IMPACT OF CAPITAL STRUCTURE ON PROFITABILITY OF NEPALESE

COMMERCIAL BANKS

A Thesis

By

Shushila Aryal

Central Department of Management

Exam Roll No: 827/16

T.U Registration No: 7-2-305-243-2011

Submitted in partial fulfillment of the requirement for the degree of

Master of Business Studies (MBS)

In the

Faculty of Management

Tribhuvan University

Kirtipur, Kathmandu

July, 2019
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CERTIFICATION OF AUTHORSHIP

I certify that the work in this thesis has not been previously submitted for degree or has it
been submitted as part of requirement for a degree of those selected commercial banks
except as fully acknowledge

I also certify that the thesis has been written by me. Any help that I have requested during
the study and preparation of the work has been acknowledged. In addition. I certify that
all the required information sources and literature used are indicated in the reference
section of thesis.

Shushila Aryal

Exam Roll No.: 827/16

T.U. Redg. No.: 7-2-305-243-2011

Date: July, 2019

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RECOMMENDATION LETTER

It is certified that thesis entitled ‘Impact of Capital Structure on Profitability of

Nepalese Commercial Banks’ submitted by Shushila Aryal is an original piece of
research work carried out by candidate under my supervision. Literary presentation is
satisfactory and thesis is acceptable. Work evinces the capacity has work at least 6
months after registration the proposal. The thesis is forwarded for examination.

Mr. Bal Ram Duwal

(Thesis Supervisor)

Central Department of management

Tribhuvan University, Kathmandu Nepal

Date: July, 2019

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APPROVAL SHEET

We, the undersigned, have examined the thesis entitled ‘Impact of Capital Structure on
Profitability of Nepalese Commercial Banks’ presented by Shushila Aryal, a
candidate for degree of Master of Business Studies (MBS) and conducted the viva voice
examination of the candidate. We hereby certify that the thesis is worthy of acceptance.

Dr. Bal Ram Duwal

(Thesis supervisor)

Internal Examiner

External Examiner

Prof. Dr. Sanjay Kumar Shrestha

(Chairman, Research Committee)

Prof. Dr. Ramji Gautam

(Head of the Department)

Date: July, 2019

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ACKNOWLEDEMENTS

The research project entitled “Impact of Capital Structure on Profitability of Nepalese

Commercial Banks” has been prepared to fulfill the partial requirement for the MBS
degree course of Tribhuvan University. I would like to express my gratitude towards each
and every individual who have supportive helping hands for the completion of thesis
work. Without whom, it is not possible anyways.

First of all, I would like to express my endless gratitude to the almighty god for each and
every help and courage at hard times. Then I would like to express sincere thanks to my
supervisor Dr. Bal Ram Duwal for their very supportive and kind behavior as and when I
need help. His guidance for this work is incredible, without which it would not be
success. Similarly, I also would like to express my gratitude to ‘Head of Department’
Prof .Dr. Ramji Gautam and chairman of the research committee Professor Dr. Sanjay
Kumar Shrestha.

I also would like to give special thanks to my lovely friend Puja Bhattarai for her
guidance throughout the study.

Lastly, I would like to express special thanks to my parents Baburam Aryal and Khima
Aryal who has been with me as a supporter, guider and mentor always be there in
difficulties throughout my life and academic career. Finally I would like to give big
thanks to all Central Department of Management family, Tribhuvan University.

Shushila Aryal

Central Department of Management

Tribhuvan University, Kathmandu, Nepal

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Table of contents

Titles Page No.

Certification of authorship ii

Recommendation letter iii

Approval Sheet iv

Acknowledge v

Table of contents vi

List of tables x

List of figures xii

Abbreviations xiii

Abstract xiv

Chapter – i – Information 1-17

1.1 Background of the study 1

1.1.1 Importance of capital structure 4

1.1.2 Determinants of capital structure 5

1.2 Profile of selected banks 10

1.2.1 Agriculture Development Bank Limited 11

1.2.2 Nepal SBI Bank Limited 11

1.2.3 Nepal Investment Bank Limited 12

1.2.4 Siddhartha Bank Limited 12

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1.2.5 Global IME Bank Limited 13

1.3 Statement of the problem 14

41.4 Objectives of the study 14

1.5 Significance of the study 15

1.6 Limitation of the study 15

1.7 Organization of the study 16

Chapter - ii – Literature review 18-32

2.1 Introduction 17

2.2 Theory of capital structure 17

2.2.1 Net income theory 17

2.2.2 Net operating income theory 18

2.2.3 The Modigliani and Miller model theory 19

2.2.4 Traditional theory 20

2.3 Determinants of profitability 21

2.3.1 Liquidity 22

2.3.2 Firm size 23

2.3.3 Leverage 24

2.3.4 Efficiency 24

2.4 Review of Journal and book 25

2.5 Conceptual framework of capital structure 30

2.6 Research gap 32

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Chapter –iii – Research Methodology 33-40

3.1 Research design 33

3.2 Population and sampling 33

3.3 Nature and sources of data 33

3.4 Analysis of data 34

3.4.1 Financial ration 34

3.4.2 Statistical tool 38

Chapter - iv – Data Presentation and Analysis 41-64

4.1 Introduction 41

4.2 Descriptive analysis of variables of the study 45

4.2.1 Short term debt to total assets 46

4.2.2 Long term debt to total assets 47

4.2.3 Total debt to total assets 48

4.2.4 Total debt to total equity 49

4.2.5 Earning Per Share 50

4.2.6 Return on assets 51

4.2.7 Return on equity 52

4.3 Correlation between dependent and independent variable 53

4.3.1 EPS and independent variable 53

4.3.2 ROA and independent variable 55

 ix

4.3.3 ROE and independent variable 57

4.4 Relationship between dependent and independent variable 58

4.4.1 EPS and independent variable 58

4.4.2 ROA and independent variable 60

4.4.3 ROE and independent variable 62

Chapter-V-Conclusion 65-70

5.1 Summary 65

5.2 Conclusion 68

5.3 Implications 69

5.4 Implication for further study 70

Reference 71-73

Appendices
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List of Tables

Table No. Page No.

1.1 Profile of selected banks 10

4.1 Equity 41

4.2 Total Debt 42

4.3 Long-term Debt 43

4.4 Short-term Debt 44

4.5 Total Assets 44

4.6 Profitability 45

4.7 Short term debt to total assets 46

4.8 Long term debt to total assets 47

4.9 Total Debt to total assets 48

4.10 Total debt to total equity 49

4.11 Earnings per share 50

4.12 Return on assets 51

4.13 Return on equity 52

4.14 Correlation between EPS and independent variable 50

4.15 Hypothesis testing 54

4.16 Correlation between ROA and independent variable 55

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4.17 Hypothesis testing 56

4.18 Correlation between ROE and independent variable 57

4.19 Hypothesis testing 58

4.20 Model Summery 58

4.21 Anova 59

4.22 Coefficient 60

4.23 Model Summery 60

4.24 Anova 61

4.25 Coefficient 61

4.26 Model Summery 62

4.27 Anova 63

4.28 Coefficient 63
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List of figure

Figure No. Page No.

2.5.1 Conceptual relation between dependent and independent 31

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Abbreviation

ATM = Automatic Tailor Machine

BAFIA = Bank and Financial Institution Act

CEO = Chief Executive Officer

D/E = Debt Equity Ratio

EBIT = Earnings Before Interest and Tax

EPS = Earnings Per Share

L&A = Loan and Advance

LTDTA = Long Term Debt to Total Assets

No. = Number

NPAT = Net Profit After Tax

ROA = Return on Assets

ROE = Return on Equity

STDTA = Short Term Debt to Total Assets

TA = Total Assets

TDTA = Total Debt to Total Assets

TDTE = Total Debt to Total Equity

WACC = Weighted Average Cost of Capital

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ABSTRACT

This research aims to investigating the impact of capital structure on profitability of

Nepalese commercial banks by selecting five commercial banks Agriculture Development
Bank Limited, Nepal Investment Bank Limited, Nepal SBI Bank Limited and Siddhartha
Bank Limited. The study considers analytical and descriptive methodology are used to
find the result. The study considers annual reports for statistical analysis. Descriptive
analysis has conducted by collecting data from the annual report and analytical analysis
including correlation, multiple regression analysis, hypothesis testing has been done by
using annual data for the reliable result from related websites of the concerned banks
NRB websites and publications as well. The study has considers annual of 2012-2018. In
this study return on equity, return on assets and earnings per share are used as
profitability indicators representing dependent variables and long term debt to total
assets ratio, short term debt to total assets ratio, total debt to total assets ratio and total
debt to total equity ratio are used as capital structure indicators representing
independent variables. Both SPSS and excel are used to analyze these variables. The
empirical results that GIBL has higher level of mean value of STDTA and NIBL has
higher level of mean of ROE. There is no statistically relationship of ROE with STDTA,
LTDTA and TDTE. EPS has very weak negative relationship with STDTA. ADBL has
higher level of EPS which is highest among others. GIBL has lowest level of EPS
because, its risk and return tradeoff between capital composition is weak than other
bank. Composition of capital of GIBL bank leads to lower level of EPS due to high using
of equity and low level of income as well as it also leads to lower level of ROA. So, with
analysis, GIBL is recommended to increases its proportion of debt to finance assets in
coming year.
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CHAPTER-I

INTRODUCTION

1.1 Background of the study

The term ‘structure’ means the arrangement of the various parts. So capital structure means
the arrangement of capital from different sources so that the long-term funds needed for the
business are raised. Thus, capital structure refers to the proportions or combination of equity
share capital, preference share capital, debenture, long-term loans, retained earnings and
other long-term sources of fund in the total amount of capital which a firm should raise to run
its business. Capital structure is the combination of debt and equity securities that comprise a
firm’s financing of its assets.

The relative proportion of various sources of funds used in a business is termed as financial
structure. Capital structure is a part of the financial structure and refers to the proportion of
the various long- term sources of financing. It is concerned with making the array of the
sources of the funds in a proper manner, which is in relative magnitude and proportion. The
capital structure of a company is made of debt and equity securities that comprise a firm’s
financing of its assets. It is permanent financing of a firm represented by long- term debt,
preferred stock and net worth. So, it related to the arrangement of capital and excludes short-
term borrowing. It denotes some degree of permanency as it excludes short-term sources of
financing. Again each components of capital structure has a different cost to the firm.

Companies can use either debt or equity capital to finance their possessions. Greatest choice
is a combination of debt and equity. In circumstance where interest was not duty deductible,
companies’ proprietors would be uninterested as to whether they used debt or equity, and
where interest was tax deductible, they would make best use of the worth of their
organization by spending 100% debt bankrolling (Champion, 2000).
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A company’s capital structure points out how its assets are financed. When a company
finances its operations by opening up or increasing capital to an investor (preferred
shares, common shares, or retained earnings), it avoids debt risk, thus reducing the
potential that it will go bankrupt. Moreover, the owner may choose debt funding and
maintain control over the company, increasing return on the operations. Debt takes the
form of a corporate bond issue, long-term loan, or short-term debt. The latter directly
impacts the working capital. Having said that, a company that is 70% debt-financed and
30% equity-financed has a debt-to-equity ratio of 70%; this is the leverage. It is very
important for a company to manage its debt and equity financing because a favorable
ratio will be attractive to potential investors in the business.

Capital can be raised either through the acquisition of debt or through equity. Equity
financing comes from the sale of stock to shareholders. Debt can come from many
sources, such as bank loans, personal loans and credit card debt, but it must always be
repaid at a later date, usually with interest. Both types of capital financing carry some
degree of expense that must be paid to access funds, called the cost of capital. For debt
capital, this is the interest rate charged by the lender. The cost of equity is represented by
the rate of return on investment that shareholders expect in dividends. While debt tends to
cost less than equity, both types of capital financing impact a company's profit margins in
important ways. Perhaps the clearest example of this is the impact of debt on the bottom
line. Somewhere between operational expenses and the net profit figure on a company's
income statement lies expenses incurred for the payment of debts. A company with a
particularly debt-heavy capital structure makes larger interest payments each year,
thereby reducing net profit. Debt allows companies to leverage existing funds, thereby
enabling more rapid expansion than would otherwise be possible. The effective use of
debt financing result in an increases in revenue that exceeds the expense of interest
payments. In addition, interest payments are tax-deductible, reducing a company's overall
tax burden.
 3

The impact of equity financing on a company's profit margins is equally important,

though not quite so straightforward. While equity funds stimulate growth without
requiring repayment, shareholders are granted limited ownership rights, including voting
rights. They also expect a return on their investment in the form of dividends, which are
only paid if the company turns a profit. A business funded by shareholder equity is
beholden to its investors and must remain consistently profitable in order to fulfill this
obligation. Business ownership is shared, so the proverbial pie of profits must be divided
into a greater number of pieces. A company funded fully by debt may have hefty interest
payments each month, but when all is said and done, the profits belong entirely to the
business owners. Without shareholder dividends to pay, the profits can be reinvested in
the business through the purchase of new equipment or by opening a new location,
generating even greater profits down the road.

Another indirect effect of capital structure on profitability is its impact on the potential
availability of additional capital if it is needed in the future. A company with a
particularly high debt to equity ratio may be seen as unnecessarily risky by both lenders
and potential shareholders, making it difficult to raise additional funds. Limited access to
capital funding, in turn, limits the business's growth potential, keeping profit
margins stagnant.

Capital structure is the mix of long- term sources of funds used by a firm. It is made up of
debt and equity securities and refers to permanent financing of a firm. It is compose of
long-term debt, preference share capital and shareholder’s funds. Capital structure also
suggests the ratio between owned capital and borrowed capital. While planning the
capital structure, proper balance between debt and equity is essential. There is no hard
and fast rule in deciding the composition of capital structure.

Every firm employs the use of capital to do its business. This capital employed may be
consisting of equity (ownership contribution) and debt. Debt is any external funding
which is repayable and has an associated cost. The cost may be direct such as interest
payment or indirect such as agency cost. Debt could be short term (less than one year) or
long term (more than a year). Firms may use different forms of debt such as taking a
 4

credit facility directly from a financial institution, issuing (warrants or convertible)

bonds, using lease financing or taking a trade credit to finance their business (Agyeman,
2015).

Capital Structure refers to balance between equities and long term liabilities and it sets
the firm's leverage. Leverage, in turn, determines how owners and creditors share risks
and rewards in proportion to their share of company funding (Muzumber, 2006).
Modigliani-Miller (MM) theorem is the broadly accepted capital structure theory because
is it the origin theory of capital structure theory which had been used by many
researchers. According to MM Theorem, these capital structure theories operate under
perfect market. Various assumptions of perfect market such as no taxes, rational
investors, perfect competition, absence of bankruptcy costs and efficient market. MM
Theorem states that capital structure or finances of a firm is not related to its value in
perfect market (Modigliani & M, 1958).

Hence capital structure implies the composition of fund raised from various sources
broadly classified as debt and equity. It may be defined as the proportion of debt and
equity in the total capital that will remain invested in a business over a long period of
time. Capital structure is concerned with the quantitative aspect. A decision about the
proportion among the proportion among these types of securities refers to the capital
structure decision of an enterprise.

1.1.1 Importance of capital structure

Decisions relating to financing the assets of a firm are very crucial in every business and
the finance manager is often caught in the dilemma of what the optimum proportion of
debt and equity should be. As a general rule there should be a proper mix of debt and
equity capital in financing the firm’s assets. Capital structure is usually designed to serve
the interest of the equity shareholders.

Therefore instead of collecting the entire fund from shareholders a portion of long term
fund may be raised as loan in the form of debenture or bond by paying a fixed annual
charge. Through these payments are considered as expenses to an entity, such method of
 5

financing is adopted to serve the interest of ordinary shareholders in a better way. The
importance of designing a proper capital structures are value maximization, cost
minimization, increase in share price, investment opportunity, growth of the country.

1.1. 2 Determinants of the capital structure

Capital structure refers to the way a firm chooses to finance its assets and investments
through some combination of equity, debt, or internal funds. It is in the best interests of
a company to find the optimal ratio of debt to equity to reduce their risk of insolvency,
continue to be successful and ultimately remain or to become profitability. The factors
influencing the capital structure (or determinants of capital structure) are discussed as
follows:

1. Financial Leverage or Trading on Equity: The use of long term fixed interest
bearing debt and preference share capital along with equity share capital is
called financial leverage or trading on equity. If the assets financed by debt yield a
return greater than the cost of the debt, the earnings per share will increase without an
increase in the owners’ investment. Similarly, the earnings per share will also
increase if preference share capital is used to acquire assets. But the leverage impact
is felt more in case of debt because (i) the cost of debt is usually lower than the cost
of preference share capital, and (ii) the interest paid on debt is a deductible charge
from profits for calculating the taxable income while dividend on preference shares is
not. Because of its effect on the earnings per share, financial leverage is one of the
important considerations in planning the capital structure of a company. The
companies with high level of the Earnings Before Interest and Taxes (EBIT) can
make profitable use of the high degree of leverage to increase return on the
shareholders’ equity. One common method of examining the impact of leverage is to
analyze the relationship between Earnings Per Share (EPS) at various possible levels
of EBIT under alternative methods of financing. The EBIT-EPS analysis is one
important tool in the hands of the financial manager to get an insight into the firm’s
capital structure management. The earnings per share also increase with the use
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of preference share capital but to the act fact that interest is allowed to be deducted
while computing tax, the leverage impact of debt is much more.

2. Growth and Stability of Sales: The capital structure of a firm is highly influenced by
the growth and stability of its sales. If the sales of a firm are expected to remain fairly
stable, it can raise a higher level of debt. Stability of sales ensures that the firm will
not face any difficulty in meeting its fixed commitments of interest payment and
repayments of debt. Similarly, the rate of growth in sales also affects the capital
structure decision.

3. Cost of Capital: Every dollar invested in a firm has a cost. Cost of capital refers to the
minimum return expected by its suppliers. The expected return depends on the degree
of risk assumed by investors. A high degree of risk is assumed by shareholders than
debt-holders. The capital structure should provide for the minimum cost of capital.
Measuring the costs of various sources of funds is a complex subject and needs a
separate treatment. Needless to say that it is desirable to minimize the cost of capital.
Hence, cheaper sources should be preferred, other things remaining the same. The
main sources of finance for a firm are equity share capital, preference share
capital and debt capital. The return expected by the supplier of capital depends upon
the risk they have to undertake. For shareholders the rate of dividend is not fixed and
the Board of Directors has no legal obligation to pay dividends even if the profits
have been made by the company. The loan of debt-holders is returned within a
prescribed period, while shareholders can get back their capital only when the
company is wound up. This leads one to conclude that debt is a cheaper source of
funds than equity. The tax deductibility of interest charges further reduces the cost of
debt. The preference share capital is cheaper than equity capital, but is not as cheap as
debt is. Thus, in order to minimize the overall cost of capital, a company should
employ a large amount of debt.

