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ISBN- 81-7488-038-0
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CAPITAL STRUCTURE PLANNING IN PUBLIC ENTERPRISES
D. RAMULU
The problem of finding an optimum capital structure had been one of the issues that engaged the attention of experts in the field of finance including Modigliani and Miller (The Noble Laurates). The discussion has been continuous on the issue for the reason that there is no conclusive evidence available so far. Though it is believed that the presence of Taxes will be able to find a solution to the question of optimum capital structure, this point of view has also been challenged by the economists. The question of capital structure planning in Public Enterprises has assumed significant proportions for the reason that the P.Es. are not able to stabilize their finances. Though the Government has stipulated a fixed debt-equity ratio of 1:1, no P.E. is following this dictum scrupulously. As such, the increasing interest burden is in a position to endanger the viability of P.Es. in India.
In this context, the present study attempts to examine the capital structure planning in P.Es. with a view to recognizing the factors influencing the design. It also attempts to survey the understanding of the management in respect of capital structure planning as a vital factor influencing the design. The study, in particular, highlights the deviations in the precept and practice of capital structure planning.
More specifically, the study attempts to test the following hypotheses :
(i) Capital structure planning in P.Es. is executed keeping in view of the broad policy of 1:1 relation between debt and equity;
(ii) The existing system of financing is able to permit the P.Es. to reduce their dependence on Government support;
(iii) Capital structure in PEs. Is planned giving due consideration to factors like age, nature of industry, size of investment; profitability, risk etc; and
(iv) Capital structure has no impact on the viability of the P.Es. in terms of profitability and liquidity.
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