s

A CAPITAL STRUCTURE MANAGEMENT

OF

NEPAL INVESTMENT BANK LTD AND CITIZEN BANK LTD

A Project Work Proposal

By

Bipana Adhikari

Himalaya College

T.U. Regd. No.:7-2-0750-0023-2015

Submitted To:

Faculty of Management

Tribhuvan University

Kathmandu

In the partial Fulfillment of Requirements of degree of

Bachelor in Business Studies (BBS)

Kathmandu, Nepal

2018
1. Introduction

1.1 Background of the Study

Capital structure management plays vital role in a real life of an organization. Organization
whether they are government owned or privately owned, have to make pertinent capital structure
decision in identifying exactly how much capital is needed to run their operation smoothly.
Generally fund is acquired by the firm in two way equity and debt. Equity provides the
ownership to the shareholders. On the other hand, the debt or borrowed fund has a fixed charge
irrespective to the earnings of the firm and firm has to pay fixed charge periodically to the debt
provider. The collected capital may be big or small in amount which builds up the financial
power it would be worthy and productive if such amount is collected from various people are
utilized in proper way.

Capital structure is different from financial structure as financial structure includes both long
term and shot term sources of financing. Thus, a firm’s capital structure is only a part of its
financial structure. Thus, the financial structure shows the true picture of organization. It reflects
out of short term obligation and long term sources of fund of the company. Different factor such
as sale stability assets structure operating leverage, growth rate, profitability, taxes management
attitude, lender attitudes, market condition, legal requirement etc. should be taken into
consideration while designing the capital structure.

The success and failure of the industry mainly depends, the ability of the top management and
make appropriate capital structure management. One of the most perplexing issues facing
financial managers is to relationship between capital structure and stock price. How much debt
financing, as opposed to equity financing should a firm use? Should different industries and
different firms within industries have different capital structures and if so what are the factors
that lead to these differences? (Brigham et.al., 1999) studied capital structure which leads to the
following conclusion:

1. There exists an optimal capital structure, or at least an optimal range of structure, for
every firm.
 2. However, financial theory is not powerful enough at this point to locate a firm optimal
capital structure with precision.
3. The capital structure is not set in isolation; rather it depends on a set of factors. Which
include the firm’s dividend policy, its capital investment opportunities, and investor’s
preferences for different types of securities at each point in time?

Capital structure is concerned with the management of liabilities side of the balance sheet. It
refers to the way the firm’s assets are financed with. Prudent financial structure design requires
answers to the following questions:

1. What should be the maturity composition of the firm’s sources of funds?

2. In what proportions relative to should the various forms of permanent financing be
utilized?

These four points largely determine the capital structure, but operating condition can cause the
actual structure to vary from the target.

Within a period of two and half decades, the Nepalese financial system has grown significantly
both in terms of business volume and size of assets and market. The period show a number of
financial institutions coming into existence with varied rapture of operations and offering a wide
range of financial service. Since the second half of the 1980, significant achievement have been
made in Nepalese financial system in mid July 2007, the Nepalese financial comprised the
commercial banks, development banks, cooperatives, non-government organizations and some
non-banking financial institutions. Commercial banks, development banks, cooperatives and
non-government organization licensed to carry out limited banking business come under the
regulatory and supervisory jurisdiction of NRB.

1.2 Statement of the Problem

The capital structure concept has been the subject of controversy since the publication of
Modigliani and Millers classic paper in 1958. They hold the view that the cost of a firm remains
invariant to capital structure changes. On the other hand, tradition proposition is that the cost of
capital is the function of capital structure (Solomon: 1969). There are many empirical works
regarding the capital structure supporting and against traditional view. For example: the studies
by Barges (1963), Western (1963), Wippern (1963), Flath and Knoebear (1980) and Pandey
(1981) rejected the MM approach. However, no simple and exact conclusive result exists
regarding their relationship capital structure and cost of capital are the touchstone of financing
and investment decision and ex-post evaluation of financing performance of an organization.
Capital structure and cost of capital helps to maximize the value of the firm. So, the corner stone
of the problem is to look into the problem of capital structure of Nepalese enterprises whether
they are manufacturing or commercial. Most of the Nepalese organization facing the problem of
capital structure management due to lack of knowledge, environmental changes throat-cut
competition globalization etc. To sum up, the study deals with the following issues:

1. How is capital structure managed in Nepalese commercial banks?

2. How is the trend of composition of debt and equity capital structure?
3. What are the relationships among total deposit to total loan and advances, total assets to
net profit after tax, long term debt to net profit after tax and shareholders fund to net
profit after tax of commercial banks in Nepal?
4. What further suggestions and recommendations can be made on the selected banks?

1.3 Objectives of the Study

The major objective of the study is to evaluate and analyze the capital structure management in
Nepalese commercial banks. Following are the specific objectives:

1. To evaluate the performance of CBs banks, in terms of long term debt, shareholders
equity, total assets, total deposit, total loan and advances, EBIT and net profit after tax +
interest etc.
2. To compare the financial results of selected commercial banks.
3. To examine the relationship between variables affecting debt and equity capital of
commercial banks.

1.4 Significant of the Study

The banks selected for the study hold a strong position in contributing to uplift the economy.
Therefore, their financial position capital structure and cost of capital is the matter of concern.
This study will be beneficial to overview their capital structure management and to formulate
future strategies to do much better in their horizon. Not only can the sampled banks benefited
from the study but also the other firms and new researchers for the review of literature in near
future. The researcher chosen the study of capital structure management as the subject matter and
also in the present context it seems relevant.

1.5 Organization of the Study

The whole study has been divided into five major chapters:

Chapter I: Introduction: This chapter deals with major issues to be investigated along with
background of the study, statement of problem, objectives of the study, significance of the study
and organization of the study.

Chapter II: Review of Literature: This chapter includes a discussion of the conceptual framework
and review of relevant research studies.

Chapter III: Research Methodology: This chapter describes the research methodology employed
in the study.

Chapter IV: Data Presentation and Analysis: This is the heart of the study in which all the
relevant collected data are analyzed and interpreted.

Chapter V: Summary, Conclusion and Recommendations: This chapter indicates that the
summary conclusion and recommendations of the study.

2. Research Methodology

2.1 Research Design

To conduct this study descriptive approach has been adopted. Descriptive approach has been
utilized mainly for conceptualization of the problem. Analytical approach has been followed
mainly to analyze the variable that affect the capital structure management.

2.2 Population and Sample

All the commercial banks operating in Nepal i.e. 28 are considered as population of the study.
For the study purpose, only Two commercial banks has been taken as sample. The sample banks
are Nepal Investment Bank Limited and Citizen Bank Limited. as via judgmental non-random
sampling method.
2.3 Nature and Sources of Data
The authenticity of a research depends upon the collected data. Data collected for any kind of
research study can be either primary or secondary or both. This study is related to the capital
structure management; therefore the sources of data used in this study are basically of secondary
nature. All the study analysis and evaluation have been based on the available annual report
(profit and loss account, balance sheet and income statement) and progress reports of the
concerned banks. The other sources were unpublished thesis, research study, several books,
journals, magazines and newspapers in different libraries; internet was also an important source
of data collection. The use of primary sources was negligible.

2.4 Data Processing Procedure

The study is basically based on the secondary data. The data are collected in crude form in the
initial stage and then properly synthesized, arranged, tabulated and calculated to serve the
objective of the study.

2.5 Tools for Analysis

Data collected from various sources are analyzed and presented in proper tables and format.
Collected data have been analyzed using both financial as well as statistical tools as per the
requirements. In financial tools different ratios like leverage ratio, and profitability ratios have
been used. Similarly, in statistical tools average, standard deviation, correlation coefficient and
probable error have been used.
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