4. Risk: There are two types of risk that are to be considered while planning the capital
structure of a firm viz (i) business risk and (ii) financial risk. Business risk refers to
the variability to earnings before interest and taxes. Business risk can be internal as
 7

well as external. Internal risk is caused due to improper products mix non availability
of raw materials, incompetence to face competition, absence of strategic management
etc. internal risk is associated with efficiency with which a firm conducts it operations
within the broader environment thrust upon it. External business risk arises due to
change in operating conditions caused by conditions thrust upon the firm which are
beyond its control e.g. business cycle.

5. Cash Flow: One of the features of a sound capital structure is conservation.

Conservation does not mean employing no debt or a small amount of debt.
Conservatism is related to the assessment of the liability for fixed charges, created by
the use of debt or preference capital in the capital structure in the context of the firm’s
ability to generate cash to meet these fixed charges. The fixed charges of a company
include payment of interest, preference dividend and principal. The amount of fixed
charges will be high if the company employs a large amount of debt or preference
capital. Whenever a company thinks of raising additional debt, it should analysis its
expected future cash flows to meet the fixed charges. It is obligatory to pay interest
and return the principal amount of debt. A firm which shall be able to generate larger
and stable cash inflows can employ more debt in its capital structure as compared to
the one which has unstable and lesser ability to generate cash inflow. Debt financial
implies burden of fixed charge due to the fixed payment of interest and the principal.
Whenever a firm wants to raise additional funds, it should estimate, project its future
cash inflows to ensure the coverage of fixed charges.

6. Nature and Size of a Firm: Nature and size of a firm also influence its capital
structure. All public utility concern has different capital structure as compared to
other manufacturing concern. Public utility concerns may employ more of debt
because of stability and regularity of their earnings. On the other hand, a concern
which cannot provide stable earnings due to the nature of its business will have to
rely mainly on equity capital. The size of a company also greatly influences the
availability of funds from different sources. A small company may often find it
difficult to raise long-term loans. If somehow it manages to obtain a long-term loan, it
 8

is available at a high rate of interest and on inconvenient terms. The highly restrictive
covenants in loans agreements of small companies make their capital structure quite
inflexible. The management thus cannot run business freely. Small companies,
therefore, have to depend on owned capital and retained earnings for their long-term
funds. A large company has a greater degree of flexibility in designing its capital
structure. It can obtain loans at easy terms and can also issue ordinary shares,
preference shares and debentures to the public. A company should make the best use
of its size in planning the capital structure.

7. Control: Whenever additional funds are required by a firm, the management of the
firm wants to raise the funds without any loss of control over the firm. In case the
funds are raised though the issue of equity shares, the control of the existing
shareholder is diluted. Hence they might raise the additional funds by way of fixed
interest bearing debt and preference share capital. Preference shareholders and
debenture holders do not have the voting right. Hence, from the point of view of
control, debt financing is recommended. But, depending largely upon debt financing
may create other problems, such as, too much restrictions imposed upon imposed
upon by the lenders or suppliers of finance and a complete loss of control by way of
liquidation of the company.

8. Flexibility: Flexibility means the firm’s ability to adapt its capital structure to the
needs of the changing conditions. The capital structure of a firm is flexible if it has no
difficulty in changing its capitalization or sources of funds. Whenever needed the
company should be able to raise funds without undue delay and cost to finance the
profitable investments. The company should also be in a position to redeem its
preference capital or debt whenever warranted by future conditions. The financial
plan of the company should be flexible enough to change the composition of the
capital structure. It should keep itself in a position to substitute one form of financing
for another to economies on the use of funds.

9. Requirement of Investors: The requirements of investors is another factor that

influence the capital structure of a firm. It is necessary to meet the requirements of
 9

both institutional as well as private investors when debt financing is used. Investors
are generally classified under three kinds, i.e. bold investors, cautions investors and
less cautions investor.

10. Capital Market Conditions (Timing): Capital Market Conditions do no remain the
same for ever sometimes there may be depression while at other times there may be
boom in the market is depressed and there are pessimistic business conditions, the
company should not issue equity shares as investors would prefer safety.

11. Marketability: Marketability here means the ability of the company to sell or market
particular type of security in a particular period of time which in turn depends upon -
the readiness of the investors to buy that security. Marketability may not influence the
initial capital structure very much but it is an important consideration in deciding the
appropriate timing of security issues. At one time, the market favors debenture issues
and at another time, it may readily accept ordinary share issues. Due to the changing
market sentiments, the company has to decide whether to raise funds through
common shares or debt. If the share market is depressed, the company should not
issue ordinary shares but issue debt and wait to issue ordinary shares till the share
market revives. During boom period in the share market, it may not be possible for
the company to issue debentures successfully. Therefore, it should keep its debt
capacity unutilized and issue ordinary shares to raise finances.

12. Inflation: Another factor to consider in the financing decision is inflation. By using
debt financing during periods of high inflation, we will repay the debt with dollars
that are worth less. As expectations of inflation increase, the rate of borrowing will
increase since creditors must be compensated for a loss in value. Since inflation is a
major driving force behind interest rates, the financing decision should be cognizant
of inflationary trends.

13. Floatation Costs: Floatation costs are incurred when the funds are raised. Generally,
the cost of floating a debt is less than the cost of floating an equity issue. This may
encourage a company to use debt rather than issue ordinary shares. If the owner’s
 10

capital is increased by retaining the earnings, no floatation costs are incurred.

Floatation cost generally is not a very important factor influencing the capital
structure of a company except in the case of small companies.

14. Legal Considerations: At the time of evaluation of different proposed capital

structure, the financial manager should also take into account the legal and regulatory
framework (MBA Knowledge Base, 2012)

1.2 Profile of Selected Banks

The profile of selected banks are shown by the following table:

Profile of Selected Banks

Table 1.1(in millions)

Name ADBL* SBI# NIBL+ SBL@ GIBL##

Paid up Capital 10374 8047 10646 8464 8888
Total Assets 1354120 102539 17189 119869 125847
Loan and Advance 100525 75236 120825 86077 92352
Debenture 460 1000 1250 1204 400
Reserve 9922 3254 9772 3932 3229
Deposits 104216 84227 136586 94580 949
No. of branch 40 72 78 104 133
ATM 232 110 108 83 141
Note:* ADBL (2018)

# SBI (2018)

+ NIBL (2018)

@SBL (2018)

## GIBL (2018)

The table 1.1 indicates, the selected commercial bank used paid up capital. They have
huge number of branches and ATM services which are available all over the country. The
total deposit of ADBL, SBI, NIBL, SBL and GIBL are 104216, 84227, 136586, 94580
and 949.
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1.2.1 Agriculture Development Bank Ltd

With the main objective of providing institutional credit for enhancing the production and
productivity of the agricultural sector in the country, the Agricultural Development Bank,
Nepal was established in 1968 under the Agriculture Development Bank Limited Act
1967, as successor to the cooperative Bank. The Land Reform Savings Corporation was
merged with ADBN in 1973. Subsequent amendments to the Act empowered the bank to
extend credit to small farmers under group liability and expand the scope of financing to
promote cottage industries. The amendments also permitted the bank to engage in
commercial banking activities for the mobilization of domestic resources. Agricultural
Development Bank Limited (ADBL) is an autonomous organization largely owned by
Government of Nepal. The bank has been working as a premier rural credit institution
since the last three decades, contributing a more than 67 percent of institutional credit
supply in the country. Hence, rural finance is the principal operational area of ADBL.
Furthermore, the bank has also been involved in commercial banking operations since
1984. The enactment of Bank and Financial Institution Act (BAFIA) abolished all Acts
related to financial institutions including the ADBN Act, 1967. In line with the BAFIA,
ADBL has been incorporated as a public limited company on July 14, 1948. Thus, ADBL
operates as a "A" category financial Institution under the legal framework of BAFIA and
the Company Act, 1996.

1.2.2 Nepal SBI Bank Ltd

Nepal SBI Bank Ltd. (NSBL) is a subsidiary of State Bank of India (SBI) having 55
percent of ownership. The local partner viz. Employee Provident Fund holds 15% equity
and General Public 30%. In terms of the Technical Services Agreement between SBI and
the NSBL, the former provides management support to the bank through its expatriate
officers including Managing Director who is also the CEO of the Bank. Central
Management Committee (CENMAC), consisting of the Managing Director & CEO,
Chief Operating Officer & Dy. CEO, Chief Financial Officer, Chief Risk Officer and
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Chief Officer, exercises overall control functions with the help of 3 Regional Offices, and
oversee the overall operations of the Bank.

NSBL was established in July 1993 and has emerged as one of the leading banks of
Nepal, with 869 skilled and dedicated Nepalese employees working in a total of 83
outlets, which includes 72 branches, 7 extension counters, 3 Regional Offices and
Corporate Office. With presence in 39 districts in Nepal, the Bank is providing value
added services to its customers through its wide network of 110 ATMs (including 2
Mobile ATMs and 4 CRMs), internet banking, mobile wallet, SMS banking, etc. NSBL is
one of the fastest growing Commercial Banks of Nepal with more than 8.33 lakhs
satisfied deposit customers and over 6.50 lakhs ATM/Debit cardholders. The Bank
enjoys leading position in the country in terms of penetration of technology products, viz.
Mobile Banking, Internet Banking and Card Services. The Bank is moving ahead in the
Nepalese Banking Industry with significant growth in Net Profit with very nominal NPA.

1.2.3 Nepal Investment Bank Ltd

Nepal Investment Bank Ltd. (NIBL), previously Nepal Indosuez Bank Ltd., was
established in 1986 as a joint venture between Nepalese and French partners. The French
partner (holding 50% of the capital of NIBL) was Credit Agricole Indosuez, a subsidiary
of one of the largest banking group in the world.

Later, in 2002 a group of Nepalese companies comprising of bankers, professionals,

industrialists and businessmen acquired the 50% shareholding of Credit Agricole
Indosuez in Nepal Indosuez Bank Ltd., and accordingly the name of the Bank also
changed to Nepal Investment Bank Ltd. NIBL has 78 branches,108 ATM available in
Nepal.

1.2.4 Siddhartha Bank Ltd

Siddhartha Bank Limited (SBL), established in 2002 and promoted by prominent

personalities of Nepal, today stands as one of the consistently growing banks in Nepal.
While the promoters come from a wide range of sectors, they possess immense business
acumen and share their valuable experiences towards the betterment of the Bank.
 13

Within a short span of time, Siddhartha Bank has been able come up with a wide range of
products and services that best suits its clientele. Siddhartha Bank has been posting
growth in its portfolio size and profitability consistently since the beginning of its
operations. The management of the Bank has been thoroughly professional. Siddhartha
bank has 104 branches, 83 ATM services in Nepal.

Siddhartha Bank has been able to gain significant trust of the customers and all other
stakeholders to become one of the most promising commercial banks in the country in
less than 15 years of its operation. The Bank is fully committed towards customer
satisfaction. The range and scope of modern banking products and services the Bank has
been providing is an example to its commitment towards customer satisfaction. It is this
commitment that has helped the Bank register quantum growth every year. And the Bank
is confident and hopeful that it will be able to retain this trust and move even further
towards its mission of becoming one of the leading banks of the industry.

1.2.5 Global IME Bank Ltd

Global IME Bank Ltd. (GIBL) emerged after successful merger of Global Bank Ltd (an
“A” class commercial bank), IME Financial Institution (a “C” class finance company)
and Lord Buddha Finance Ltd. (a “C” class finance company) in year 2012. Two more
development banks (Social Development Bank and GulmiBikas Bank) merged with
Global IME Bank Ltd in year 2013. Later, in the year 2014, Global IME Bank made
another merger with Commerz and Trust Bank Nepal Ltd. (an “A” class commercial
bank). During 2015-16, Global IME Bank Limited acquired Pacific Development Bank
Limited (a "B" Class Development Bank) and Reliable Development Bank Limited (a
“B” Class Development Bank. Global Bank Limited (GBL) was established in 2007 as an
‘A’ class commercial bank in Nepal which provided entire commercial banking services.
The bank was established with the largest capital base at the time with paid up capital of
NPR 1.0 billion. The paid up capital of the bank has since been increased to NPR
8.88 billion. The bank's shares are publicly traded as an 'A' category company in the
Nepal Stock Exchange.
 14

The bank has diversified interests in hydro power, manufacturing, textiles, services
industry, aviation, exports, trading and microfinance projects, just to mention a few.

1.3 Statement of the problem

The choice of capital structure is one of the most important strategic financial decisions
of firms. Capital structure is the mix of the long-term sources of funds used by a firm. It
is made up of debt and equity securities and refers to permanent financing of a firm. It is
composed of long term debt, preference share capital and shareholder’s funds. The capital
structure of a company is made up of debt and equity securities that comprise a firm’s
financing of its assets.

In practice, it is noticed that firms procure funds without much of the analysis that may
cost them an arm and the leg to survive in the competitive modern business environment
for the long. Thus, it seems to be the relevant topic discussion which tries to explore the
capital structure of selected banks in Nepal, so that the fact can be revealed whether
strengthening their proper mixture in capital structure adds to their competitive
advantage.

For the study, following research question has been raised;

1. What is the capital structure position of Nepalese commercial banks?

2. What is the relationship between capital structure and profitability?

3. To what extend does capital structure affects the firm efficiency (profitability)
of the selected commercial bank?

1.4 Objectives of the study

The general objective of this study is to examine the impact of capital structure on
profitability of commercial banks of Nepal, with an emphasis on performance of
business operation of banks. The objectives of study are as follows;

1. To find out the capital structure position of Nepalese commercial banks.

2. To analyze the relationship between capital structure and profitability.

 15

3. To assess how capital structure affects the firm efficiency (profitability) of the
selected commercial bank.

1.5 Significance of the study

The significance of the study is theoretical as well as practical or applied. Some of the
significances are as follows;

1. This study help to provide information regarding the composition of capital

structure on the basis of term to maturity,
2. This study have significant role to play in filling gap in understanding of the
impact of capital structure decisions on profitability of selected Nepalese
Commercial Banks,

3. It is also hoped that this study may be able to explore the capital structure of
selected commercial banks,

4. This study will be useful for researchers, students and for those who wants to
have further study in details,

5. Similarly, this study may be fruitful to financial institutions.

1.6 Limitation of the study

Following will be the limitation of the study;

1. There is only small size of sample so that the research might not generalized
whole population of 28 commercial banks.

2. The study is limited to only five commercial banks, thus may not represent the
whole banking industry of Nepal.

3. The reliability of the secondary data is highly depends on the accuracy of the
annual report of the concerned banks.

4. In this study, ROE, ROA and EPS are used as dependent variables and
STDTA, LTDTA, TDTA and TDTE are used as independent variable.
 16

5. In this study, descriptive and analytical methods are used to analyze the data.

1.7 Organization of the study

The research will be organized into five chapters, which will be presented in such a way
that the research objective will be easily meet and research questions will be answered
properly. Each chapter’s content is further described as follows:

Chapter 1: Introduction

It will contain the general introduction and background of the research with the short
overview of selected commercial banks. The chapter will also have the statement of
problem, research objective, limitations of the study, significance of the study.

Chapter 2: Review of literature

This chapter will look for the review of the previous studies related to this research
subject to know the prevalent situations of capital structure and other factors as well. The
first part will deals with the conceptual framework and second part will considers the
review of different sources of information.

Chapter 3: Research methodology

This chapter will considered about method of doing research on which whole study is
based upon, while will contains the nature and sources of data to be used in the research
and sampling method and procedures will be mentioned with data analysis tools.

Chapter 4: Data presentation and analysis

The fourth chapter will deals with the presentations and analysis of the data collected
from various sources using different financial and statistical tools with finding and brief
comment on them.

Chapter 5: Conclusion

This chapter will have summery, conclusions and recommendation, of the study.
Reference and appendices will also attached in this study.
 17

CHAPTER-II
LITERATURE REVIEW
2.1 Introduction

This chapter describes theoretical base for the study to bring out the link between
profitability and capital structure. Also analyze the empirical review of impact of capital
structure on profitability.

2.2 Theory of capital structure

One of the major objectives of a firm is to maximize the wealth of owners or shareholders
of the firm. The wealth of shareholders’ in turn is defined as the current price of the
firm’s outstanding shares. In order to achieve this objective firm’s management should
take rational financing decisions regarding optimal capital structure which in turn would
minimize its cost of capital (Goyal, 2013).

Under this section, the study discusses the theories that are in line with the study of
capital structure. These theories includes: Net Income theory, Net Operating theory,
Traditional theory and Modigliani and Miller Model Theory.

2.2.1 Net Income Theory

Net income theory suggests that value of the firm can be increased by decreasing the
overall cost of capital through higher debt proportion. According to Net Income
approach, if the financial leverage increases, the weighted average cost of capital
decreases and the value of the firm and the market price of the equity shares increases.

Net Income Theory to valuation is based on three assumptions.First, there are no taxes;
second, the cost of debt is less than of equity. Capitalization votes on the cost of
equity: found that the use of debt doesn’t change the risk perception of investors.
That the financial risk perception of the investors doesn’t change with the introduction of
debtor change in leverage implies that due to change in leverage, there is no change in
either the cost of debt or the cost of equity. The implication of the three
assumptions under laying the Net Income Theory is that as the degree of leverage
 18

increases, the proportion of a cheaper source of funds that is debt in the capital structure
increases. As a result, the weighted average cost of capital tends to decline, leading to an
increase in the total value of the firm. Thus, with the cost of debt and cost of equity being
constant, the increased use of debt (increase in leverage), will magnify the shareholder's
earning and thereby, the market value of the underway shares (Pandey, 1992).

The financial leverage is, according to the Net Income Theory, an important variable to
the capital structure of a firm. With a judicious mixture of debt and equity, firms can
evolve the highest and the overall cost of capital is the lowest. At that structure, the
market price per share would be maximums.

If the firm uses no debt or if the financial leverage is in zero, the overall cost of capital
will be equal to the equity capitalization vote. The weighted average cost of capital will
decline.

Capital Structure policy includes a trade-off between risk and return, using more debt
raises the riskiness of the firms' earning stream, but it also raises the expected vote of
return on equity. Higher risk tends to lower the stack's price, but a higher expected rate of
return raises it. The optimal capital structure strikes that balance between risk and return
which maximizes the price of the stock. Optimal capital structure also minimizes the
firm's overall cost of Capital.

2.2.2 Net Operating Income Theory

Net operating income is a calculation used to analyze the profitability of real estate
investments that generate income. Net operating income equals all revenue from the
properly minus all reasonably necessary operating expenses. Net operating income is a
before tax figure that excludes principal and interest payments on loans, capital,
expenditures, depreciation, and amortization. The metric is also used in other industries
but is called earnings before interest and tax.

