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Financial Structure of RSRM
CHAPTER 1
Overview of RSRM Steel
1.1 History
Ratanpur Steel Re-Rolling Mills Ltd. was established in January 1984 to meet the
growing demand for high quality deformed bars in market.
Today, RSRM is widely recognized as a foremost leader in the steel industry,
extending its pioneering Commitment from an expansive mill site located in the heart
of the progressive Baizid Bostami Industrial Area.
Inspired to meet the growing demand for steel in Bangladesh, Ratanpur Steel has
embarked upon a series of initiatives aimed at increasing its production capacity. The
ongoing modernization and technically advanced expansion projects are designed to
produce world class products, which will further enhance the company's presence in
the country of steel production.
Plant facilities have come to include Induction Melting Furnaces with a Ladle
Refining Furnaces, a Continuous Casting plant and Rolling Mills with the latest
automated features. Other auxiliaries include well equipped Crane facilities, a Main
Power Substation, QualityControlCenter, Maintenance Shops and facilities of fresh
water, compressed air and natural gas.
1.2 Values and Purposes

Our Values:
 A "PRINCIPAL" Player
 The drivers of our ambition
 Trustworthy
 Creative
 Reliable
 Dynamic
 Perceptive
Our Purposes
 To reach a league where we will matter beyond normal commercial objectives.
 To become the standard for quality enterprise and to exude a winning attitude in
order to make a difference in our environment.
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1.3 Vision and Mission

Our Vision
To be the trend setter and the power force of the steel re-rolling industry.
Our Mission
We will continue to be the first name in the region’s steel industry by harnessing our
assets and resources to achieve profitable growth, operational and organizational
excellence, and good corporate citizenship.
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CHAPTER 02
Introduction
2.1 Prelude
Capital structure is the permanent financing of a firm represented by a long term debts
plus preferred stock and net worth. The capital structure & investment decisions are
the most important in determining the long term existence, profitability and growth of
the enterprises. The capital structure decision determines the ownership for the
providers of finance. It can be said that capital structure decision involves the two
main tasks namely planning of capital structure and financing of capital structure.
Financial structure is defined as the total financing of the firm representing permanent
financing in the forms of long term debt, preferred stock, common equity including
net worth as well as temporary financing in the forms of short term loans and credits.
It also refers to the way the firm’s assets are financed. it is the entire liabilities side of
the balance sheet of the firm.
A firm’s overall cost of capital will reflect the required return on the firm’s assets as
whole. A firm uses both debt and equity capital, these overall costs of capital will be a
mixture of the returns needed to compensate its creditors and those needed to
compensate its stockholders.
Profitability can be measured by three ways. These are profit margin, return on asset
and return on equity. Profit margin can be calculated by net income divided by sales.
Return on assets is a measure profit per taka of assets. Return on equity is a measure
of how the stock holders fared during the year.
There are various sources from which a firm can finance its financial structure. Firms
typically use these sources:Share capital, Preferred stock, Capital surplus, Retained
earnings, Treasury stock, Stock options, Reserve, Bankloan, Mortgage, bonds,
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Debenture, other obligations not due for one year.
2.2 Review of Literature
This study seeks to develop an understanding of the financial structure of steel and re
rolling mills sector specifically RSRM. The sector appears to exhibit a homogeneous
financial structure among firms and this study explicates that financial structure. This
study has reviewed several existing theories, article, research studies etc. to reach to a
decision.
 Harris and Raviv (1990) insisted on the theory that the role of debt
information for investors affects capital structure. The informational role of
debt is two sided: (1) the simple ability of the firm to make its contractual
payments to debt holders releases information. (2) In default, management
must soothe creditors to avoid liquidation, either through informal
negotiations or through formal bankruptcy proceedings. These processes
disperse substantial information to investors. Since default gives creditors the
option to force the firm into liquidation and spreads information helpful to
investors, debt is an important tool in capital structure. Harris and Raviv
emphasized the important role of debt in terms of providing information to
investors.
 David and Shan (1996) addressed three issues to develop a theory to
determine corporate scope and corporate financial structure: the optimal
financial structure, the optimal scope of operation, and the interaction
between these two. They looked at mergers and spin offs as a method to
improve adequacy of corporate control because corporate scope has impact
on the efficiency of the financial structure in management. They suggested
that diversification alone can be an inadvisable corporate financial strategy
because it may allow the manager too much or too little power in new
investment decisions.
 Ferri and Jones (1979) chose industrial class, size, variability of income, and
operating leverage to determine their influence on financial structure. They
found: a) Industry class or strategic group relate to a firm’s leverage, but less
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directly than previously suggested b) A firm’s use of debt is connected with

its size, but the relationship does not seem to be positive as shown in other
studies c) Variation in income does not show any relationship with a firm’s
leverage And, d) operating leverage does not affect the percentage of debt in
a firm’s financial structures, and the relationship between these two types of
leverage appear to be negative, as financial theory suggests.
 Taggart (1977) developed a new model of corporate financing and concluded
that changes in the market values of long-term debt and equity are crucial
determinants of corporate security issues. The author suggested that
permanent capital increases every quarter to the extent that firms can retain
earnings, while any shortfall has compensation through bond and stock
issues. Another point is that firms also look at their debt capacity, but, if
bond issues result in extreme debt levels, stock issues will be stimulated as a
countermeasure. The author argued that because of slow adjustments to the
permanent capital targets, liquid assets and short term debt are crucial in
dealing with short-run fluctuations in the external financing deficit.
 Myers (1984) stated that theories do not explain financing behavior. He said
in his paper, “The Capital Structure Puzzle,” that “The capital structure
puzzle is even tougher than the dividend one” (Myers, 1984, p 575).
 Myers (2001) also attempted to explain the combination of financing sources
that corporations use. He reviewed the tradeoff and pecking order theory, and
concluded that no general theory applies in financial structure.
 Ball, Lev and Watts (1976) investigated the relationship between balance
sheet composition and income variation. They found that variations in a
firm’s annual income relate to changes in balance sheet composition. They
suggested that this relationship is meaningful for financial statement analysts
interested in changes in the relative shares of financial statement items: the
“common size statements” method. They concluded that income variation is
a source of such relative share changes.
 Stowe, Watson and Robertson (1980) identified and explained the
relationships between the two sides of the balance sheet. They maintained
that while the separation of investing and financing decisions is a valuable
assumption which notably simplifies many corporate financial decisions, the
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actual balance sheets of corporations do not represent independence between

