, a heated
ddiscussion took place on the best method of financing the expansion. Mr. K.C. Soni,
Chairman and Managing Director (CMD), had therefore directed Mr. Tandon to critically
evaluate the points made by the various members of the board. He also asked him to prepare a report
on behalf of the company’s management to be presented at the board meeting to be held in the last
w eek of January 2020.

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 Background of the Company

CEC was started in the late fifties as a government company. It is one of the important
engineering companies in the public sector in India, manufacturing a wide range of products. CEC’s
products include industrial machinery and equipment for chemicals, paper, cement and fertilizers
industries, super heaters, economizers and solid material handling and conveying equipment.

CEC had started with a paid-up capital of Rs. 10 million in 1959. As per the estimated balance
sheet at the end of the financial year 2020, it has a paid-up capital of Rs.180 million (divided
into 18 million shares of Rs.10 each) and reserves of Rs. 459.6 million. The company’s sales have
shown a general increasing trend in spite of a number of difficulties such as recessionary
conditions, high input cost, frequent power cuts and unremunerative regulated prices of certain
products. In the last decade, CEC’s sales have increased from Rs.1,804 million in the financial year
2011 to Rs.3,042 million in 2019.

The sales for the year ending 31 March 2020 are estimated to be Rs.3,377 million. Net profit (profit
after tax, PAT) has increased from Rs.171 million in FY 2011 to Rs.435 million in FY 2019. The
company is projecting a profit after tax of Rs.503 million in FY 2020. Due to the recessionary and
other economic factors, sales and profits of the company have shown a cyclical behaviour over the
last decade. Table 14.13 gives sales and profit data since FY 2011.

Table 14.13 Central Equipment Company Selected Financial Data for year ending 31st March

(Rs. Millions)

FY Sales PBIT PAT Dividend EPS

2011 1804.4 343 171 90 9.50

2012 1707.8 155 78 90 4.33

2013 1894.0 412 206 90 11.44

2014 2270.8 522 261 90 14.50

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 2015 2520.0 580 290 108 16.11

2016 2775.0 666 333 108 18.50

2017 2949.2 768 384 144 21.33

2018 2433.8 -53 -53 90 --

2019 3042.3 662 435 270 24.17

2020$ 3376.9 775 503 270 27.94

$= Estimates

 The Expansion Project

The need for expansion was felt because the market was fast-growing and the company has at
times reached its existing capacity. The project is expected to cost Rs.200 million, and generate
an average profit before interest and taxes (PBIT) of Rs.40 million per annum, for a period of
ten years. It is expected that the new plant will cause a significant increase in the firm’s fixed
costs. The annual total expenses of the company after expansion are expected to consist of
55% of fixed and 45% variable expenses. The company’s financial condition during the
financial year 2020-21 is expected as shown in Table 14.14 without and with the
expansion.

Table 14.14 Central Equipment Company Projected Sales and Profits without and with
Expansion in FY 2020-21

(Rs. Millions)
FY Sales PBIT PAT Dividend EPS

Without 3579.5 850 595 300 33.06

Expansion

With 4032.3 1250 875 570 23.03

Expansion #

# Projections include financial impact of proposed expansion and equity financing Rs.10 per share is assumed.

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 The management has already evaluated the financial viability of the project and found it
acceptable even under adverse economic conditions. Mr. Soni felt that there would not be any
difficulty ln getting the proposal approved from the board and relevant government authorities.
He also thought that the production could start as early as from April 2018.

 Financing of the Project

CEC has so far followed a very conservative financing policy. All these years, the company has
financed its growth through budgetary support from the government in the form of equity capital
and internally generated funds. The company has also been meeting its requirements for working
capital finance from the internal funds. The company has, however, negotiated a standing credit
limit of Rs.100 million from a large nationalized bank. In the past, it has hardly used the bank
limit because of sufficient internal resources. As may be seen from the estimate d balance sheet
as on 31st March 2020 in Table 14.15 CEC’s capital employed included paid-up share capital and
reserves without any debts. The CMD feels that given the government’s current attitude whereby
it would like profitable companies to raise funds from the capital markets for their investments, it
may look odd for CEC to obtain budgetary support from the government. However, in his
assessment, C EC being a profitable company, the government may agree to allow it to come up
with an IPo, provided the government’s Shareholding remains at least equal to 51% of the total
paid-up capital and may also be willing to provide budgetary support for the project. More
significantly, he felt that raising equity might be difficult and it may dilute equity earnings. The
company’s merchant banker suggested that in case it wants to go for IPO, it may be able to sell shares
about 20 to 50% above its par value of Rs.10. Given these facts, CMD decided to reconsider
the company’s policy of avoiding long-term debt. It was thought that the use of debt could be
justified by the expected profitable position of the company.