Another theory of capital structure is the net operating income theory. This theory is
dramatically opposite to the Net Income theory. The essence of this theory is that the
capital structure decision of a firm is irrelevant. Any change in leverage will not lead to
 19

any change in the total value of a firm and the market price of shares as well as the
overall cost of capital is independent of the degree of leverage. The Net Operating
Income theory is based on the following propositions:

1. Overall cost of capital/Capitalization role is constant

2. Residual value of equity

3. Changes in cost of equity capital

4. Cost of debt

2.2.3 The Modigliani and Miller Model Theory

There are three basic proposition of the MM theory; the overall cost of capital (K0) and
the value of the firm (V) are dependent of its capital structure. The cost of capital and
firm are constant for all degrees of leverage. The total value is given by capitalizing the
expected stream of operating saving at a discount rate appropriate for its risk class.

The second proposition of the MM theory is that the Ke is equal to the capitalization rate
of a pure equity stream plus a premium for financial risk equal to the difference
between the pure equity capitalization rates (Ke) and (Ki) time the ratio of debt to equity.
In other word, Ke increases in a manner to offset exactly the use of a less expensive
source of funds represented by debt.

Third proposition of the Modigliani and Miller theory is that the unit off rule for
investment purpose is completely independent of the way in which an investment is
framed. The proposition that the weighted average cost of capital is constant irrespective
of the type of capital structure is based on the following assumption:

i. Perfect Capital Market: The implication of a perfect capital market is that

a. securities are infinitely divisible
b. investors are free to buy/sell securities
c. Investors can borrow without restrictions on the share terms and conditions
as firm.
d. there are not transaction cost
 20

e. information is perfect i.e. another investors has the same information which is
readily available to him without cost
f. investors are rational and behave accordingly
ii. Given the assumption of perfect information and rationally, all investors have the same
expectation of firm's net operating income (EBIT) with which to evaluate the value of
firms.
iii. Business risk is equal among all firms within similar operating investments. That
means all firms can be divided into equivalent risk class. The term equivalent risk
class means that the expected earnings have identical risk characteristics. Firm’s
within and industry as assumed to have the same risk characteristics. The
categorization of firms into equivalent risk class is on the basis of the industry group
to which the firm belongs.
iv. The dividend payment ration is 100%.
v. There are no taxes. This assumption is removed later.

2.2.4 Traditional Theory

Traditional theory is midway between net income and net operating income theory. It
partakes of some features of both these theories. It is also known as the intermediate
theory. It resembles the net income theory in arguing that cost of capital and total value
of the firm are not independent of the capital structure. But it doesn’t subscribe to the
view (NI theory) that value of a firm will necessarily increase for all degree of
leverage. In other respect it shares a feature with the net operating theory that beyond a
certain degree of leverage, the overall cost of capital increases leading to a decrease in the
total value of the firm. But it differ from the net operating theory in that is does not argue
that the weighted average cost of capital is constant for all degree of leverage.

The crux of the traditional view relating to leverage and valuation is that through
judicious use of debt equity proportion, a firm can increase its total value and thereby
reduce its overall cost of capital. The rationale behind this view is that debt is a relatively
cheaper source of funds as compared to ordinary shares. With a change in leverage, that
is, using more debt in place of equity; a relatively cheaper source of funds replaces
 21

sources of funds which involve a relatively higher cost. Thus obviously causes a decline
in the overall cost of capital. If the debt‐ equity ratio is raised further the firm would
become financially more risky to the investors who would penalize the firm by
demanding a higher equity capitalization rate. But the increase in equity capitalization
rate may not be as high as to neutralize the benefit of using cheaper debt. In other words,
the advantages arising out of the use of debt is so large that, even after allowing for
higher equity capitalization rate the benefit of the use the cheaper source of funds is still
available.

If however, the amount of debt is increased further, two things are likely to happen,
owing the increased financial risk, equity rate will record a substantial rate and the firm
would become very risky to the creditors who also would like to be compensated by a
higher return such that cost of debt will rise. The use of debt beyond a certain point will,
therefore, have the effect of raising the WACC and conversely the value of the firm. Thus
up to a point degree of leverage the use of debt will favorably affect the value of a firm;
beyond that point use of debt will adversely affect it. At that level of debt‐equity ratio, the
capital structure is an optimal capital structure.

2.3 Determinants of Profitability

The measures of bank profitability usually considered in the literature on the

determinants of bank profitability are the return on assets (ROA), return on equity (ROE)
and in some cases, the net interest margin (NIM). Bank profitability determinants are
usually explained in the form of internal and external variables. The internal variables are
those that determine bank’s management decisions and specifically affect policy
objectives, such as liquidity risk, credit risk, bank size, financial leverage and expense
management. The external variables are those that emanate from industry related factors
and macroeconomic influences, which includes competition and the level of
concentration, the level of unemployment, inflation rate and real per capita income.

There are various determinants of a firm’s profitability; these determinants might have a
positive or undesirable result on the company’s profitability. In view of this, the study
 22

will discuss the following determinants of profitability; liquidity, firm size, Leverage and
efficiency.

2.3.1 Liquidity

Profitability and liquidity has interrelationship with each other. Liquidity is related to the
position of working capital and liquid assets like average receivable, stock, cash, liquidity
in any firm is necessary in order to meet short term obligation. But there should be
optimal level of liquidity in a firm. The appropriate level of liquidity concept can be
explain by following points:

1. Higher level of liquidity in firm negatively affect firm’s profitability because idle
level of assets each nothing or due to the less productive as set, profitability
decrease as higher level of current assets holding in the firm.
2. Insufficient liquidity or current assets in the firm will also have effect on short
term obligation payment capacity of the firm, that ultimately loads to close of
goodwill in long run.
So, appropriate tradeoff between liquidity and profitability is necessary to maintain
optimal level of liquidity assets.

Padachi (2006) notes that liquidity affects the firm profitability, liquidity risk can be
evaluated using two approaches, these include: liquidity ratios and liquidity gap.
Liquidity gap is the difference between liabilities and assets at present and future data.
Liquidity is described as the amount of capital that is available for spending and
investing. Capital includes cash, credit and equity. Most institutions prefer using debt
because it is a cheaper source of financing because of tax deductions. Stable firms are
more liquidity because they invest in short-term investments that generate free cash
flows, their long-term investments are examined to ensure that they earn a return on
investment. It is argued that a positive gap between assets and liabilities is equal to a
deficit. Liquidity ratios can also be described as balance ratios that establish liquidity
trends of a firm. The firm should aim at achieving a proper balance between assets and
liabilities to minimize the cost of findings while ensuring that funds for investment can be
 23

accessed in a short period of time. Firm can achieve this through holding a portfolio of
assets which can easily be converted into liquid assets. Examples include treasury bills
that are short-term in nature and risk free (Padachi et al., 2008).

2.3.2 Firm Size

Generally firm size indicates the capital injected by the firm in order to operate business.
Whereas the six of the firm can be determined on the basis of operational activities and
amount of capital of the firm. So, the firm which has scope of large number of activities
with higher level of capital will generate large profit than in having less capital and
operational sized firm.

For a firm to be profitable, it means that its assets have to generate income which is
important for investments and meeting short-term financial responsibilities. There exists
substantial evidence that firm size is instrumental in contributing towards firm
profitability. Stable firms opt to diversify their products lines and investment and thus
minimize their risk of bankruptcy. So, a optimistic link is anticipated between company
scope and leverage(Graham, 2000). Institutional stockholders opt to capitalize hugely in
stable companies in the trust that they possess lower peril of insolvency since big
companies have access to resources needed and ability to minimize risks of their stock
investment. Therefore, they are fewer susceptible to monetary suffering and insolvency
peril (Wald, 1999).

Large firms get discounts from suppliers because they deal with bulky products, this
minimizes their operational costs and impact positively on their profitability. This is also
supported by Jonsson (2007) who maintains that large banks are profitable as compared
to smaller banks. They have a large portfolio of customers that attracts more customers
while retaining present customers. Such banks possess a huge turnover of customers and
a huge assets base and can easily access credit because of its credibility from stakeholders
and financial stability (Williamson, 2001).
 24

2.3.3 Leverage

Leverage indicates the proportion of debt capital, total capital injected by the firm.
Higher level of leverage or debt capital increases the financial risk of the firm and as
higher level of leverage increase risk and return is well but this high of debt employment
by firm will have adverse effect on long term solvency capacity of the firm. So, there
should be appropriate level of debt employment in the firm. Generally, optimum ratio
40% debt and 60% equity.

Abor (2005) define leverage as the amount of debt used to finance company assets. A
firm that utilizes more debt compared to leverage is perceived to be highly levered.
Empirical review depicts a mixture of reaction on the link between these two variables
(leverage and profitability) as follows: Robb & Robinson (2009), Ruland & Zhou (2011)
depict a positive linkage between leverage and profitability. In view of this, Jensen
(1976) indicates the presence of a optimistic linkage amid leverage and firm profitability.
note that use of debt increases firm market value. Financial leverage was found to
contribute positively towards company’s yield on equity considering the influence of
earnings of the firm’s possessions which is more as compared to the aggregate cost of
interest of firm’s debt. Financial leverage impacts positively on return on equity taking
into account the earnings power of a firm’s assets that are more compare to the average
cost of debt. Abor (2005) posits the being of a positive linkage amid total debt and
profitability (profitability was measured using return on equity). Equally,
Chandrakumarmangalam & Govindasamy (2010) found that leverage was positively
linked to profitability and wealth of shareholders that was maximized when firms utilized
excessive debt.

2.3.4 Efficiency

The efficiency of the firm is related to the production and productivity of the firm. The
firm which can produce higher level of production with reasonable cost amount, is the
firm operating at efficiency level. So, higher the productivity leads to the higher level of
profitability. So, there is positive relation between profitability and efficiency.
 25

Berger & De Young (2010) define efficiency as level of performance which defines a
procedure that utilizes the lowermost sum of contributions to generate outputs. Efficiency
is the use of all contributions to produce a agreed yield which include individual period
and vigor. Competence is a notion that can be measured by decisive the proportion of
valuable production to entire contribution. It mitigates the surplus of incomes for
example physical resources, vigor and period while seeking to achieve the expected yield.
Drake & Hall (2013) note that efficiency of firm suggests better profitability, huge
amounts of resources directed in, better charges and service value for customers and
better security in terms of enhanced wealth buffer in engrossing peril.

The information got from evaluation of the firm’s performance can be utilized in
improving the general competence of processes and in turn, this might contribute towards
realizing a viable verge Hasan & Marton (2009). Charge efficiency looks at the charge
expenses of firm (interest plus noninterest expenditures) as a purpose of designated
variables supposed to effect the cost arrangement of firms and a price remaining, which
replicates the prices that cannot be clarified by the firm. These unsolved prices are
presumed to be a quantity of a firm’s additional expenses or rate incompetence. Study
will measure efficiency using cost efficiency which will be computed by dividing total
operating expenses divided by total income.

2.4 Review of Journal and book

Mesquita & Lara (2006)in their article “Capital Structure and Profitability: The Brazilian
Case”, have shown a great dispersion among the several capital sources used by the
Brazilian companies, exception to the equity, the main component, and the one that
presents smaller variability. As to the relationship between return rates and debt, the
results indicate inverse relationship for the long run financing, and direct relationship for
short-run financing and equity.

The facts of the most lucrative companies are the ones with lowest debt are in
consonance with other empiric evidences. However the low debt level, when compared to
 26

the debt level of more developed economies, such as United States, Japan, Germany and
United Kingdom, indicates that the Brazilian companies are using debt in a extremely
conservative way. Perhaps the high interest rates practiced at the Brazilian market, the
instability of the exchange rate politics and remaining atmosphere of uncertainty of the
local economy which conveys operational and financial risks that hinder the managerial
planning and inhibit the adoption of more sophisticated debt politics can explain that fact.

In this article, the variables which are used as rate of return to the equity, total debt of
short and long run, and the total equity in the relation to the total liability. Raja & Dave,
(2013) in their article ‘Capital Structure and Profitability’: Indian Evidences. Samiksha, It
is undoubted that capital structure decision is imperative over profitability of the
company. They analyzes the magnitude and direction of the impact that capital structure
decision has on profitability, employing debt negatively affects profitability. Further, it
can be conferred that combining short term and long term debt is of vital importance to
the finance manager. Merely, keeping debt capital in capital structure and receiving
benefits of trading on equity is not enough. However, several times finance managers
chose to finance assets depending upon their objectives, irrespective of benefits / pitfalls
of concerned source of finance. In this article dependent variable is return on equity and
independent variables are short term debt, long term debt and total liability.

Raheman, Zulfiqar, & Mustafa (2007)in their article, “Capital Structure and Profitability:
Case of Islamabad Stock Exchange”, have stated that firstly there is negative relationship
between the long term debt and profitability verifying first hypothesis, which means that
firms with having more long term debt are less profitable. This can be attributed to the
interest cost bear by the company for a long term debt financing, which increase the fixed
costs of the product and resultantly decrease the profitability. Secondly numeric
verifications and statistical analysis shows negative relationship between net operating
profitability and debt ratio.

Thirdly the relationship of profitability with percentage of equity in the total financing
has direct relationship meaning thereby more equity leads to more profits. Fourthly size
with profitability numerical calculations have accepted that with the increase in size of
 27

the firm the profitability increases. The study has taken the N-log of sales as proxy for
growth in size and the increase in sales result in more profits. In this article the dependent
variable is net operating profitability and independent variables are debt ratio, long term
debt to liabilities, equity to liabilities and size of the firm.

Abor (2008) has examined the determinants of capital structure decisions of publicly
quoted firms, large unquoted firms and small and medium enterprises (SMEs) in Ghana.
Publicly quoted and large unquoted firms were found to have higher debt ratios than
small and medium enterprises (SMEs). Overall, listed and unquoted firms exhibit
different financing behavior from that of SMEs. Short term debt constitutes a relatively
high proportion of total debt of Ghanaian firms.

Listed firms are better positioned to raise equity finance from the stock market, and large
unquoted firms are also able to access equity finance from institutional investors usually
through private placements. Firm size was found to have a positive relationship to short-
term debt ratio of SMEs and debt ratios of quoted firms, but negative with respect to
long-term debt ratio in the case of unquoted firms. The results of this study seem to
support the pecking order hypothesis, given that both long-term and short-term debts
have inverse associations with profitability in all the sample groups. Firm growth was
found to have a positive association with long-term debt for the unquoted firms’ sample
and short-term debt ratio for SMEs. Limited liability companies are more likely to obtain
long-term debt finance relative to sole-proprietorship businesses.

The issue of capital structure is an important strategic financing decision that firms have
to make. Clearly, the pecking order theory appears to dominate the Ghanaian capital
structure story. It is therefore important for policy to be directed at improving the
information environment. In this article the variables are long term debt ratio, short term
debt ratio, age of the firm, size, assets structure, profitability, growth, dividend, risk, tax,
and ownership.

Driffield & Pal (2008) have stated that many firms in the worst affected countries
indulged in some reckless capital structure behavior. There is evidence that firms in the
 28

worst affected countries not only have higher leverages (being the result of high debt
even in a situation of deteriorating assets), but also tend to have lower speed of
adjustment than their counterparts in the least affected countries. This general ranking is
robust to various alternative specifications and sample selections.

The case of Malaysia is particularly interesting in this context: while by virtue of its
rigorous institutional and legal environment and also access to market based finance, the
country was successful to restrict leverages to a generally lower level, it was not so
successful to ensure speedy adjustment of capital structure and was among the worst
affected countries hit by the crisis. This analysis also identifies some important
adjustment mechanisms: (a) adjustment speeds are greater for larger firms and firms in
the top leverage quartile who tend to have access to cheaper credit, as reflected in a
comparison of effective interest rates. (b) Firms with more cash flow tend to have faster
speed of adjustment. (c) Firms with only long-term debt however have lower speed of
adjustment. (d) Firms in countries with tighter regulations and access to equity finance
tend to have lower leverage and higher speed of adjustment (with the exception of
Malaysia). (e) In general financially distressed firms in most countries tend to have
higher speed of adjustment, revealing cases of sudden adjustment; the latter is especially
evident in the post-crisis period, highlighting the fact that lessons have been learnt after
the crisis.

Tailab (2014) investigated the impact of capital structure on financial performance as

measured by return on equity and return on assets for a period of nine year. It was
hypostasized that these factors are not significantly associated with firm’s profitability.
The main result indicate that the total debt has a significant negative impact on ROE and
ROA, while size in terms of sales has significantly negative effect only on ROE of the
American firms. However, a short debt significantly has a positive influence on ROE. An
insignificant either negative or positive relationship was observed between long term
debt, debt to equity and size in terms of total assets and profitability. In this article
dependent variables are ROA and ROE and independent variables are short term debt,
long term debt, total debt, debt to equity, size.
 29

Mahmood (2009), has assessed the profitability and capital structure among property
developers and contractors in Malaysia. The study uses a sample of 25 property
companies and 20 construction companies for a period of eight years from 2000 through
2008.

The study provides insight into the performance of property developers and contractor’s
profitability and factors impacting capital structure decisions of these firms to the
Malaysia economy. Thus, the key contributions of the study were to explore and expand
on existing literature from a Malaysian perspective. The study presented that the
developers in Malaysia are larger and more profitable compared to contractors’
counterparts. This is because their capital gearing and debt equity ratio are less than those
of contractors. Further, contractors are heavily burden with debt and the need to service
this debt is very high and thus, this led to low pre-tax profit margin as well as profit
margin. The results from the regression analysis indicate that capital gearing is negatively
related with net profit margin and price earnings ratio for both property and construction
sectors. The simple argument for the result is that the high gearing firms have to service
their large amount of debt which in turn will reduce their profit margin and PE ratio,
regardless of sector size.

Hutchison & Cox (2006) has demonstrated that for banks in the U.S. there is a positive
relationship between financial leverage and the return on equity for both the 1996-2002
and the 2003-2009 periods. Furthermore, the proportionality of financial leverage to
return on equity appears to have been more or less maintained between the later more
regulated time periods as opposed to the earlier freer period.

Moreover, when viewing the return on assets relationship a similar pattern as the return
on equity to capital relationship is observed. That is, ROA is inversely related to financial
leverage. Again, there seems to be a dearth of evidence to sustain the notion that the
1996-2002 periods is different than the 2003-2009 period. Bank performance has been
robust to the regulatory environment that they have faced. In this article, used variables
are capital, ROA, ROE.
 30

Fred (2015) analyzed that the relationship between capital structure variables
(independent variables) against profitability variables (dependent variable). Fixed effect
regression method was used to measure the relationship between capital structure and
return on asset (ROA) while random effect regression model used to test the relationship
between capital structure and return on equity of manufacturing companies (ROE).
Moreover, partial correlation technique also used to measure the relationship between the
study variables in order to support the regression results.

