A Study on Financing Decisions of Automobile Industry in India

Abstract

Financial management theories have always tried to focus on maximisation of organisation value. The value of the firms is dependent on the expected earnings or cash flow an organisation will be able to generate and total cost of capital. It is the financial analysts and managers job to forecast the expected cash flows and estimate the cost the capital. The cost of capital is directly related to the capital structure. newlineThe capital structure is one of the most complex and controversial area of financial management of an organisation. Several studies across different countries and industries are available in finance literature which has evidenced the significance of optimising the capital structure for maximisation of value of organisation. newlineThe capital structure refers to components of long term finance sources used by an organisation to finance its fixed assets. The major categories of capital structure are 1) Equity share capital 2) Debt capital and 3) Preference share capital or hybrid securities. In general, debt is the cheapest form of capital available in the financial market, but yet organisation is cautious on using the debt over certain level of debt, as it increases the financial risk. Contemporarily, there are arguments favouring the using the internal funds (equity shareholders capital) to minimise the cost of capital and floatation cost. newlineHence, the choice of capital structure components is not easy as said. A finance manager of an organisation endeavours to optimise the capital structure by having right mix of the various securities available under different categories of capital structure. The decision of selection of financing sources are dependent on various factors namely profitability, firms size, revenue growth, liquidity, nature of business and industry. The optimal capital structure targets to minimum total cost of capital and hence increase the value of the organisation. newlineThe current study attempts to analyse and evaluate the financing decision in automobile industry in India. The study is a mode