Table 14.15 CEC: Estimated Balance Sheet as on 31st March 2020

Capital Assets

Sundry Creditors 151.8 Cash & Bank 89

Balance

Tax Provision 30.3 Sundry Debtors 180.7

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 Other Current Inventory 41.1
121.5
Liabilities

Other Current Assets 47.1

Current Liabilities 303.6 Current Assets 357.9

Paid-up Share 180.0 Gross Block 819.9

Capital

Reserves & Surplus 459.6 Accumulated 234.6

Depreciation

Net Worth 639.6 Net Block 585.3

Total Capital 943.2 Total Assets 943.2

Mr. Tandon has determined that the company could sell Rs.1,000 denomination bonds for an
amount of Rs.200 million either to the public or to the financial institutions through private
p l a c e m e n t . T h e i n t e r e s t rate on bonds will be 10.8% per annum, and they could
be redeemed after seven years in three equal annual instalments. The bonds and interest thereon
will be fully secured against the assets of the company. In Mr. Tandon’s view, the company
will have to sell a large number of bonds to the financial institutions as CEC being a new
company in the Capital Market, the public may not fully subscribe to the issue. The bond-
holders shall have right to appoint one nominee director on the board of the company, which
shall, however, be exercised by the bond trustees only if the company defaults in the payment of
interest or repayment on the due date.

In Mr. Tandon’s opinion, the bond was a cheaper source of finance, since the interest amount
was tax-deductible. Given the corporate tax rate of 35%, the 10.8% interest rate was equal to
7% from the company’s point of view. On the other hand, he thought that equity capital
would be costly to service, as CEC is currently paying a dividend of 15% on its paid-up capital.
Further, as per the current tax laws in India, the company would have to pay tax on dividends.
Thus, the bond alternative looked attractive to Mr.Tandon on the basis of the comparison of costs.

The expansion proposal was discussed in the January 2020 meeting of the board. As most of the
members were convinced about the profitability and desirability of the project, they did not take
much time to approve it. Immediately after this decision, Mr. Tandon informed the members

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 about the possibility of raising finance through a bond issue. He then presented his report
highlighting the comparison between bond and equity financing. His conclusions clearly
showed that bond financing was better for the company. Mr. Tandon was surprised to note
substantial disagreement existed among the members regarding the use of bond.

One Director questioned the correctness of Mr. Tandon’s calculation of the cost of the bond as
he had ignored the implications of the repayment if loan. According to him, this would mean a
higher cost of bond as compared to equity capital. Yet another director emphasized that a lot of
annual cash outflow will also take place under the bond alternative. He felt that the issue of the
bond would thus add to the company’s risk by pressurizing its liquidity. Most Of the
directors, however, were in agreement with the estimate of post-expansion profit before
interest and taxes (PBIT) of Rs.1250 million.

One of the directors argued that given the expected higher PBIT, the post-expansion equity
return would significantly increase if the funds are raised by issuing bonds. He even
emphasized that the job of the management should be to maximize the profitability of equity
owners by taking reasonable risks. Another director countered this argument lay stating that the
equity return could be diluted if the company was unable to earn sufficient profit from the
existing business and the new project. The discussion on bond vs. equity financing was so
involved that there did not seem to be any sign of a unanimous agreement being reached. At
this juncture, Mr. Tandon suggested that the discussion on financing alternatives might be
postponed until January end to allow him sufficient time to come up with a fresh analysis
incorporating the various points raised in the current meeting. Mr. Tandon was wondering what
he should do so that a unanimous decision could be reached.

 Discussion Questions

1. Calculate EPS under the alternatives of employing (a) Rs.200 million debt and no fresh equity,
(b) Rs.100 million debt and Rs.100 million equity and (c) Rs.200 million equity and no debt.
Also make calculations for EPS. Draw a chart showing PBIT on x-axis and EPS and EPS on
the taxis for the debt- equity mix. What inferences do you derive?
2. Debate the issues raised in the case for and against the use of debt. Why do a large number
of board members seem to be against the use of debt? What are the real risks involved? How
would you measure them?
3. In addition to profitability and risk factors, what are other considerations before CEC to decide
about its debt policy? Should it employ debt to finance its expansion?

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 PBIT

(A) (B) (C)

FINANCIAL PLANS
Rs.1250 Rs. 1250 Rs. 1250

EPS 44.36 28.77 21.38

Solution
1.

Using this above data, we will draw a chart showing PBIT on the x-axis and EPS on the taxes for
the debt-equity mix.