This study revealed that, capital structure of listed manufacturing companies in Tanzania
affect company profitability in terms of return on assets positively. On the other side,
capital structure of listed manufacturing companies has negative relationship with
company profit in terms of shareholders fund or return on equity. The results indicate that
debt usage has more advantage for companies that depend much on assets to generate
profit than those that depend much on equity or shareholders fund to generated company
profit.

2.5 Conceptual framework of Capital structure

Conceptual framework:

From review of journal and article, different authors used different variable to find out
the result. In this study, the selected dependent and independent variables are as follows;
 31

2.5.1 Conceptual relationship between dependent and independent variable of this

study is as follows:

Figure 2.1

Independent Variables Dependent Variables

Short Term Debt to Total assets Return on Equity

Long Term debt to Total assets Return on Assets
Total Debt to Total Assets Earnings Per Share
Total Debt to Equity

Sources: Fred (2015)

Fig: Conceptual Framework of the study

The sources of funding for a business are divided into two main categories, owners’
funding (equity) and borrowed funding (debt). The objective of the business owners is to
increase their wealth and the performance of firms. In relation to this objective the
increase in the performance is measured by the increase in return on the shareholders’
funds. The independent variable in this study was capital structure and the dependent
variable was financial performance. The concept illustrated above assumes that
increasing the level of the debt in the capital structure will increase the turnover of the
business and hence its profit, resulting in an increase in returns to the business owners.
An increase in interest rate is expected to result in reduced borrowing, increased interest
expenses and thus reduced returns to business owners.

Model

YEPS=0+1 (SDTA)+2 (LDTA)+3 (TDTA)+4 (TDTE)+

YROA=0+1 (SDTA)+2 (LDTA)+3 (TDTA)+4 (TDTE)+

YROE=0+1(SDTA)+2(LDTA)+3(TDTA)+4 (TDTE)+
 32

Where,
0 is the intercept, 1,2,34 is the independent Variable, . Are the error terms

Hypothesis

H1: There is a relationship between short term debt ratio and banks profitability in Nepal.

H2: There is a relationship between long term debt ratio and banks profitability in Nepal.

H3: There is a relationship between total debt to total asset ratio and banks profitability in
Nepal.

H4: There is a relationship between total debt to total equity ratio and banks profitability
in Nepal.

2.6 Research gap

All of the above studies reviewed have concentrated mainly on how the capital structure
should be, or how much the company should earn the profit, but none of the theses have
put effort to find out the relationship between capital structure and profitability. To fulfill
such gap, the present study has been conducted to illuminate the impact of capital
structure on profitability, along with the capital structure of the bank, and the profitability
position.

While review of literature various studies show that the study are done on other variables
but this study also consider EPS as dependent variable and trying to analyze the effect of
capital structure composition on shareholders wealth as well.

During review of literature, there was found most of the research is done considering
capital structure and profitability for manufacturing company rather than banking sectors.
Very few studies are done by considering Earning per share as dependent variable but
study use earnings per share as dependent variable and conduct the analysis both
profitability and capital structure of banking sectors as well.
 33

CHAPTER-III

RESEARCH METHODOLOGY

3.1 Research Design

A research design is the overall path or method by which the research study is guided. It
serves as a framework for the study directing the collection and analysis of the data, in
which the research method is to be utilized and sampling plan to be followed. Research
designed is the way through which we find the required answer of the research questions
and ultimately meet the research objectives. The research design of this study is
descriptive as well as analytical.

3.2 Population and sampling

There are twenty eight commercial banks operating in the country. However, the analysis
of all these commercial banks in terms of capital structure and its impact on profitability
will be need great effort to conduct. There are few commercial banks to issue debenture
and bond. There are 28 commercial banks. In which the banks which have issued
debenture and bond is very rare, Only there are five commercial banks that have record of
issuing debt composition in their capital structure from the year of 2012. So, for the
research, the population and sampling banks seems to be same and equal as well.

1. Nepal SBI Bank Limited

2. Agriculture Development Bank Limited
3. Nepal Investment Bank Limited
4. Siddhartha Bank Limited
5. Global IME Bank limited

3.3 Nature and Sources of Data

The data used in this are fully secondary in nature. Published annual reports of concerned
banks are taken as basic source of data. The relating to financial performance are directly
obtained from the concerned banks. Similarly, related books, magazines, journals,
 34

articles, reports bulletins, and Nepal Rastra Bank, related website from internet etc. as
well as supplementary data.

3.4 Analysis of Data

Financial as well as statistical tools are used to make the analysis more convenient,
reliable and authentic. For the data analysis, different items from the balance sheet and
other statement are tabulated. Their ratios, percentage, mean, standard deviation, and
coefficients of correlation are then calculated and presented in the tables. To study the
relationship between two or more variables, correlation coefficients are also calculated.
Following are the brief introduction of the financial and statistical tools used in this
study.

3.4.1 Financial Ratio

Under the financial tool, mainly capital structure and profitability of the banks have been
measured.

1. Capital structure

Capital structure can be a mixture of a firm's long-term debt, short-term debt, common
equity and preferred equity. A company's proportion of short- and long-term debt is
considered when analyzing capital structure. When analysts refer to capital structure, they
are most likely referring to a firm's debt-to-equity (D/E) ratio, which provides insight into
how risky a company is. Usually, a company that is heavily financed by debt has a more
aggressive capital structure and therefore poses greater risk to investors.

a. Short Term Debt to total Assets

The short-term debt to total assets ratio is a measurement representing the percentage of
corporation’s assets financed with loans or other debt obligation lasting less than one.
This ratio provides a general measure of the short-term financial position of a company.

𝑆ℎ𝑜𝑟𝑡 𝑇𝑒𝑟𝑚 𝐷𝑒𝑏𝑡

𝑆ℎ𝑜𝑟𝑡 − 𝑡𝑒𝑟𝑚 𝐷𝑒𝑏𝑡 𝑡𝑜 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
 35

b. Long Term Debt to total assets

The long-term debt to total assets ratio is a measurement representing the percentage of
corporation’s assets financed with loans or other debt obligation lasting more than one.
This ratio provides a general measure of the long-term financial position of a company,
including its ability to meet financial requirements for outstanding loans. If a business has
a high long-term debt to assets ratio, it suggests the business has a relatively high degree
of risk, and eventually it may not be able to repay its debts. This makes lenders more
skeptical about loaning the business money and investors more leery about buying shares.
In contrast, if a business has a low long-term debt to assets ratio, it can signify the
relative strength of the business. However, the assertions an analyst can make based on
this ratio vary based on the company's industry as well as other factors, and for this
reason, analysts tend to compare these numbers between companies from the same
industry.

𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝐷𝑒𝑏𝑡

𝐿𝑜𝑛𝑔 − 𝑡𝑒𝑟𝑚 𝐷𝑒𝑏𝑡 𝑡𝑜𝑇𝑜𝑡𝑎𝑙𝐴𝑠𝑠𝑒𝑠𝑡𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

c. Total Debt to Assets

Total debt to total assets is a leverage ratio that defines the total amount of debt relative
to assets. This metric enables comparisons of leverage to be made across different
companies. The higher the ratio, the higher the degree of leverages (DOLs) and,
consequently, financial risk. The total debt to total assets is a broad ratio that includes
long-term and short-term debt (borrowings maturing within one year), as well as all
assets – tangible and intangible. Total debt to total assets is a measure of the company's
assets that are financed by debt, rather than equity. This leverage ratio shows how a
company has grown and acquired its assets over time. Investors use the ratio to not only
evaluate whether the company has enough funds to meet its current debt obligations, but
to also assess whether the company can pay a return on their investment. Creditors use
the ratio to see how much debt the company already has and if the company has the
 36

ability to repay its debt, which will determine whether additional loans will be extended
to the firm.

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
𝐷𝑒𝑏𝑡𝑅𝑎𝑡𝑖𝑜 = × 100
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

d. Total Debt to equity

The Debt/Equity (D/E) Ratio is calculated by dividing a company’s total liabilities by

its shareholder equity. These numbers are available on the balance sheet of a company’s
financial statements. The ratio is used to evaluate a company's financial leverage. The
debt/equity ratio is also referred to as a risk or gearing ratio. The formula for calculating
the D/E ratio is:

The balance sheet requires total shareholder equity to equal assets minus liabilities, which
is a rearranged version of the balance sheet equation (Assets = Liabilities + Shareholder
Equity). These balance sheet categories may contain individual accounts that would not
normally be considered “debt” or “equity” in the traditional sense of a loan or the book
value of an asset. Because the ratio can be distorted by retained
earnings/losses, intangible assets, and pension plan adjustments, further research is
usually needed to understand a company’s true leverage.

Because of the ambiguity of some of the accounts in the primary balance sheet
categories, analysts and investors will often modify the D/E ratio to be more useful and
easier to compare between different stocks. Analysis of the D/E ratio can also be
improved by including short-term leverage ratios, profit performance, and growth
expectations.

The debt/equity ratio measures a company’s debt relative to the value of its net assets, it
is most often used to gauge the extent to which a company is taking on debt as a means of
leveraging its assets. A high debt/equity ratio is often associated with high risk; it means
that a company has been aggressive in financing its growth with debt.
 37

𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝐷𝑒𝑏𝑡

𝐷𝑒𝑏𝑡 − 𝐸𝑞𝑢𝑖𝑡𝑦𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

2. Profitability Ratio

Profitability ratios are a class of financial metrics that are used to assess a business's
ability to generate earnings relative to its associated expenses. For most of these ratios,
having a higher value relative to a competitor's ratio or relative to the same ratio from a
previous period indicates that the company is doing well.

a. Earnings per share

Earning per shares serves as an indicator of a company's profitability. It is the portion of a

company's profit allocated to each outstanding share of common stock. An earning per
shares is generally considered to be the single most important variable in determining a
share's price. It is also a major component used to calculate the price-to-earnings
valuation ratio.
𝑁𝑃𝐴𝑇 − 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑖𝑑 𝑜𝑛 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒
𝐸𝑃𝑆 =
𝑛𝑜. 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠

b. Return on equity

The return on equity is the amount of net income returned as a percentage of shareholders
equity. Return on equity measures a corporation's profitability by revealing how
much profit a company generates with the money shareholders have invested.

𝑁𝑃𝐴𝑇
𝑅𝑂𝐸 = × 100
𝐸𝑞𝑢𝑖𝑡𝑦 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

c. Return on assets

Return on asset is an indicator of how profitable a company is relative to its total

assets. ROA gives an idea as to how efficient management is at using its assets to
generate earnings. Calculated by dividing a company's annual earnings by its total assets,
ROA is displayed as a percentage. Sometimes this is referred to as ‘return on investment’.
 38

𝑁𝑃𝐴𝑇
𝑅𝑂𝐴 = × 100
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

3.4.2 Statistical tools

The following mentioned statistical tools will be used to interpret data:

1. Arithmetic means

Arithmetic mean is the number which is obtained by adding the various numbers of all
the items of a series and dividing the total by the number of items. Arithmetic mean is a
useful tool in statistical analysis.
The arithmetic mean is the simplest and most widely used measure of a mean, or average.
It simply involves taking the sum of a group of numbers, then dividing that sum by the
count of the numbers used in the series.
∑X
̅
X=
N
Where,
̅ = Arithmetic Mean
X
∑ X = Sum of Elements
N = Number of Observations
2. Standard Deviation
The standard deviation is a statistic that measures the dispersion of a dataset relative to its
mean and is calculated as the square root of the variance. It is calculated as the square
root of variance by determining the variation between each data point relative to the
mean. If the data points are further from the mean, there is higher deviation within the
data set; thus, the more spread out the data, the higher the standard deviation.
̅ )2
∑(X−X
S. D. = √
N

3. Coefficient of correlation

The correlation coefficient is a statistical measure that calculates the strength of the
relationship between the relative movements of the two variables. It is a useful statistical
 39

tool for measuring the intensity of the magnitude of linear relationship between two
variables. The most important method of measuring the correlation between the two
variables is “Karl person’s coefficient of correlation. “If the values of the variables are
directly proportional then the correlation is said to be positive. On the other hand, if the
values of the variables are inversely proportional, then the correlation is said to be
negative. The correlation coefficient always remains within the limit of +1 to -1. The
correlation coefficients (r) between two variables X and Y can be obtained by using
following formula.” (Gupta; 2002)

N ∑ XY−∑ X ∑ Y
r=
√N ∑ X2 –(∑ X)2 √N ∑ Y2 –(∑ Y)2

Where,
r = The correlation coefficient between two variables of X and Y
Proprieties:
a) It lies between -1 and +1
b) If r = +1, then there is perfect positive correlation.
c) If r = -1, then there is perfect negative correlation.
d) If r = 0, then there is no correlation.
e) If r = 0.7 to 0.99 (or- 0.7 to -0.99) then there is high degree positive or negative
correlation.

4. Multiple Regression Analysis

Multiple linear regression is most common form of linear regression is used to explain
the relationship between one continuous dependent variable and two or more independent
variables. The independent variables san be continuous or categorical.

Multiple linear regression (MLR), also known simply as multiple regression, is a

statistical technique that uses several explanatory variables to predict the outcome of a
response variable. The goal of multiple linear regression (MLR) is to model the linear
relationship between the explanatory (independent) variables and response (dependent)
variable.
 40

In essence, multiple regression is the extension of ordinary least-squares

(OLS) regression that involves more than one explanatory variable.

𝑦𝑖 = 𝛽0 + 𝛽1𝑥𝑖1 + 𝛽2𝑥𝑖2+. . . +𝛽𝑝𝑥𝑖𝑝 + 𝜖

Where, for i = n observation

yi =dependent variable

xi =explanatory variables

β0 =y-intercept (constant term)

βp =slope coefficients for each explanatory variable

ϵ = the model’s error term (also known as the residuals)

5. Hypothesis testing

A Hypothesis is a tentative assertion or idea or assumption about the parameters of a

population. Hypothesis testing is an act in statistics whereby an analyst tests an
assumption regarding a population parameter. The methodology employed by the analyst
depends on the nature of the data used and the reason for the analysis.
 41

CHAPTER-IV

DATA PRESENTATION AND ANALYSIS

4.1 Introduction

The previous chapter presented the research methodology applied to meet the objectives
of the study. This chapter is concerned with the presentation and analysis of data
collected. This is the one of the major chapter of this study because it indicates detail
analysis and interpretation of data from which concrete result of commercial bank. The
main objective is to present the results and analysis of the financing as well as discussion
of results. Following data is the collection information of capital structure of banks.

1. Equity Capital of Banks

The equity capital of commercial banks are presented in table 4.1. Here, equity capital
includes share capital and general reserves.

Table 4.1

Equity Capital (in millions)

Equity Capital
FY ADBL GIBL NIBL SBL SBI
2011/12 12973 2537 6050 2183 3197
2012/13 1422 3231 7020 2502 3799
2013/14 15076 6126 7926 3000 4536
2014/15 16224 7324 9807 3746 5646
2015/16 18127 87057 16288 6241 6920
2016/17 21797 11305 18708 9881 10397
2017/18 26458 13579 24871 13703 12801
(Note: Annual Report of ADBL
Annual Report of GIBL
Annual Report of NIBL
Annual Report of SBL
Annual Report of SBI)
Equity represents the amount of money that would be returned to a company’s
shareholders if all of the assets were liquidated and all of the company’s debt is paid off.
 42

Table 4.1 shows that, every commercial had a fluctuation equity. In ADBL had large
amount of equity rather than other commercial banks.

2. Total debt of Banks

Total debt of commercial banks are presented in table 4.2. Here, total debt includes long
term debt and short term debt.

Table 4.2

Total Debt (in millions)

Total Debt
FY ADBL GIBL NIBL SBL SBI
2011/12 55673 28127 59706 27395 54862
2012/13 62874 35788 66131 31151 60997
2013/14 73443 53892 78248 37277 56547
2014/15 84704 61863 94538 46901 53631
2015/16 93659 78995 113494 68161 71594
2016/17 1133 105287 132110 80020 89430
2017/18 108961 112268 147022 106166 89737

Debt is the amount of money borrowed by one party from another. Company used debt to
pay for long term assets such as land, building and equipment or to add more cash to their
working capital to cover ongoing, short term expenses. NIBL had a huge amount of total
debt rather than other banks in 2017/18.

3. Long term debt of banks

Long term debt of commercial banks are presented in table 4.3. Here, long term debt
includes Debenture and Bonds.
 43

Table 4.3

LTDTA (in millions)

Long Term Debt

FY ADBL GIBL NIBL SBL SBI
2011/12 2300 400 1050 627 600
2012/13 2300 400 800 931 800
2013/14 2300 400 1050 931 1000
2014/15 1840 400 1550 1431 1000
2015/16 1380 400 1550 1203 1000
2016/17 920 400 1550 1203 1000
2017/18 460 400 1250 1203 1000

Long-term debt is debt that matures in more than one year. Entities choose to issue long-
term debt with various considerations, primarily focusing on the timeframe for repayment
and interest to be paid. Investors invest in long-term debt for the benefits of interest
payments and consider time to maturity as a liquidity risk. A company takes on debt to
obtain immediate capital. For example, startup ventures require substantial funds to get
off the ground and pay for basic expenses such as research, insurance, licenses,
equipment, supplies, and advertising. Mature businesses also use debt to fund their
regular operations as well as new capital-intensive projects. Overall, all businesses need
to have capital on hand and debt is one source for obtaining immediate funds to finance
business operations. Table 4.3 shows that GIBL has a constraints long term debt and
ADBL has a decreasing trend while used long term debt to operate their business.

4. Short term debt of banks

Short term debt of banks are presented in table 4.4. Here, short term debt includes
Deferred tax liabilities, Deposits liability, Proposed dividend, Bills Payable other
liabilities, Borrowing.
 44

Table 4.4

STDTA (in millions)

Short Term Debt

FY ADBL GIBL NIBL SBL SBI
2011/12 53373 27727 58656 26768 54262
2012/13 60574 35387 65331 30220 60197
2013/14 71143 53491 77198 36346 55547
2014/15 82864 61462 92988 45469 52631
2015/16 92278 78595 111944 66957 70594
2016/17 104149 104887 130560 78816 88430
2017/18 108501 111868 145772 104962 88737

5.Total Assets

Total assets of banks are presented in table 4.5. Here, total assets includes Cash,
Marketable securities, Accounts receivable, Prepaid expenses, Inventory, Fixed
assets, Intangible assets, Goodwill, Other assets.
Table 4.5

Total Assets (in millions)

Total Assets
FY ADBL GIBL NIBL SBL SBI
2011/12 68646 30664 65756 29579 58059
2012/13 77097 39018 73152 33653 64796
2013/14 88519 60018 86173 40277 61082
2014/15 100928 69186 104345 50647 59277
2015/16 111786 87701 129782 74402 78515
2016/17 126866 116592 150818 89901 99828
2017/18 135419 125847 171893 119869 102538
 45

Total assets refers to the total amount of assets owned by a person or entity. Assets
are items of economic value, which are expended over time to yield a benefit for the
owner. If the owner is a business, these assets are usually recorded in the accounting
records and appear in the balance sheet of the business. Table 4.5 show that total
assets is in increasing trend of all commercial banks.

b. Profitability
Table 4.6
Net profit (in millions)

Net Profit
FY ADBL GIBL NIBL SBL SBI
2011/12 1839 265 1039 330 480
2012/13 2289 449 1915 482 771
2013/14 1520 974 1939 700 922
2014/15 3603 960 1961 767 1065
2015/16 2464 1382 2550 1254 1331
2016/17 2565 2006 3114 1386 1523
2017/18 3442 2101 3659 1904 2023

Profitability is ability of a company to use its resources to generate revenues in excess of

its expenses. In other words, this is a company’s capability of generating profits from its
operations. Table 4.6 show, ADBL has a fluctuation net profit upto 2011 to 2018. GIBL
has also a fluctuation net profit upto 2011 to 2014 after 2014 GIBL has increasing trend
in net profit. NIBL, SBL and SBI also has a increasing trend of net profits.

4.2 Descriptive Analysis of variables of the study

Descriptive statistics are brief descriptive coefficients that summarize a given data set,
which can be either a representation of the entire or a sample of a population. Descriptive
analysis only describe the dependent and independent variables of capital structure.
 46

4.2.1 Short Term Debt to Total Assets (STDTA)

Table 4.7

STDTA
Year ADBL GIBL NIBL SBI SBL
2012 0.9049 0.9345 0.892 0.9042 0.7775
2013 0.8979 0.929 0.893 0.9069 0.7856
2014 0.9023 0.9093 0.8958 0.8912 0.8037
2015 0.8977 0.8878 0.8911 0.8883 0.821
2016 0.8999 0.8991 0.8625 0.8961 0.8254
2017 0.8767 0.8858 0.8656 0.8996 0.082
2018 0.0254 0.8889 0.848 0.8654 0.8756
Mean 0.772114 0.904914 0.878286 0.8931 0.710114
S.D 0.329399 0.020096 0.019161 0.013897 0.278836
(Note: Appendix-1)

The table 4.7 shows the short-term debt to total assets of five commercial banks of six
consecutive years and their mean and standard deviation. The main value of ADBL,
GIBL, NIBL, SBI, SBL are 0.772114, 0.904914, 0.878286, 0.8931 and 0.710114
respectively. The overall mean of STDTA is in satisfactory level, in which the ratio of
SBL is lower than in other four banks. GIBL has greater mean value rather than other
banks which means that GIBL used huge amount of short-term debt to finance total assets
more than other banks.

Similarly, standard deviation of ADBL, GIBL, NIBL, SBI and SBL are 0.329399,
0.020096, 0.019161, 0.013897 and 0.278836 respectively. Through it shows greater
fluctuation in STDTA ratio of SBI.
 47

4.2.2 Long Term Debt to Total Assets (LTDTA)

Table 4.8

LTDTA
Year ADBL GIBL NIBL SBI SBL
2012 0.0335 0.013 0.0159 0.0103 0.0212
2013 0.0298 0.0102 0.0109 0.0123 0.0276
2014 0.0259 0.0066 0.0121 0.0163 0.0231
2015 0.0182 0.0057 0.0148 0.0168 0.0282
2016 0.0123 0.0045 0.0119 0.0127 0.0161
2017 0.0072 0.0034 0.0102 0.01 0.0133
2018 0.0034 0.0032 0.0072 0.0097 0.01
Mean 0.018614 0.00665714 0.011857 0.012586 0.019929
S.D 0.011558 0.00367235 0.002899 0.002941 0.007025
(Note: Appendix-1)

The table 4.8 shows the LTDTA of five commercial bank of Nepal. ADBL have shown a
decrease in the usage of debt financing from the ratio of 0.0335 in 2012 to 0.0034 in
2017. SBI show a growth in the usage of LTD financing from the ratio of 0.0103 in 2012
upto 0.0168 in 2015 with the slightly fall in long term debt usage with the ratio of 0.0127
in 2016 upto 0.0097 in 2018.

GIBL also experienced a decrease in the usage of long term debt financing from the ratio
of 0.013 in 2012 and 0.0034 in 2018. NIBL and SBL showed a fluctuation results in the
usage to long term debt to total assets. Finally, SBL indicate a great use of long term debt
if compared with other banks with the average mean of 0.019929 while GIBL indicates a
less usage of long term debt with the average ratio of 0.00665714.

The overall trend of commercial bank above indicates a fluctuation result, which means
rise and fall of debt financing by banks. Few banks indicate an increasing trend of using
long term debts to finance their assets. For example, if commercial banks use huge long
term debt. This is an indication of growth for their banks because debt are used to finance
 48

their operations and new investment projects which provide return for the banks in the
future although using huge debts is much riskier, increase bankruptcy cost and cost of
debt of banks. Theoretically debt sage is an advantage for the company because of tax
relief acquired by the banks due to interest deducted before company profit generated.

4.2.3 Total Debt to Total Assets (TDTA)

Table 4.9

TDTA
Year ADBL GIBL NIBL SBI SBL
2012 0.811 0.9172 0.9079 0.9449 0.9261
2013 0.8155 0.9171 0.904 0.9413 0.9256
2014 0.8296 0.8979 0.908 0.9257 0.9255
2015 0.8392 0.8941 0.906 0.9047 0.926
2016 0.8378 0.9007 0.8744 0.9118 0.9161
2017 0.0893 0.903 0.8759 0.8958 0.89
2018 0.8046 0.8921 0.8553 0.8751 0.8856
Mean 0.718143 0.903157 0.890214 0.914186 0.913557
S.D 0.277613 0.010244 0.021379 0.025075 0.017995
(Note: Appendix-1)

Result from table 4.9 shows that, ADBL indicated the rise in the use of debt financing to
finance assets while reduction in using total debt was shown by SBL. ADBL have been
experiencing the rise in the use of debt financing from the ratio of 0.811 in 2012 upto
0.8392 in 2015 and slightly fall in debt financing in the year 2016 to 2017 with the ratio
of 0.8378 and 0.0893 respectively after that in 2017 ADBL rise in the use of debt
financing the ratio of 0.8046.
 49

4.2.4 Total Debt to Total Equity (TDTE)

Table 4.10

TDTE
year ADBL GIBL NIBL SBI SBL
2012 4.2916 11.0881 9.8689 17.158 12.5481
2013 4.4206 11.077 9.4195 16.0562 12.4497
2014 4.8714 8.7968 9.873 12.4668 7.4087
2015 5.2208 8.4471 9.6399 9.4991 12.52
2016 5.1667 9.0739 6.9681 10.3453 10.9201
2017 0.52 9.3134 7.0617 8.6007 8.0983
2018 4.1182 8.268 5.9114 7.0101 7.7477
Mean 4.087043 9.437757 8.391786 11.59089 10.2418
S.D 1.630141 1.177509 1.680187 3.819923 2.404361
(Note: Appendix-1)

Result from table 4.10 shows that, ADBL indicated the rise in the use of debt financing
while other banks indicated a fluctuations results of falling and rising use of debt
financing for some years. ADBL have been experiencing the rise in the use of debt
financing for the ratio of 4.2916 in 2012 upto 5.1667 in 2016 and slightly fall in debt
financing for the 2017 with the ration of 0.52 and after that in 2018, ADBL rise in the use
of debt financing with the ratio of 4.1182. Moreover, GIBL, NIBL, SBI and SBL showed
a fluctuation in the use of debt financing where from 2012 to 2018.

To summarize the information table 4.10, average mean indicated that SBI was a bank
that used huge amount of debt to finance equity if compared with other banks with the
ratio of 11.59089 that means a SBI uses more debt as compared with equity or
shareholder fund.
 50

4.2.5 Earnings Per Share (EPS)

Table 4.11

EPS(%)
Year ADBL GIBL NIBL SBI SBL
2069 60.57 12.14 34.49 22.93 20.41
2070 71.54 18.57 50.82 32.75 29.8
2071 47.53 23.71 46.77 34.83 38.63
2072 105.23 19.16 41.11 34.84 37.76
2073 62.59 22.42 35.15 34.29 41.52
2074 36.19 24.82 33.7 21.99 26.39
2075 36.64 23.64 35.66 25.16 26.45
Mean 60.04143 20.6371429 39.67143 29.54143 31.56571
S.D 23.99324 4.4307814 6.779748 5.899431 7.830362
(Note: Appendix-1)

The table 4.11 indicates, there was a fluctuation situation of earnings per share of selected
commercial bank in Nepal. ADBL show the highest EPS in 2015(105.23) among others.
SBL is increasing ratio of 20.41 in 2012 upto 38.63 in 2014 and slightly fall down by
37.76 in 2015 and that slightly rise by 41.52 in 2016 and after that fall by 26.39 in 2017
and slightly rise by 26.45. EPS of ADBL is highest among all because it has optimum
level of capital structure that has efficiently managed between risk and return trade off of
equity, short term debt, and long term debt. So the shareholders wealth has maximized
among other banks.
 51

4.2.6 Return on Assets (ROA)

Table 4.12
ROA
Year ADBL GIBL NIBL SBI SBL
2012 0.0268 0.0086 0.0158 0.0082 0.0111
2013 0.0296 0.0115 0.0261 0.0119 0.0143
2014 0.0171 0.0157 0.0225 0.0151 0.0173
2015 0.0357 0.0138 0.0188 0.0179 0.0151
2016 0.022 0.0157 0.0196 0.0169 0.0168
2017 0.0202 0.0172 0.0206 0.0152 0.0154
2018 0.0254 0.0167 0.0213 0.0197 0.0159
Mean 0.025257 0.01417143 0.020671 0.014986 0.015129
S.D 0.006232 0.00312395 0.003204 0.003873 0.002045
(Note: Appendix-1)

Table 4.12 indicates a return on assets of selected commercial banks in Nepal. This is the
contribution of bank assets in profit generation from table 4.7 indicates, ADBL,
GIBL,NIBL, SBI and SBL was a fluctuation results for the rest of seven years. ROA of
ADBL is rising up the ratio of 0.0268 in 2012 to 0.0296 in 2013 and slightly fall in
2014(0.0171) after that in 2015 ROA is increase and slightly fall by 0.0357 and slightly
fall the ratio of 0.022 in 2016 to 0.0254 in 2018.
 52

4.2.7 Return on Equity (ROE)

Table 4.13

ROE
Year ADBL GIBL NIBL SBI SBL
2012 0.1418 0.1045 0.1717 0.1501 0.1513
2013 0.1609 0.139 0.2727 0.203 0.1928
2014 0.1008 0.1589 0.2447 0.2034 0.2334
2015 0.2209 0.1311 0.2 0.1887 0.2047
2016 0.1359 0.1587 0.1566 0.1924 0.201
2017 0.1176 0.1774 0.1664 0.1464 0.1402
2018 0.1301 0.1547 0.1471 0.158 0.1389
Mean 0.144 0.14632857 0.194171 0.177429 0.180329
S.D 0.038786 0.02374115 0.04771 0.025056 0.036884
(Note: Appendix-1)

Table 4.13 indicate a return on equity of selected commercial banks in Nepal, this is the
contribution of shareholders fund in profit generation. The information indicate that SBI
experienced a rise in return on equity from 2012 showing a ratio of 0.1501 upto
2014(0.2034) and after that 2015 upto 2017 there is fluctuations situation and after that,
in 2018 ADBL rise in return on equity. Moreover, ADBL, GBIL, NIBL and SBL was a
fluctuation results of falling and rising return on equity ratio.

The table 4.13 indicates that the all commercial banks generate less amount of profit n
term of return on equity for all five sampled banks. Profit generated by all companies has
less than 50% average of return on equity. That means contribution of equity on profit is
less for commercial banks.
 53

4.3 Correlation between dependent and independent variables

4.3.1 Correlation between EPS and independent variables

Table 4.14

EPS STDTA LTDT TDTA TDTE

A
EPS Pearson 1 -.175 .449** -.149 -.435**
Correlation
Sig. (2-tailed) .314 .007 .392 .009
STDTA Pearson -.175 1 .052 .998** .623**
Correlation
Sig. (2-tailed) .314 .765 .000 .000
LTDTA Pearson .449** .052 1 .108 .014
Correlation
Sig. (2-tailed) .007 .765 .537 .935
TDTA Pearson -.149 .998** .108 1 .621**
Correlation
Sig. (2-tailed) .392 .000 .537 .000
TDTE Pearson - .623** .014 .621 **
1
Correlation .435**
Sig. (2-tailed) .009 .000 .935 .000
**. Correlation is significant at the 0.01 level (2-tailed).
Note: SPSS Output

The table shows the overall correlation between variables. The correlation coefficient
between STDTA and EPS is -0.175 which means there is low degree of negative
correlation between STDTA and EPS, however it is not statistically significant. Similarly,
the correlation coefficients between LTDTA and EPS is 0.449 correlation value which
shows moderate level positive relationship between LTDTA and EPS. It is statistically
significant. Again, the correlation coefficient between TDTA and EPS is -0.149
correlation value which shows low degree of negative relationship between TDTA and
EPS. However, it is not statistically significant. Similarly, the correlation coefficient
TDTE and EPS have -0.435 correlation value which means moderate degree negative
relationship between TDTE and EPS. It is statistically significant.
 54

Hypothesis testing

𝐻0 =There is no significant relationship of EPS and STDTA, LTDTA, TDTA and TDTE.
𝐻1 = There is a significant relationship of EPS and STDTA, LTDTA, TDTA and TDTE

Summary of hypothesis test

Table 4.15

Null Hypothesis Significant Decision

Value
There is no significant relationship .314 Retain the null hypothesis
of EPS and STDTA.
There is no significant relationship .007 Reject the null hypothesis
of EPS and LTDTA.
There is no significant relationship .392 Retain the null hypothesis
of EPS and TDTA.
There is no significant relationship .009 Reject the null hypothesis
of EPS and TDTE.

In conclusion, EPS has significant relationship with only LTDTA and TDTE.
 55

4.3.2 ROA and Independent Variables

Table 4.16

Correlations
ROA STDTA LTDT TDTA TDTE
A
ROA Pearson 1 -.266 .230 -.252 -.659**
Correlation
Sig. (2-tailed) .123 .183 .145 .000
STDTA Pearson -.266 1 .052 .998** .623**
Correlation
Sig. (2-tailed) .123 .765 .000 .000
LTDTA Pearson .230 .052 1 .108 .014
Correlation
Sig. (2-tailed) .183 .765 .537 .935
TDTA Pearson -.252 .998** .108 1 .621**
Correlation
Sig. (2-tailed) .145 .000 .537 .000
**
TDTE Pearson -.659 .623** .014 .621 **
1
Correlation
Sig. (2-tailed) .000 .000 .935 .000
**. Correlation is significant at the 0.01 level (2-tailed).
Note: SPSS Output

The table shows the overall correlation between variables. Under this section, the
correlation between independent and dependent variable are analysed. At per correlation
analysis the variables are statistically significant at 1 percent or 0.01 significant level.
According to the table, the correlation between STDTA and ROA has -0.266 value which
means there is negative correlation between STDTA and ROA. Similarly, the correlation
coefficients between LTDTA and ROA have 0.230 correlation value which shows
moderate relationship between LTDTA and EPS. Again, the correlation coefficient
between TDTA and ROA have -0.252 correlation value which shows negative
relationship between TDTA and ROA. Similarly, the correlation coefficient TDTE and
ROA have -0.659 correlation value which means weak negative relationship between
 56

TDTE and ROA. TDTE variables are statistically significant because their p-value is less
than 0.01 significant level.

Hypothesis testing

𝐻0 = There is no significant relationship ROA and STDTA, LTDTA, TDTA and TDTE.
𝐻1 = There is a significant relationship of ROA and STDTA, LTDTA, TDTA and TDTE.

Summary of hypothesis testing

Table 4.17

Null Hypothesis Significant Decision

Value
There is no significant relationship .123 Retain the null hypothesis
of ROA and STDTA.
There is no significant relationship .183 Reject the null hypothesis
of ROA and LTDTA.
There is no significant relationship .145 Retain the null hypothesis
of ROA and TDTA.
There is no significant relationship .000 Reject the null hypothesis
of ROA and TDTE.

In conclusion, ROA has a significant relationship only with TDTE.

 57

4.3.3 ROE and Independent Variables

Table 4.18

Correlations
ROE STDTA LTDTA TDTA TDTE
ROE Pearson 1 .286 .247 .298 .381*
Correlation
Sig. (2-tailed) .096 .152 .082 .024
STDTA Pearson .286 1 .052 .998** .623**
Correlation
Sig. (2-tailed) .096 .765 .000 .000
LTDTA Pearson .247 .052 1 .108 .014
Correlation
Sig. (2-tailed) .152 .765 .537 .935
TDTA Pearson .298 .998** .108 1 .621**
Correlation
Sig. (2-tailed) .082 .000 .537 .000
*
TDTE Pearson .381 .623** .014 .621 **
1
Correlation
Sig. (2-tailed) .024 .000 .935 .000
*. Correlation is significant at the 0.05 level (2-tailed).
**. Correlation is significant at the 0.01 level (2-tailed).
Note: SPSS Output

The table shows the overall correlation between variables. Under this section, the
correlation between independent and dependent variable are analysed. At per correlation
analysis the variables are statistically significant at 1 percent or 0.01 significant level.
According to the table, the correlation between STDTA and ROE has 0.286 value which
means there is weak correlation between STDTA and ROE. Similarly, the correlation
coefficients between LTDTA and ROE have 0.247 correlation value which shows
moderate relationship between LTDTA and ROE. Again, the correlation coefficient
between TDTA and ROE have 0.298 correlation value which shows moderate
relationship between TDTA and ROE. Similarly, the correlation coefficient TDTE and
ROE have 0.381 correlation value which means weak relationship between TDTE and
 58

ROE. All variables have no statistically significant because their p-value is higher than
0.01 significant level.

Hypothesis Testing

𝐻0 = There is no significant relationship ROE and STDTA, LTDTA, TDTA and TDTE.
𝐻1 = There is a significant relationship of ROE and STDTA, LTDTA, TDTA and TDTE.
Summary of hypothesis testing

Table 4.19

Null Hypothesis Significant Decision

Value
There is no significant relationship .096 Retain the null hypothesis
of ROE and STDTA.
There is no significant relationship .152 Retain the null hypothesis
of ROE and LTDTA.
There is no significant relationship .082 Retain the null hypothesis
of ROE and TDTA.
There is no significant relationship .024 Reject the null hypothesis
of ROE and TDTE.