DEBT-EQUITY MIX

2401

PBIT
EPS

1250 1250 1250

1201 EPS

44.36 28.77 21.38

1
PLAN ( A ) PLAN ( B ) PLAN ( C )

PBIT

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 From the above chart, we can see that EPS is highest when the company employs Rs. 200
million debt and no fresh equity. This is because the interest expense reduces the taxable income,
resulting in a lower liability and higher net income. However, we also observe that the difference
in EPS between the three alternatives is relatively small, indicating that the choice of financing
mix may not have a significant impact on EPS.

2.
 Arguments for the use of debt:

• Debt financing can provide tax benefits as interest payments are tax-deductible.
• Debt financing can increase the return on equity if the company is able to earn a higher rate of
return on the borrowed funds than the interest rate paid on the debt.
• Debt financing can allow the company to take advantage of growth opportunities that it may not
able to finance through equity alone.

 Arguments against the use of debt:

• Debt financing increases the financial risk of the company as it must make regular interest
payments and repay the principal amount at maturity.
• Debt financing can lead to decrease in the return on equity if the company is unable to earn a
higher rate of return on the borrowed funds than the interest rate paid on the debt.
• Debt financing can limit the company’s flexibility in terms of future financing options and
investment decisions.

A large number of board of members seem to be against the use of debt because they are
concerned about the risks involved. The real risks involved in debt financing include:

◦ Interest rate risk: If interest rates rise, the cost of debt financing will increase, which can reduce
the company’s profitability and cash flow.
◦ Default risk: If the company is unable to make regular interest payments or repay the principal
amount at maturity, it may default on its debt obligations, which can to bankruptcy.
◦ Covenants and restrictions: Debt financing often comes with covenants and restrictions that limit
the company’s ability to take certain actions, such as paying dividends or making new
investments.

These risks can be measured using financial ratios such as debt- to- equity ratio, interest
coverage ratio and debt service coverage ratio. These ratios can help assess the company’s ability
to meet its debt obligations and thr level of financial risk it faces.

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 3. In addition to profitability and risk factors, there are several other considerations that Central
Equipment Company (CEC) should take into account when deciding on its debt policy. These
include:

◦ Cost of Capital: CEC should consider the cost of different sources of capital, including debt and
equity, and choose the most cost-effective option.
◦ Market Conditions: CEC should consider the prevailing market conditions, including interest
rates and investor settlement, when deciding on its debt policy.
◦ Capital Structure: CEC should consider its existing capital structure and the impact that
additional debt financing would have on its overall financial position.
◦ Growth Prospects: CEC should consider its growth prospects and the potential for future
investment opportunities, as well as the impact that debt financing would have on its ability to
pursue these opportunities.
◦ Industry norms: CEC should consider the debt policies of other companies in its industry and
ensure that its own policy is in line with industry norms.

Based on these considerations, CEC should carefully evaluate whether it should employ debt to
finance its expansion. While debt financing can provide benefits such as tax advantages and
increased return on equity, it also comes with risks such as increased financial risk and limited
flexibility. CEC should weigh these factors carefully and choose the financing option that best
meets its needs and objectives.

Literature Review
Every firm whether small scale firms or large scale firms need funds to operate; especially large
scale firms, they need funds to expand their operations and activities. The motive of every firm is
to make profit, maximize owner’s wealth, and to achieve this motive they need to source for fund
in order to finance their operations and activities. Firms have multiple financing sources to
finance their investment. Basically, financing sources can be categorized into two; the internal
financing sources which include reserves and retained earnings; external financing which
includes long-term loans, bond issuance, ordinary and preferred stock issuance. (These sources
are long-term sources of finance).

Firms must choose the best financing sources to reach the optimal capital structure so that they
can make suitable financing decision that would enable them achieve positive returns. Financial
leverage is the extent to which fixed income securities (debt) are used in a firm’s capital
structure. A firm’s capital structure is the composition or structure of its liabilities. Furthermore,

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 financial leverage reflects the amount of debt used in capital structure of the firm. Debt carries
fixed obligation of interest payment. Thus, financial leverage increases as the fixed financial
expenses of a firm increases i.e. interest expenses increases as higher amount of debt is incurred.
Also with a high level of debt relative to equity, a small percentage change in earnings before
interest and tax (EBIT) will lead to a large percentage change in net income.

Objective Of The Study

 To study the impact of financial structures of the company.
 To study the impact of financial leverages on profitability of the company.
 To study the impact of financial leverages on liquidity of the company.