In conclusion ROE has no significant relationship with independent variables.

4.4 Relationship between Dependent Variables and Independent Variables

4.4.1 EPS and Independent Variable

Table 4.20

Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .638a .407 .349 14.27355
a. Predictors: (Constant), TDTE, LTDTA, STDTA
 59

Note: SPSS Output

Based on modal summary, table 4.20 shows the correlation coefficient (R value for this
research is 0.638. this means there is a moderate positive relationship between dependent
and independent variables. Similarly, the R square indicates the extent of percentage the
independent variable can explain the variation in the dependent variable. So, 40.7% of
variance in EPS is contributed by STDTA, LTDTA, TDTE and remaining is due to other
factors.
Due to multi-collinearity problem on TDTA, it is excluded from regression analysis.

Table 4.21

ANOVAa
Model Sum of Df Mean Square F Sig.
Squares
1 Regression 4327.651 3 1442.550 7.081 .001b
Residual 6315.758 31 203.734
Total 10643.409 34
a. Dependent Variable: EPS
b. Predictors: (Constant), TDTE, LTDTA, STDTA
Note: SPSS Output

EPS is the portion of a company’s profit that is allocated to every individual share of the
stock. EPS serves as an indicator of a company’s profitability. EPS is a key driver of
share prices. It is generally considered to be the single most important variable in
determining a share’s price.

EPS is an important factor used in valuing a company because it breaks down a firm’s
profits on per share basis. So that table 4.21 indicates, there is exist relation between EPS
and Independent variable. EPS has significant relationship with all independent variables
having significant value of 0.001 which is less than 0.05.
 60

Table 4.22

Coefficient
Model Unstandardized Standardized T Sig.
Coefficients Coefficients
B Std. Error Beta
1 (Constant) 32.382 16.006 2.023 .052
STDTA 15.874 22.428 .125 .708 .484
LTDTA 1011.09 311.397 .450 3.247 .003
6
TDTE -2.710 .922 -.520 -2.939 .006
a. Dependent Variable: EPS
Note: SPSS Output

The table 4.22 shows that the impact between dependent variable on independent
variable. The independent variable LTDTA and TDTE has affect EPS significantly.
However, STDTA have not affect on EPS with significant value 0.484. The model
summary can be presented as follows:
YEPS=32.3820+15.874(SDTA)+1011.096(LDTA)-2.71 (TDTE)+

4.4.2 ROA and Independent Variables

Table 4.23

Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .722a .521 .475 .00405
a. Predictors: (Constant), TDTE, LTDTA, STDTA
Note: SPSS Output

Based on model summary, table 4.23 shows the correlation coefficient (R value) for this
research is 0.722. This means there is a moderate positive relationship between dependent
and independent variables. Similarly, the R square indicates the extent of percentage the
 61

independent variables can explain the variation in the dependent variable. So, 0.521
(52.1%) of variance in ROA is contributed by STDTA, LTDTA, TDTE and remaining is
due to other factors.

Table 4.24

ANOVAa
Model Sum of Df Mean F Sig.
Squares Square
1 Regression .001 3 .000 11.245 .000b
Residual .001 31 .000
Total .001 34
a. Dependent Variable: ROA
b. Predictors: (Constant), TDTE, LTDTA, STDTA
Note: SPSS Output

The table 4.24 indicated that there is significant relationship between dependent variable
and independent variable. ROA has significant relationship with all independent variables
having significant value of 0.000 which is less than 0.05.
Due to multi-collinearity problem on TDTA, it is excluded from regression analysis.

Table 4.25
Coefficients and Hypothesis Testing
Model Unstandardized Standardized t Sig.
Coefficients Coefficients
B Std. Error Beta
1 (Constant) .020 .005 4.313 .000
STDTA .009 .006 .220 1.384 .176
LTDTA .163 .088 .230 1.849 .074
TDTE -.001 .000 -.799 -5.029 .000
a. Dependent Variable: ROA
Note: SPSS Output
 62

To looking impact of dependent variable and independent variables from table 4.25
shows that, TDTE has significant impact on ROA with significant level 0.000 because
significant value is less than 0.05. However, STDTA and LTDTA have not affect on
ROA because their significant value is higher than significant level of 0.05. The model
summery can be expressed as follows:
YROA=0.0200+0.009(SDTA)+0.163(LDTA)-0.001 (TDTE)+

4.4.3 ROE and Independent Variables

Table 4.26

Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .454a .206 .129 .04356
a. Predictors: (Constant), TDTE, LTDTA, STDTA
Note: SPSS Output

Based on model summary, table 4.26 shows the correlation coefficient (R value) for this
research is 0.454. This means there is a moderate positive relationship between dependent
and independent variables. Similarly, the R square indicates the extent of percentage the
independent variables can explain the variation in the dependent variable. So, 0.206
(20.6%) of variance in ROE is contributed by STDTA, LTDTA, TDTE and remaining is
due to other factors.

Due to multi-collinearity problem on TDTA, it is excluded from regression analysis.

 63

Table 4.27

ANOVAa
Model Sum of Df Mean Square F Sig.
Squares
1 Regression .015 3 .005 2.682 .064b
Residual .059 31 .002
Total .074 34
a. Dependent Variable: ROE
b. Predictors: (Constant), TDTE, LTDTA, STDTA
Note: SPSS Output

The table 4.27 indicates that the overall dependent variable and independent variable
have an insignificant relation. ROE has no significant relationship with all independent
variables having significance level of 0.064 which is greater than 0.05.

Table 4.28

Coefficientsa
Model Unstandardized Standardized T Sig.
Coefficients Coefficients
B Std. Error Beta
1 (Constant) .087 .049 1.779 .085
STDTA .021 .068 .062 .303 .764
LTDTA 1.418 .950 .239 1.492 .146
TDTE .005 .003 .339 1.656 .108
a. Dependent Variable: ROE
Note: SPSS Output

To looking the impact of dependent variable on independent variable the table shows
4.28 that, the independent variables STDTA, LTDTA and TDTE have not affect on ROE
having significant level of 0.764, 0.146 and 0.108 respectively which is greater than 0.05.
The summery can be expressed as follows:
 64

YROE=0.0870+0.021(SDTA)+1.418(LDTA)+0.005 (TDTE)+
 65

CHAPTER-V

CONCLUSION

This capital includes summary, conclusion, implications and implications for further
research.

5.1 Summary

Capital structure can be a mixture of a firm’s long-term debt, short term debt, Common
equity and preferred equity. A company’s proportion of short and long term debt is
considered when analyzing capital structure. When analysts refer to capital structure, they
are most likely referring a firm’s debt to equity ratio, which provides insight into how
risky a company is. Usually, a company that is heavily financed by debt has a more
aggressive capital structure and therefore poses greater risk to investors. This risk,
however may be the primary source of the firm’s growth.

The term capital structure refers to the percentage of capital at work in a business by
types. Broadly speaking, there are two forms of capital: Equity capital and debt capital.
Each types of capital has its benefits and drawbacks, and a substantial part of wise
corporate steward ship and management is attempting to find the perfect capital structure
regarding risk/ reward payoff for shareholders.

The capital structure of a concern depends upon a large number of factors such as
leverage or trading on equity, growth of the company, nature and size of business, the
idea of retaining control, flexibility of capital structure, requirement of investors, cost of
flotation of new securities, timing of issue, corporate tax rate and the legal requirements.
It is not possible to rank hem because all such factors of new securities, timing if issues,
corporation tax rate and the legal requirements. It is not possible to rank hem because all
such factors are of different important and the influence of individual factors of a firm
changes over a period of time.

Capital Structure is referred to as the ratio of different kinds of securities raised by a firm
as long-term finance.
 66

Capital Structure means a combination of all long-term sources of finance. It includes

equity. Share capital, Reserve and Surplus, Preference Share capital, Loan, Debenture
and other such long-term sources of finance. A company has to decide the proportion in
which it should have its own finance and outsider’s finance particularly debt finance.
Based on the proportion of finance, WACC and value of a firm are affected.

The main objective of this study is to find out the exact relationship between capital
structure and profitability over and across the selected commercial banks, for which out
of total population of 28 commercial banks, five major banks agricultural development
bank (ADBL), Nepal Investment Bank ltd (NIBL) and Global IME bank ltd (GIBL),
Siddhartha Bank Limited(SBL) and Nepal SBI Bank Limited (SBI) is taken as sample of
which ADBL is public sectors commercial bank and NIBL, GIBL, SBL and SBI are
private sectors commercial banks.

The average value of STDTA of ADBL, GIBL, NIBL, SBI and SBL are 0.772114,
0.904914, 0.878286, 0.8931 and 0.710114 respectively. SBL has lower mean value rather
than other banks. It means that SBL use more equity than debt. The average value of
LTDTA of ADBL, GIBL, NIBL, SBI and SBL are 0.018614, 0.00665714, 0.011857,
0.012586 and 0.019929 respectively. GIBL has lowest value comparison to other. The
average value of TDTA of ADBL, GIBL, NIBL, SBI and SBL are 0.718143, 0.903157,
0.890214, 0.914186 and 0.913557 respectively and ADBL has lower average value than
others bank average value.

From regression table and its output, find that there is statistically significant relationship
of EPS with LTDTA because the output is 0.003 which is less than 0.05. So, reject the
null hypothesis. There is no statistical relationship of EPS with STDTA because there is
no statistical evidence to reject null hypothesis because the value of STDTA is 0.484
which is greater than 0.05. So, that accepts the null hypothesis.

There is a significant relation of EPS with TDTE because the output is 0.006 which is
less than 0.05. So, null hypothesis is rejected.
 67

From regression analysis, find that there is no statistically significant relationship of ROA
and STDTA because the output is 0.176 which is higher than 0.05. So, null hypothesis is
accepting.

There is a significant relationship of ROA with TDTE because the output is 0.000 which
is less than 0.05. So, null hypothesis is rejected.

There is no significant relationship of ROA and LTDTA because the output is 0.074
which is greater than 0.05. So, null hypothesis is accepting.

From regression analysis table, find that is statistically significant relation of EPS with
LTDTA and TDTE having value are 0.003 and 0.006. So, null hypothesis is rejecting.
But, there is no statistically significant relationship STDTA with EPS having value of
0.484. So, null hypothesis is accepting. Due to multi-collinearity problem on TDTA, it is
excluded from regression analysis.

From regression analysis table, find that there is statistically significant relationship of
ROA with TDTE having value is 0.000. So, null hypothesis is rejecting. But there is no
statistically significant relationship of ROA with STDTA and LTDTA having value are
0.176 and 0.074. So, null hypothesis is accepting. Due to multi-collinearity problem on
TDTA, it is excluded from regression analysis.

From regression analysis table, find that there is no statistically significant relationship
of ROE with STDTA, LTDTA and TDTE having value are 0.764, 0.146 and 0.108. So,
null hypothesis is accepting. Due to multi-collinearity problem on TDTA, it is excluded
from regression analysis.

Which indicates that EPS also increase with the increasing LTDTA that mean LTDTA
and EPS has positive relationship between there are two variables. This means, higher the
long term debt proportion, higher would be the per share earnings to the shareholders.
Higher use of dent proportion reduces the equity proportion may leads to higher EPS.
EPS has strong negative relationship with TDTE which have correlation coefficient of
0.435.
 68

5.2 Conclusion

Commercial banks are the backbone of the economic development of the country which
flow the capital from various part of the country to deficit unit as an intermediary and
ultimately promote and finance the industries, business, infrastructures and other welfare
of the citizens. It collects the deposits from the surplus customer units and provide to
those who are in need. Its service range and scope of activities are in wide range hence
able to earn large profit.

The study reveal that GIBL has higher level of STDTA which has the mean value of
0.904914, which is highest among all. SBL has lowest level of STDTA which has the
mean value of 0.710114 which means that SBL use less amount of short term debt to
finance total assets. It means that GIBL use huge amount of short term debt to finance
their assets rather than other selected banks.

SBL has higher level of LTDTA which has the mean value of 0.019929 which is highest
among all. GIBL has lowest level of LTDTA which has the mean value of 0.0065714. It
mean that SBL use huge amount of long term debt to finance the assets.

SBI has higher level of TDTA which has mean value of 0.914186 which is highest
among all. ADBL has lowest level of TDTA which has the mean value of 0.716143. SBI
use huge amount of total debt to finance their assets from the selected commercial banks.

SBI has higher level of TDTE which has the mean value of 11.59089 which is highest
among all. ADBL has lowest level of TDTE which has mean value of 4.087043. SBI use
huge amount of debt to finance their equity for the wealth of the bank as well as for
shareholders.

NIBL has higher level of ROE which has the mean value of 0.194171 which is lowest
among all. ADBL has lowest level of ROE. ADBL may have lowest level of ROE
because of lowest level long term debt employment in its capital structure that it has
adopted lowest level of risk and hence leads to lower of return on equity.
 69

ADBL has higher level of ROA which has the mean value of 0.025257 which is highest
among others. GIBL has lowest level of ROA which has the mean value of 0.01417143.
ADBL has highest level of ROA because its efficient use of capital structure composition
of all the components take short term debt, long term debt and equity.

ADBL has higher level of EPS which has the mean value of 60.04143 which is highest
among others. GIBL has lowest level of EPS which has the mean value of 20.6371429
because, its risk and return tradeoff between capital composition is weak than other bank.

5.3 Implications

1. GIBL has higher mean value of STDTA and it has lowest mean value of LTDTA.
It means that GIBL has use high level of short term and lower level of long term
debt to finance its total assets. It indicates that using lower level of long term debt
means it does not assume say risk and tax advantage of using debt hence, using
higher level of equity. Such composition of capital of this bank leads to lower
level of EPS due to high using of equity and low level of income as well as it also
leads to lower level of ROA. So, with this analysis, GIBL is recommended to
increases its proportion of debt to finance assets in coming year.

2. ADBL has lowest mean value of TDTE and it has also lowest mean value of
TDTA. Which indicates that, it also has use lower proportion of long term debt.
Hence, its performance regarding ROA and EPS has highest mean value is quite
good, but the ROE has lowest mean value than other four banks. So, it might
because of highest employment of equity than other four. So, it is also
recommended to slightly increase in its debt capital. Hence, by increasing the
other indicators. ADBL is also to manage its rate of return in manage its rate of
return in satisfactory level with efficient management of investment and
management capability of liquidity and profitability to ensure best return to its
shareholders.

3. NIBL has higher mean value of ROE which means that it used lower level of
equity.
 70

5.4 Implications for further study

A study should be taken to analyze the impact of capital structure on profitability of

other development banks, financial companies, service companies and non listed
companies. In addition, future studies could be done to analyze the determinants of
capital structure in Nepalese banks. Moreover, study on relationship between the
capital structures of Nepalese commercial banks and companies of other nations
should be done.
 71

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 APPENDICES

Appendix-1

Short Term Debt to Total Assets

STDTA
Year ADBL GIBL NIBL SBI SBL
2069 0.9049 0.9345 0.892 0.9042 0.7775
2070 0.8979 0.929 0.893 0.9069 0.7856
2071 0.9023 0.9093 0.8958 0.8912 0.8037
2072 0.8977 0.8878 0.8911 0.8883 0.821
2073 0.8999 0.8991 0.8625 0.8961 0.8254
2074 0.8767 0.8858 0.8656 0.8996 0.082
mean 0.896567 0.907583 0.883333 0.897717 0.682533
S.D 0.010111 0.020611 0.015052 0.007262 0.294804

Long Term Debt to Total Assets

LTDTA
Year ADBL GIBL NIBL SBI SBL
2069 0.0335 0.013 0.0159 0.0103 0.0212
2070 0.0298 0.0102 0.0109 0.0123 0.0276
2071 0.0259 0.0066 0.0121 0.0163 0.0231
2072 0.0182 0.0057 0.0148 0.0168 0.0282
2073 0.0123 0.0045 0.0119 0.0127 0.0161
2074 0.0072 0.0034 0.0102 0.01 0.0133
Mean 0.02115 0.00723333 0.012633 0.013067 0.021583
S.D 0.010311 0.00365987 0.002241 0.002904 0.006018
Total Debt to Total Assets

TDTA
Year ADBL GIBL NIBL SBI SBL
2069 0.811 0.9172 0.9079 0.9449 0.9261
2070 0.8155 0.9171 0.904 0.9413 0.9256
2071 0.8296 0.8979 0.908 0.9257 0.9255
2072 0.8392 0.8941 0.906 0.9047 0.926
2073 0.8378 0.9007 0.8744 0.9118 0.9161
2074 0.0893 0.903 0.8759 0.8958 0.89
mean 0.703733 0.905 0.896033 0.9207 0.918217
S.D 0.301229 0.009869 0.016249 0.019951 0.014359

Total Debt to Total Equity

TDTE
year ADBL GIBL NIBL SBI SBL
2069 4.2916 11.0881 9.8689 17.158 12.5481
2070 4.4206 11.077 9.4195 16.0562 12.4497
2071 4.8714 8.7968 9.873 12.4668 7.4087
2072 5.2208 8.4471 9.6399 9.4991 12.52
2073 5.1667 9.0739 6.9681 10.3453 10.9201
2074 0.52 9.3134 7.0617 8.6007 8.0983
mean 4.08185 9.632717 8.805183 12.35435 10.65748
S.D 1.785666 1.15955 1.397174 3.55162 2.342154
Return on Equity

ROE
Year ADBL GIBL NIBL SBI SBL
2069 0.1418 0.1045 0.1717 0.1501 0.1513
2070 0.1609 0.139 0.2727 0.203 0.1928
2071 0.1008 0.1589 0.2447 0.2034 0.2334
2072 0.2209 0.1311 0.2 0.1887 0.2047
2073 0.1359 0.1587 0.1566 0.1924 0.201
2074 0.1176 0.1774 0.1664 0.1464 0.1402
Mean 0.146317 0.144933 0.202017 0.180667 0.187233
S.D 0.041954 0.025691 0.047058 0.025793 0.035101

Return on Assets

ROA
Year ADBL GIBL NIBL SBI SBL
2069 0.0268 0.0086 0.0158 0.0082 0.0111
2070 0.0296 0.0115 0.0261 0.0119 0.0143
2071 0.0171 0.0157 0.0225 0.0151 0.0173
2072 0.0357 0.0138 0.0188 0.0179 0.0151
2073 0.022 0.0157 0.0196 0.0169 0.0168
2074 0.0202 0.0172 0.0206 0.0152 0.0154
Mean 0.025233 0.01375 0.020567 0.0142 0.015
S.D 0.006827 0.003197 0.003497 0.00358 0.00220907
Earnings per share

EPS
Year ADBL GIBL NIBL SBI SBL
2012 60.57 12.14 34.49 22.93 20.41
2013 71.54 18.57 50.82 32.75 29.8
2014 47.53 23.71 46.77 34.83 38.63
2015 111.77 19.16 41.11 34.84 37.76
2016 52.79 22.42 35.15 34.29 41.52
2017 31.59 24.82 33.7 21.99 26.39
mean 62.63167 20.13667 40.34 30.27167 32.41833
S.D 27.51977 4.631866 7.169608 6.106116 8.214074
 Appendixs-2

Variables Entered/Removed a
Mod Variables Variables Metho
el Entered Removed d
1 TDTE, . Enter
LTDTA,
STDTAb
a. Dependent Variable: EPS
b. Tolerance = .000 limit reached.

Model Summary
Mod R R Adjusted R Std. Error
el Square Square of the
Estimate
a
1 .641 .411 .343 15.21829
a. Predictors: (Constant), TDTE, LTDTA, STDTA

ANOVAa
Model Sum of Df Mean F Sig.
Squares Square
1 Regressio 4202.237 3 1400.746 6.048 .003b
n
Residual 6021.508 26 231.596
Total 10223.745 29
a. Dependent Variable: EPS
b. Predictors: (Constant), TDTE, LTDTA, STDTA
 Coefficientsa
Model Unstandardized Standar t Sig. Collinearity
Coefficients dized Statistics
Coeffici
ents
B Std. Error Beta Tolerance VIF
1 (Const 33.02 17.151 1.925 .065
ant) 2
STDT 21.65 24.852 .174 .871 .391 .568 1.75
A 7 9
LTDT 892.6 370.912 .369 2.407 .023 .961 1.04
A 64 0
TDTE -3.030 1.077 -.564 -2.813 .009 .563 1.77
5
a. Dependent Variable: EPS

Excluded Variablesa
Model Beta In t Sig. Partial Collinearity Statistics
Correlation Tolerance VIF Minimu
m
Toleran
ce
1 TD 250.42 .539 .595 .107 1.079E-7 9265266.1 1.079E-
b
TA 6 58 7
a. Dependent Variable: EPS
b. Predictors in the Model: (Constant), TDTE, LTDTA, STDTA
 Collinearity Diagnosticsa
Mod Dimensi Eigenval Condition Variance Proportions
el on ue Index (Constan STDT LTDT TDTE
t) A A
1 1 3.740 1.000 .00 .00 .01 .00
2 .196 4.370 .00 .00 .69 .10
3 .053 8.395 .20 .02 .30 .58
4 .011 18.680 .80 .97 .00 .32
a. Dependent Variable: EPS

Variables Entered/Removed a
Mod Variables Variables Metho
el Entered Removed d
1 TDTE, . Enter
LTDTA,
STDTAb
a. Dependent Variable: ROA
b. Tolerance = .000 limit reached.

Model Summary
Mod R R Adjusted R Std. Error
el Square Square of the
Estimate
a
1 .723 .523 .468 .00435
a. Predictors: (Constant), TDTE, LTDTA, STDTA
 ANOVAa
Model Sum of Df Mean F Sig.
Squares Square
1 Regressio .001 3 .000 9.514 .000b
n
Residual .000 26 .000
Total .001 29
a. Dependent Variable: ROA
b. Predictors: (Constant), TDTE, LTDTA, STDTA

Coefficientsa
Model Unstandardized Standardize t Sig. Collinearity
Coefficients d Statistics
Coefficients
B Std. Error Beta Tolerance VIF
1 (Constant) .020 .005 4.041 .000
STDTA .010 .007 .250 1.391 .176 .568 1.759
LTDTA .136 .106 .177 1.280 .212 .961 1.040
TDTE -.001 .000 -.809 -4.483 .000 .563 1.775
a. Dependent Variable: ROA

Excluded Variablesa
Model Beta In t Sig. Partial Collinearity Statistics
Correlation Toleran VIF Minimu
ce m
Toleran
ce
1 TD 398.58 .966 .343 .190 1.079E- 926526 1.079E-
b
TA 9 7 6.158 7
a. Dependent Variable: ROA
b. Predictors in the Model: (Constant), TDTE, LTDTA, STDTA
 Collinearity Diagnosticsa
Mod Dimensi Eigenval Condition Variance Proportions
el on ue Index (Constan STDT LTDT TDTE
t) A A
1 1 3.740 1.000 .00 .00 .01 .00
2 .196 4.370 .00 .00 .69 .10
3 .053 8.395 .20 .02 .30 .58
4 .011 18.680 .80 .97 .00 .32
a. Dependent Variable: ROA

Variables Entered/Removed a
Mod Variables Variables Metho
el Entered Removed d
1 TDTE, . Enter
LTDTA,
STDTAb
a. Dependent Variable: ROE
b. Tolerance = .000 limit reached.

Model Summary
Mod R R Adjusted R Std. Error
el Square Square of the
Estimate
a
1 .346 .120 .018 .04043
a. Predictors: (Constant), TDTE, LTDTA, STDTA
 ANOVAa
Model Sum of Df Mean F Sig.
Squares Square
1 Regressio .006 3 .002 1.177 .338b
n
Residual .042 26 .002
Total .048 29
a. Dependent Variable: ROE
b. Predictors: (Constant), TDTE, LTDTA, STDTA

Coefficientsa
Model Unstandardized Standardiz t Sig. Collinearity
Coefficients ed Statistics
Coefficien
ts
B Std. Beta Toleran VIF
Error ce
1 (Consta .100 .046 2.194 .037
nt)
STDTA .056 .066 .206 .844 .406 .568 1.759
LTDTA .493 .985 .094 .500 .621 .961 1.040
TDTE .002 .003 .162 .662 .514 .563 1.775
a. Dependent Variable: ROE

Excluded Variablesa
Model Beta In t Sig. Partial Collinearity Statistics
Correlatio Tolera VIF Minimum
n nce Tolerance
1 TD 1086.97 2.058 .050 .381 1.079E 9265266.15 1.079E-7
b
TA 7 -7 8
a. Dependent Variable: ROE
b. Predictors in the Model: (Constant), TDTE, LTDTA, STDTA
 Collinearity Diagnosticsa
Mod Dimensi Eigenval Condition Variance Proportions
el on ue Index (Constan STDT LTDT TDTE
t) A A
1 1 3.740 1.000 .00 .00 .01 .00
2 .196 4.370 .00 .00 .69 .10
3 .053 8.395 .20 .02 .30 .58
4 .011 18.680 .80 .97 .00 .32
a. Dependent Variable: ROE
IMPACT OF CAPITAL STRUCTURE ON PROFITABILITY OF NEPALESE
COMMERCIAL BANKS

A Thesis Proposal

By

Shushila Aryal

Central Department of Management

Exam Roll No: 827/16

Class Roll No: 49

Registration No: 7-2-305-243-2011

Submitted in partial fulfillment of the requirement for the degree of

Master of Business Studies (MBS)

in the

Faculty of Management

Tribhuvan University

Kirtipur, Kathmandu

February , 2019
 CHAPTER-I

INTRODUCTION

1.1 Background of the study

The term ‘structure’ means the arrangement of the various parts. So capital structure
means the arrangement of capital from different sources so that the long-term funds
needed for the business are raised. Thus, capital structure refers to the proportions or
combination of equity share capital, preference share capital, debenture, long-term
loans, retained earnings and other long-term sources of fund in the total amount of
capital which a firm should raise to run its business. Capital structure is the
combination of debt and equity securities that comprise a firm’s financing of its
assets.

The relative proportion of various sources of funds used in a business is termed as

financial structure. Capital structure is a part of the financial structure and refers to
the proportion of the various long- term sources of financing. It is concerned with
making the array of the sources of the funds in a proper manner, which is in relative
magnitude and proportion. The capital structure of a company is made u of debt and
equity securities that comprise a firm’s financing of its assets. It is permanent
financing of a firm represented by long- term debt, preferred stock and net worth. So,
it related to the arrangement of capital and excludes short-term borrowing. It denotes
some degree of permanency as it excludes short-term sources of financing. Again
each components of capital structure has a different cost to the firm.

A company’s capital structure points out how its assets are financed. When a
company finances its operations by opening up or increasing capital to an investor
(preferred shares, common shares, or retained earnings), it avoids debt risk, thus
reducing the potential that it will go bankrupt. Moreover, the owner may choose debt
funding and maintain control over the company, increasing return on the operations.
Debt takes the form of a corporate bond issue, long-term loan, or short-term debt. The
latter directly impacts the working capital. Having said that, a company that is 70%
debt-financed and 30% equity-financed has a debt-to-equity ratio of 70%; this is the
leverage. It is very important for a company to manage its debt and equity financing
because a favorable ratio will be attractive to potential investors in the business.
Capital can be raised either through the acquisition of debt or through equity. Equity
financing comes from the sale of stock to shareholders. Debt can come from many
sources, such as bank loans, personal loans and credit card debt, but it must always be
repaid at a later date, usually with interest.

Both types of capital financing carry some degree of expense that must be paid to
access funds, called the cost of capital. For debt capital, this is the interest rate
charged by the lender. The cost of equity is represented by the rate of return on
investment that shareholders expect in dividends. While debt tends to cost less than
equity, both types of capital financing impact a company's profit margins in important
ways. Perhaps the clearest example of this is the impact of debt on the bottom line.
Somewhere between operational expenses and the net profit figure on a company's
income statement lies expenses incurred for the payment of debts. A company with a
particularly debt-heavy capital structure makes larger interest payments each year,
thereby reducing net profit. Debt allows companies to leverage existing funds,
thereby enabling more rapid expansion than would otherwise be possible. The
effective use of debt financing result in an increases in revenue that exceeds the
expense of interest payments. In addition, interest payments are tax-deductible,
reducing a company's overall tax burden.

The impact of equity financing on a company's profit margins is equally important,

though not quite so straightforward. While equity funds stimulate growth without
requiring repayment, shareholders are granted limited ownership rights, including
voting rights. They also expect a return on their investment in the form of dividends,
which are only paid if the company turns a profit. A business funded by shareholder
equity is beholden to its investors and must remain consistently profitable in order to
 fulfill this obligation. Business ownership is shared, so the proverbial pie of profits
must be divided into a greater number of pieces. A company funded fully by debt
may have hefty interest payments each month, but when all is said and done, the
profits belong entirely to the business owners. Without shareholder dividends to pay,
the profits can be reinvested in the business through the purchase of new equipment
or by opening a new location, generating even greater profits down the road.

Another indirect effect of capital structure on profitability is its impact on the

potential availability of additional capital if it is needed in the future. A company with
a particularly high debt to equity ratio may be seen as unnecessarily risky by both
lenders and potential shareholders, making it difficult to raise additional funds.
Limited access to capital funding, in turn, limits the business's growth potential,
keeping profit margins stagnant.

Capital structure is the mix of long- term sources of funds used by a firm. It is made
up of debt and equity securities and refers to permanent financing of a firm. It is
compose of long-term debt, preference share capital and shareholder’s funds.

Hence capital structure implies the composition of fund raised from various sources
broadly classified as debt and equity. It may be defined as the proportion of debt and
equity in the total capital that will remain invested in a business over a long period of
time. Capital structure is concerned with the quantitative aspect. A decision about the
proportion among the proportion among these types of securities refers to the capital
structure decision of an enterprise.

1.2 Overviews of selected bank

1.2.1 Agriculture Development Bank Limited

With the main objective of providing institutional credit for enhancing the production
and productivity of the agricultural sector in the country, the Agricultural
Development Bank, Nepal was established in 1968 under the ADBN Act 1967, as
 successor to the cooperative Bank. The Land Reform Savings Corporation was
merged with ADBN in 1973. Subsequent amendments to the Act empowered the
bank to extend credit to small farmers under group liability and expand the scope of
financing to promote cottage industries. The amendments also permitted the bank to
engage in commercial banking activities for the mobilization of domestic resources.
Agricultural Development Bank Limited (ADBL) is an autonomous organization
largely owned by Government of Nepal. The bank has been working as a premier
rural credit institution since the last three decades, contributing a more than 67
percent of institutional credit supply in the country. Hence, rural finance is the
principal operational area of ADBL. Furthermore, the bank has also been involved in
commercial banking operations since 1984. The enactment of Bank and Financial
Institution Act (BAFIA) abolished all Acts related to financial institutions including
the ADBN Act, 1967. In line with the BAFIA, ADBL has been incorporated as a
public limited company on July 14, 2005. Thus, ADBL operates as a "A" category
financial Institution under the legal framework of BAFIA and the Company Act,
2053. According to the balance sheet of 2074, total deposit is Rs. 99.81 billion, net
profit is Rs. 2.5 billion and share capital is Rs.13.93 billion. ADBL still have 40 ATM
and 232 branches all over the county.

1.2.2 Nepal SBI Bank Limited

Nepal SBI Bank Ltd. (NSBL) is a subsidiary of State Bank of India (SBI) having 55
percent of ownership. The local partner viz. Employee Provident Fund holds 15%
equity and General Public 30%. In terms of the Technical Services Agreement
between SBI and the NSBL, the former provides management support to the bank
through its expatriate officers including Managing Director who is also the CEO of
the Bank. Central Management Committee (CENMAC), consisting of the Managing
Director & CEO, Chief Operating Officer & Dy. CEO, Chief Financial Officer, Chief
Risk Officer and Chief Credit Officer, exercises overall control functions with the
help of 3 Regional Offices, and oversee the overall operations of the Bank.
 NSBL was established in July 1993 and has emerged as one of the leading banks of
Nepal, with 869 skilled and dedicated Nepalese employees working in a total of 83
outlets, which includes 72 branches, 7 extension counters, 3 Regional Offices and
Corporate Office. With presence in 39 districts in Nepal, the Bank is providing value
added services to its customers through its wide network of 110 ATMs (including 2
Mobile ATMs and 4 CRMs), internet banking, mobile wallet, SMS banking, IRCTC
Ticket Online Booking facility, etc. NSBL is one of the fastest growing Commercial
Banks of Nepal with more than 8.33 lakhs satisfied deposit customers and over 6.50
lakhs ATM/Debit cardholders. The Bank enjoys leading position in the country in
terms of penetration of technology products, viz. Mobile Banking, Internet Banking
and Card Services. The Bank is moving ahead in the Nepalese Banking Industry with
significant growth in Net Profit with very nominal NPA. As of 31st Chaitra, 2074, the
Bank has deposits of Rs. 83.66 billion and advances (net) of Rs. 74.05 billion, besides
investment portfolio of Rs. 17.93 billion.

1.2.2 Nepal Investment Bank LTD

Nepal Investment Bank Ltd. (NIBL), previously Nepal Indosuez Bank Ltd., was
established in 1986 as a joint venture between Nepalese and French partners. The
French partner (holding 50% of the capital of NIBL) was Credit Agricole Indosuez, a
subsidiary of one of the largest banking group in the world. According to balance
sheet of 2074, total deposit is Rs.125.66 billion, net profit is Rs.3.11 billion and share
capital is Rs. 10.62 billion.

Later, in 2002 a group of Nepalese companies comprising of bankers, professionals,

industrialists and businessmen acquired the 50% shareholding of Credit Agricole
Indosuez in Nepal Indosuez Bank Ltd., and accordingly the name of the Bank also
changed to Nepal Investment Bank Ltd. NIBL has 78 branches,108 ATM available in
Nepal.
1.2.4 Siddhartha Bank Limited

Siddhartha Bank Limited (SBL), established in 2002 and promoted by prominent

personalities of Nepal, today stands as one of the consistently growing banks in
Nepal. While the promoters come from a wide range of sectors, they possess
immense business acumen and share their valuable experiences towards the
betterment of the Bank.

Within a short span of time, Siddhartha Bank has been able come up with a wide
range of products and services that best suits its clientele. Siddhartha Bank has been
posting growth in its portfolio size and profitability consistently since the beginning
of its operations. The management of the Bank has been thoroughly professional.
Siddhartha bank has 104 branches, 83 ATM services in Nepal.
Siddhartha Bank has been able to gain significant trust of the customers and all other
stakeholders to become one of the most promising commercial banks in the country
in less than 15 years of its operation. According to the balance sheet of 2074 total
deposit is Rs.77.31 billion, net profit is Rs.1.38 billion and share capital is Rs. 75.84
billion. The Bank is fully committed towards customer satisfaction. The range and
scope of modern banking products and services the Bank has been providing is an
example to its commitment towards customer satisfaction. It is this commitment that
has helped the Bank register quantum growth every year. And the Bank is confident
and hopeful that it will be able to retain this trust and move even further towards its
mission of becoming one of the leading banks of the industry.
1.2.5 Global IME Bank Limited

Global IME Bank Ltd. (GIBL) emerged after successful merger of Global Bank Ltd
(an “A” class commercial bank), IME Financial Institution (a “C” class finance
company) and Lord Buddha Finance Ltd. (a “C” class finance company) in year
2012. Two more development banks (Social Development Bank and Gulmi Bikas
Bank) merged with Global IME Bank Ltd in year 2013. Later, in the year 2014,
Global IME Bank made another merger with Commerz and Trust Bank Nepal Ltd.
 (an “A” class commercial bank). During 2015-16, Global IME Bank Limited
acquired Pacific Development Bank Limited (a "B" Class Development Bank) and
Reliable Development Bank Limited (a “B” Class Development Bank. Global Bank
Limited (GBL) was established in 2007 as an ‘A’ class commercial bank in Nepal
which provided entire commercial banking services. The bank was established with
the largest capital base at the time with paid up capital of NPR 1.0 billion. The paid
up capital of the bank has since been increased to NPR 8.88 billion. The bank's shares
are publicly traded as an 'A' category company in the Nepal Stock Exchange. Global
IME Bank operates 133 branches and 141 ATM services in Nepal.
It is in line with the aim of the bank to be “The Bank for All” by giving necessary
impetus to the economy through world class banking service. For the day to day
operations, the bank has been using the world renowned FINACLE software that
provides real time access to customer database across all branches and corporate
locations of the bank. This state of the art customer database has also been linked to a
Management Information System that provides easy reach to all possible database
information for balanced and informed decision making. A disaster recovery system
(DRS) of the Bank has also been established in the Western Region of Nepal (200
kms west of Kathmandu). The bank has been able to achieve excellent diversification
of its assets. A well balanced distribution of exposure in areas of national interest has
been possible through long term forecasting and timely strategic planning. The bank
has diversified interests in hydro power, manufacturing, textiles, services industry,
aviation, exports, trading and microfinance projects, just to mention a few. According
to the balance sheet of 2074, total deposit is Rs.101.91 billion, net profit is Rs.2.006
billion and share capital is Rs.8.8 billion.

1.3 Statement of the problem

The choice of capital structure is one of the most important strategic financial
decisions of firms. Capital structure is the mix of the long-term sources of funds used
by a firm. It is made up of debt and equity securities and refers to permanent
financing of a firm. It is composed of long term debt, preference share capital and
 shareholder’s funds. The capital structure of a company is made up of debt and equity
securities that comprise a firm’s financing of its assets.