Research Methodology
 Research methodology in finance refers to the methodical approach and procedures used to look
into and analyse financial problems and events. To obtain understanding of financial theories,
practices, and market dynamics, it entails the application of scientific financial research
methods, data collecting, analysis, and interpretation.
 A combination of primary data, gained through surveys or experiments, and secondary data,
gathered through financial statements, market reports, and other sources, is frequently used by
finance researchers.
 The goal of the finance research methods are to provide solid and trustworthy results that
advance knowledge of financial markets, investments, corporate finance, risk management, and
other important fields.
 Selecting the appropriate research methodology in finance is one of the key factors that can make
or break a project.

Limitations Of The Study

The limitations of the study are as follows:-

 Can’t go out of station for internship.

 Network issue in doing internship.
 Can’t socialize.
 Can’t work in offline.
 Can’t work as a team.

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 Financial Report Of Company
Here is a summary of financial information of ACMEGRADE PRIVATE LIMITED for the
financial year ending on 31 March, 2023.

 Revenue / turnover of ACMEGRADE PRIVATE LIMITED is INR 1 cr - 100 cr.

 Net worth of the company is 15,070.32 %.
 EBITDA of the company is 000000.
 Total assets of the company is 1,293.78 %.
 Liabilities of the company is 1,008.33 %.

Operating Revenue INR 1 cr - 100 cr

EBITDA 000000

Net worth 15,070.32 %

Debt/Equity Ratio 3.26

Return on Equity 99.34 %

Total Assets 1,293.78 %

Fixed Assets N/A

Current Assets 1,198.05 %

Current Liabilities 1,008.33 %

Trade Receivables 0.00 %

Trade Payables 645.32 %

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Current Ratio 1.20

Conclusion
The main objective of the study was to find out the relationship between financial leverage and
firms’ value. Financial leverage (debt) is a good source of finance to firms as it enables firms to
carry out long- term projects and also reduce the tax payable by the firm. It has also been
observed that the large amount of debt (high leverage ratio) have negative effect on firms that
makes low profit, thus the investors may receive little or no earnings (dividend). Investors’ faith
in both the companies and the capital market is shaken; hence the market value of firms’ shares
will fall same as its value. This study has however established that there is a relationship between
financial leverage and firms’ value and also financial leverage has effect on firms’ value, both
positive and negative effects.

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However, the researcher is hoping that if companies/firms can implement the recommendations
stated below, it is expected that they would be able to enjoy the positive effects of financial
leverage and avoid the negative effects of financial leverage.

Recommendations
Based on this research work, the researcher made the following recommendations:
Corporate financial decision makers (in large firms) should employ more of long-term-debt than
equity in their financial option. This is in line with the pecking order theory. Also firms are
strongly advised to always compare the marginal benefit of using long-term-debt to the marginal
costs of long-term-debt before concluding on using it in financing their operations. This is
because as shown by this work, long-term-debt has impact on firms’ value. Also, firms should
ensure to use optimal level of debt in their capital structure, as this will lead to optimum capital
structure and thus maximization in firms’ value.

Finally, traditional theory states that as a company gearing increases above zero, the weighted
average cost of capital (WACC) will fall initially, because of the higher proportion of lower cost
debt capital in the firm’s capital structure, but eventually increases when gearing gets above a
certain level because of the rising cost of equity which offsets the higher proportion of low cost
debt. The researcher advises companies to reduce their use of debt at the point where the
weighted average cost of capital begins to increase, thus making the firms’ value to fall.

References

ACMEGRADE PRIVATE LIMITED - Company Profile, Directors, Revenue & More - Tofler
www.tofler.in

Financial Leverage - Learn How Financial Leverage Works corporatefinanceinstitute.com

Acmegade Internship Report | PDF www.scribd.com

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PPT - Submitted to: Submitted by: PowerPoint Presentation, free download - ID:3432475
www.slideserve.com

Financial Research Methods | Research In Finance researchinfinance.co.uk

Financial Leverage - Meaning, Ratio, Calculation, Example www.wallstreetmojo.com

Capital Structure: Meaning, Factors, Types, Importance byjus.com

Capital Structure | Formula + Calculator www.wallstreetprep.com

Full-Paper-FINANCIAL-LEVERAGE-AND-FIRMS’-VALUE-A-STUDY-OF-SELECTED-
FIRMS-IN-NIGERIA.pdf file:///C:/Users/HP/Downloads/Documents/Full-Paper-FINANCIAL-
LEVERAGE-AND-FIRMS%E2%80%99-VALUE-A-STUDY-OF-SELECTED-FIRMS-IN-
NIGERIA.pdf

Internship Training Certificate

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Internship Certificate

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