In practice, it is noticed that firms procure funds without much of the analysis that
may cost them an arm and the leg to survive in the competitive modern
business environment for the long. Thus, it seems to be the relevant topic of
discussion which tries to explore the capital structure position of selected banks in
Nepal, so that the fact can be revealed whether strengthening their proper mixture
pattern in capital structure adds to their competitive advantage.

So, this concise study revolves around the derivation of understanding the capital
structure pattern of the selected banks in Nepal, namely Nepal SBI Bank Limited
(NSBL), Nepal Investment Bank Limited(NIBL), Agriculture Development Bank
Limited(ADBL), Global IME Bank Limited and Siddhartha Bank Limited.

For the study, following research question has been raised;

1. What is the impact of capital structure in profitability?

2. What is the relationship between capital structure and profitability?
3. To what extend does capital structure affects the firm efficiency (profitability)
of the selected commercial bank?
1.4 Objectives of the study

The general objective of this study is to examine the impact of capital structure on
profitability of commercial banks of Nepal, with an emphasis on performance of
business operation of banks.
1.4.1 Specific objectives of study:

1. To find out the impact of capital structure in profitability.

2. To analyze the relationship between capital structure and profitability.
3. To assess how capital structure affects the firm efficiency (profitability) of the
selected commercial bank.

1.5 significance of the study

The significance of the study is theoretical as well as practical or applied. Some of the
significances are as follows;

1. This study help to provide information regarding the composition of capital

structure on the basis of term to maturity,

2. It is also hoped that this study may be able to explore the capital structure of
selected commercial banks,

3. This study will be useful for researchers, students and for those who wants to
have further study in details.

4. Similarly, this study may be fruitful to financial institutions.

1.6 Limitation of the study

Following will be the limitation of the study;

1. There will be small size of sample so that the research might not generalized
whole population of 28 commercial banks.

2. The study is limited to only five banks, namely Nepal SBI Bank Limited,
Nepal Investment Bank Limited (NIBL), Agriculture Development Bank
Limited (ADBL), Global IME Bank Limited and Siddhartha Bank Limited
thus may not represent the whole banking industry of Nepal.

3. This reliability of the secondary data highly depends on the accuracy of the
annual report of the concerned banks.
 4. This study will be focused only secondary source of data collection.

1.7 Organization of the study

The research will be organized into five chapters, which will be presented in such a way
that the research objective will be easily meet and research questions will be answered
properly. Each chapter’s content is further described as follows:

Chapter 1: Introduction

It will contain the general introduction and background of the research with the short
overview of selected commercial banks. The chapter will also have the statement of
problem, research objective, limitations of the study, significance of the study.

Chapter 2: Review of literature

This chapter will look for the review of the previous studies related to this research
subject to know the prevalent situations of capital structure and other factors as well. The
first part will deals with the conceptual framework and second part will considers the
review of different sources of information.

Chapter 3: Research methodology

This chapter will considered about method of doing research on which whole study is
based upon, while will contains the nature and sources of data to be used in the research
and sampling method and procedures will be mentioned with data analysis tools.

Chapter 4: Data presentation and analysis

The fourth chapter will deals with the presentations and analysis of the data collected
from various sources using different financial and statistical tools with finding and brief
comment on them.

Chapter 5: Conclusion

This chapter will have summery, conclusions and recommendation, of the study.
Reference and Appendices will also attached at the of study.
 CHAPTER-II

LITERATURE REVIEW

2.1 Review of Journals and Article

Mesquita and Lara (2006), in their article “Capital Structure and Profitability: The
Brazilian Case”, have shown a great dispersion among the several capital sources used by
the Brazilian companies, exception to the equity, the main component, and the one that
presents smaller variability. As to the relationship between return rates and debt, the
results indicate inverse relationship for the long run financing, and direct relationship for
short-run financing and equity.

The facts of the most lucrative companies are the ones with lowest debt are in
consonance with other empiric evidences. However the low debt level, when compared to
the debt level of more developed economies, such as United States, Japan, Germany and
United Kingdom, indicates that the Brazilian companies are using debt in a extremely
conservative way. Perhaps the high interest rates practiced at the Brazilian market, the
instability of the exchange rate politics and remaining atmosphere of uncertainty of the
local economy which conveys operational and financial risks that hinder the managerial
planning and inhibit the adoption of more sophisticated debt politics can explain that fact.

Raja and Dave (2013),in their article ‘Capital Structure and Profitability’: Indian
Evidences. Samiksha, It is undoubted that capital structure decision is imperative over
profitability of the company. They analyzes the magnitude and direction of the impact
that capital structure decision has on profitability, employing debt negatively affects
profitability. Further, it can be conferred that combining short term and long term debt is
of vital importance to the finance manager. Merely, keeping debt capital in capital
structure and receiving benefits of trading on equity is not enough. However, several
times finance managers chose to finance assets depending upon their objectives,
irrespective of benefits / pitfalls of concerned source of finance.
Raheman, Zulfiqar and Mustafa (2007), in their article, “Capital Structure and
Profitability: Case of Islamabad Stock Exchange”, have stated that firstly there is
negative relationship between the long term debt and profitability verifying first
hypothesis, which means that firms with having more long term debt are less profitable.
This can be attributed to the interest cost bear by the company for a long term debt
financing, which increase the fixed costs of the product and resultantly decrease the
profitability. Secondly numeric verifications and statistical analysis shows negative
relationship between net operating profitability and debt ratio.

Thirdly the relationship of profitability with percentage of equity in the total financing
has direct relationship meaning thereby more equity leads to more profits. Fourthly size
with profitability numerical calculations have accepted that with the increase in size of
the firm the profitability increases. The study has taken the N-log of sales as proxy for
growth in size and the increase in sales result in more profits.
Abor (2008), in his article, “Determinants of the Capital Structure of the Ghanaian
Firms”, has examined the determinants of capital structure decisions of publicly quoted
firms, large unquoted firms and small and medium enterprises (SMEs) in Ghana. Publicly
quoted and large unquoted firms were found to have higher debt ratios than small and
medium enterprises (SMEs). Overall, listed and unquoted firms exhibit different
financing behavior from that of SMEs. Short term debt constitutes a relatively high
proportion of total debt of Ghanaian firms.

Listed firms are better positioned to raise equity finance from the stock market, and large
unquoted firms are also able to access equity finance from institutional investors usually
through private placements. Firm size was found to have a positive relationship to short-
term debt ratio of SMEs and debt ratios of quoted firms, but negative with respect to
long-term debt ratio in the case of unquoted firms. The results of this study seem to
support the pecking order hypothesis, given that both long-term and short-term debts
have inverse associations with profitability in all the sample groups. Firm growth was
found to have a positive association with long-term debt for the unquoted firms’ sample
and short-term debt ratio for SMEs. Limited liability companies are more likely to obtain
long-term debt finance relative to sole-proprietorship businesses.

The issue of capital structure is an important strategic financing decision that firms have
to make. Clearly, the pecking order theory appears to dominate the Ghanaian capital
structure story. It is therefore important for policy to be directed at improving the
information environment.
Driffield & Pal (2008), in their article, “Evolution of Capital Structure in East Asia:
Corporate Inertia or Endeavors?” have stated that many firms in the worst affected
countries indulged in some reckless capital structure behavior. There is evidence that
firms in the worst affected countries not only have higher leverages (being the result of
high debt even in a situation of deteriorating assets), but also tend to have lower speed of
adjustment than their counterparts in the least affected countries. This general ranking is
robust to various alternative specifications and sample selections.

The case of Malaysia is particularly interesting in this context: while by virtue of its
rigorous institutional and legal environment and also access to market based finance, the
country was successful to restrict leverages to a generally lower level, it was not so
successful to ensure speedy adjustment of capital structure and was among the worst
affected countries hit by the crisis. This analysis also identifies some important
adjustment mechanisms: (a) adjustment speeds are greater for larger firms and firms in
the top leverage quartile who tend to have access to cheaper credit, as reflected in a
comparison of effective interest rates. (b) Firms with more cash flow tend to have faster
speed of adjustment. (c) Firms with only long-term debt however have lower speed of
adjustment. (d) Firms in countries with tighter regulations and access to equity finance
tend to have lower leverage and higher speed of adjustment (with the exception of
Malaysia). (e) In general financially distressed firms in most countries tend to have
higher speed of adjustment, revealing cases of sudden adjustment; the latter is especially
evident in the post-crisis period, highlighting the fact that lessons have been learnt after
the crisis.

2.2 conceptual framework

“The term structure has been associated with the term capital. The term capital may be
defined as the long term funds of the firm. Capital is the aggregation of the items
appearing on the left hand side of the balance sheet minus current1 liabilities. In other
words capital may also be expressed as follows Capital= Total assets- Current
Liabilities.”(Kishor,2016)

“Capital structure refers to the combination of long term sources of fund, such as
debentures, long term debt, preference shares capital and equity capital including
reserves and surpluses. Capital structure represents the relationship among different
kinds of long term sources of capital and their amount. Normally a firm raises long term
capital through the issue of common shares, sometimes accompanied by preference
shares. The share capital is often supplemented by debt securities and other long term
borrowed capital. In some cases, the firm accepts deposits. In a going concern, retained
earnings or surpluses too form a part of capital structure, except for the common shares,
different kinds of external financing, i.e. preference shares as well as the borrowed capital
carry fixed return to the investors.” (Solomon; 1993) Financial structure refers to the
compositions of all sources and amount of funds collected to use or invest in the
business. In other words, “financial structure refers to the Capital and Liabilities side of
balance sheet. Therefore, it includes shareholder's funds, long term loans as well as short
term loans. It is different from capital structure as capital structure includes only the long
term sources of financing while financial structure includes both long term and short term
sources of financing. Thus a firm's capital structure is only a part of its financial
structure.” (Keister; 2000). In other words, equity capital includes common stock, paid in
capital, reserve and surplus and retained earnings. “One should be clear about the key
differences between two types of capital, relative to voice in management, claim on
income and assets, maturity and tax treatment. Debt holders are preferred stockholders to
not have voice in management. However, in default, they may receive a voice in
management, otherwise only common stock holders have voting rights. Debt holders
have a higher priority of claim against any earning or assets available for payment.
Generally, life of debt capital is stated, but equity capital remains in the firm for
an indefinite period of time. Tax can be saved in interest payment where as payment of
dividend is non-tax deductible expenditure. Tax must be paid before payment of
dividend to the share holders. It should be clear that due to its secondary position (in
income and assets) relative to debt suppliers of equity capital take greater risk and
therefore must be compensated with higher expected return those suppliers of debt
capital.” (Mathur; 1979)

From the 2.1 reviews of journal and article, many professor’s find out different result
from their research. Many of the result, I select some of them are;
According to the Mesquita and Lara, in their articles “capital structure and profitability:
The Brazilian Case” have used return on equity as dependent variable and short- term
debt to total liability, long term debt to total liability, equity to total liability and
proportion of debts of long term in relation to the equity. They have shown a great
dispersion among the several capital sources used by the Brazilian companies. As the
relationship between return rates and debt the result indicate inverse relationship for the
long run financing and direct relationship for short run financing and equity. To
compared the debt level of more developed economies, the Brazilian companies are using
a debt in a extremely conservative way.
According to Raja and Dave, in their article ‘capital structure and profitability’: Indian
Evidences. Samiksha, have used return on equity as a dependent variable, short-term debt
to total liability, long-term debt to total liability, equity to total liability and long term to
equity as in dependent variable. They analyzed the magnitude and direction of the impact
that capital structure decision has on profitability, employing debt negatively affect
profitability.
In my research, I use the conceptual relationship between dependent and independent
variable of this study is as follows:

Independent Variables Dependent Variables

Short Term Debt to Total assets Return on Equity

Long Term debt to Total assets Return on Assets
Total Debt to Total Assets Earnings Per Share
Total Debt to Equity

Fig: Conceptual Framework of the study

The sources of funding for a business are divided into two main categories, owners’
funding (equity) and borrowed funding (debt). The objective of the business owners is to
increase their wealth and the performance of firms. In relation to this objective the
increase in the performance is measured by the increase in return on the shareholders’
funds. The independent variable in this study was capital structure and the dependent
variable was financial performance. The concept illustrated above assumes that
increasing the level of the debt in the capital structure will increase the turnover of the
business and hence its profit, resulting in an increase in returns to the business owners.
An increase in interest rate is expected to result in reduced borrowing, increased interest
expenses and thus reduced returns to business owners.

Model

YEPS=0+1 (SDTA)+2 (LDTA)+3 (TDTA)+4 (TDTE)+

YROA=0+1 (SDTA)+2 (LDTA)+3 (TDTA)+4 (TDTE)+

YROE=0+1(SDTA)+2(LDTA)+3(TDTA)+4 (TDTE)+
Where,
0 is the intercept, 1,2,34 ,is the independent Variable, . Are the error terms

Hypothesis

H1: There is a negative relationship between short term debt ratio and banks profitability
in Nepal.

H2: There is a negative relationship between long term debt ratio and banks profitability
in Nepal.

H3: There is a negative relationship between total debt to total asset ratio and banks
profitability in Nepal.

H4: There is a negative relationship between total debt to total equity ratio and banks
profitability in Nepal.
 CHAPTER-III

RESEARCH METHODOLOGY

3.1 Research Design

A research design is the overall path or method by which the research study is guided. It
serves as a framework for the study directing the collection and analysis of the data, in
which the research method is to be utilized and sampling plan to be followed. Research
designed is the way through which we find the required answer of the research questions
and ultimately meet the research objectives.

3.2 Population and sampling

At present, 28 commercial banks are operating in the country. However, the analysis of
all these commercial banks in terms of capital structure and its impact on profitability
will be onerous to conduct. There are few commercial banks to issue debenture and bond.
So taking this numbers as the population of the study, only five commercial banks;
namely Nepal SBI Bank Limited (NSBL), Agriculture Development Bank Limited
(ADBL), Nepal Investment Bank Limited (NIBL), Global IME Bank Limited and
Siddhartha Bank Limited have been taken as the sample of the study.

There are 28 commercial banks in Nepal, among them I select five commercial banks
because each bank issue debenture and bond. In which the sample will represent both
private and public commercial banks in Nepal.

1. Nepal SBI Bank Limited

2. Agriculture Development Bank Limited
3. Nepal Investment Bank Limited
4. Siddhartha Bank Limited
5. Global IME Bank limited
3.3 Nature and Sources of Data

The data used in this are fully secondary in nature. Published annual reports of concerned
banks are taken as basic source of data. The relating to financial performance are directly
obtained from the concerned banks. Similarly, related books, magazines, journals,
articles, reports bulletins, and Nepal Rastra Bank, related website from internet etc. as
well as supplementary data.

3.4 Analysis of Data

Financial as well as statistical tools are used to make the analysis more convenient,
reliable and authentic. For the data analysis, different items from the balance sheet and
other statement are tabulated. Their ratios, percentage, mean, standard deviation, and
coefficients of correlation are then calculated and presented in the tables. To study the
relationship between two or more variables, correlation coefficients are also calculated.
Following are the brief introduction of the financial and statistical tools used in this
study.

3.4.1 Financial Ratio

Under the financial tool, mainly capital structure, solvency position, profitability, and
cost of capital of the banks have been measured.

1. Capital structure

Capital structure can be a mixture of a firm's long-term debt, short-term debt,

common equity and preferred equity. A company's proportion of short- and long-
term debt is considered when analyzing capital structure. When analysts refer to
capital structure, they are most likely referring to a firm's debt-to-equity (D/E)
ratio, which provides insight into how risky a company is. Usually, a company
that is heavily financed by debt has a more aggressive capital structure and
therefore poses greater risk to investors.

a. Short Term Debt to total Assets

b. Long Term Debt to total assets

 c. Total Debt to Assets

d. Total Debt to equity

1. Profitability Ratio

Profitability ratios are a class of financial metrics that are used to assess a
business's ability to generate earnings relative to its associated expenses. For most
of these ratios, having a higher value relative to a competitor's ratio or relative to
the same ratio from a previous period indicates that the company is doing well.

a. Earnings per share

b. Return on equity

c. Return on assets

3.4.2 Statistical tools

The following mentioned statistical tools will be used to interpret data:

1. Arithmetic means

Arithmetic mean is the number which is obtained by adding the various numbers
of all the items of a series and dividing the total by the number of items.
Arithmetic mean is a useful tool in statistical analysis.
2. Standard Deviation

The standard deviation is a statistics that measure the dispersion of a dataset

relative to its mean and is calculated as the square root of the variance.

3. Coefficient of correlation

The correlation coefficient is a statistical measure that calculates the strength

of the relationship between the relative movements of the two variables. The
range of values for the correlation coefficient bounded by 1.0 on an absolute
value basis or between -1.0 to 1.0. If the correlation coefficient is greater than
1.0 or less than -1.0, the correlation measurement is incorrect. A correlation of
 -1.0 shows a perfect negative correlation, while a correlation of 1.0 shows a
perfect positive correlation.

4. Regression Lines

The regression line is the line, which gives the best estimate of one variable
for any given value of other variable. In case of two variables X and Y, we
will have two regression lines i.e. lines is called the regression equation and
also estimating equation.

5. Trend analysis

Trend analysis is based on the idea that what has happened in the past gives
traders an idea of what will happen in the future.

6. Hypothesis testing

A Hypothesis is a tentative assertion or idea or assumption about the

parameters of a population. Hypothesis testing is an act in statistics whereby
an analyst tests an assumption regarding a population parameter. The
methodology employed by the analyst depends on the nature of the data used
and the reason for the analysis.
 References

Abor, J. (2008, March). Determinants of the capital structure of the Ghanain firms. African
Economic Reseaech Consortion,IV(4), 1-34.

Driffield, N., & Pal, S. (2008). Evaluation of capital structure in East Asia. Corporate Inertia or
Endeavors, XI (13) , 75-76.

Keister, L. (2000). Capital Structure in Transition: Financial Strategy in China’s Emerging

Economy. Kunming: Aurora Publishing House.

Kishor, M. R. ”Financial Management”, Taxmann Allied services ltd. New Delhi

Mathur, V.R. Mutalik (1979). Banking Development in India. Bombay: Pc Mansktol and Sons

Pvt. Ltd.

Mesquita, J. M., & Lara, J. E. (2006). Capital structure and Profitability. Capital structure and
Profitability XIV(9), 152-177.

Raheman, A., Zulfiqar, B., & Mustafa. (2007). Capital Structure and Profitability. Case study of
Islamabad stock III(5),347-361.

Raja, A., & Dave, N. (2013). Capital structure and Profitability:Indian Evidance, 08-11.

Soloman, E. (1993), Theory of Financial Management. Ohio: Columbia Press.