the two sides of the balance sheet. Using canonical correlation, they found
that the relationships across the balance sheet include hedging, the use of
collateral and loans, inventories related to accounts payables and managing
risk with simultaneous use of lower leverage and greater liquidity balances.
They took a set of dependent variables instead of a single variable which is
the method common to most studies.
 Chen, Defond and Park (2002) investigated a pervasive voluntary disclosure
practice and found that balance sheet disclosures are more likely among
firms: (1) in high technology industries, (2) reporting losses, (3) with larger
forecast errors, (4) engaging in mergers or acquisitions, (5) that are younger,
and (6) with more volatile stock returns.
 Marsh (1982) developed a descriptive model of the choice between long term
debt and equity. The coefficients of the model are estimated using logit
analysis employing a sample of 748 issues of equity and debt made by UK
companies during the period 1959 to 1970. The predictive ability of the
model, tested on a holdout sample of 110 equity and debt issues made
between 1971 and 1974, showed that companies are heavily affected by
market conditions and the past history of security prices in selecting between
debt and equity. In addition, the study supported that companies seem to
make financing choices as if they had target levels for both the short- term
debt and long-term debt ratios.
 Barclay and Smith (1995) examined the determinants of corporate debt
maturity. Their results supported the hypothesis that firms with more growth
options among their investment opportunities tend to issue more short-term
debt.
 Deloof (2003) investigated the relationship between working capital
management and corporate profitability using a sample of 1,009 large
Belgian non-financial firms for the period 1992 to 1996. The result indicated
a negative relationship between accounts payable and profitability. In
addition, a significant negative relationship exists between gross operating
income and the number of accounts receivable days, inventories and
accounts payable of the Belgian firms. The research suggested that managers
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can add value for their shareholders by reasonably reducing the number of
days of accounts receivable and inventories.
 Miller (1977) showed that a firm could generate higher after-tax income by
increasing the debt-equity ratio, and this additional income would result in a
higher payout to stockholders and bondholders, but the firm value need not
increase.
2.3 Statement of the Problems
A firm can finance its obligations from various sources. It can issue equity capital,
preference share, can keep a part of its net income as retained earnings or it can
borrow funds from internal or external sources. Whatever the sources are, the
financing is used to purchase new assets, pay bills, make new investments etc.
Management should always keep an eye whether its current policy regarding financial
structure is doing well or not because one slight deviation from its optimal financial
structure may cause a significant problem to the firm. So finding an optimal financial
structure is always a big issue.
Another issue is that, each form of financing has a cost which is known as cost of
capital. Stock holders expects a regular dividends on their investment, debt-holders
expects interest for their loans. And there is always an issue of opportunity cost.
Decisions makers finds it difficult to keep money in idle in the business.
From the literature review, we have come to know that, to strengthen a company’s
balance sheet managers should maintain a reasonable, proportional use of debt and
equity. A healthy capital structure that reflects a low level of debt and a corresponding
high level of equity is a very positive sign of investment quality. But high level of
equity has higher cost of capital than it would have been in terms of debt financing. In
contrast, if the company would decide to finance only by debt, then it would increase
the risk of bankruptcy and cause external flow of income. We should keep in mind
that debt financing has much more advantage over equity financing as interest on debt
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has a tax advantage that lowers the expenses for the company. So, if the managers
want to increase the market value of equity, they might consider in debt financing.
While deciding the financial structure of the firm, the managers should not only
consider the cost of capital, but also emphasize on the real fact like industry position
of the firm. If the firm is in a good position, it might have a very good, conformable
debt financing opportunity. Another study has shown that although financial structural
plan is excellent, but the company might face losses due to the adverse market
conditions, unfavorable sales & keener competitions. So, managers should consider
these facts – adverse market conditions, unfavorable sales & competitions.
Another study has shown that a firm should plan a financial structure that reduces its
risk of being bankrupt & cost of capital. It actually suggested to trade-off between risk
of bankruptcy and minimum cost of capital.
Another important issue is that the value of the firm is greatly dependent on the
financial structure. If the firm decides to acquire a major portion of the financing
through debt financing, then the firm has a risk of being bankrupt, but in contrast, it
can maximize the value of the firm. The interest for debt financing is tax-deductible;
therefore it increases the profitability of the firm.
A further important issue of financial structure is working capital. A firm should

always keep in mind whether it has adequate financing for its current liabilities. It
should never invest its every single penny in the long-term financing.
The main purpose of this study is to evaluate that whether RSRM Ltd. is following an
optimal financial structure or not. If not then what corrections can make it a perfect
one.
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2.4 Objective of the Study
The main purpose of the industrial tour is to acquire knowledge about the internal and
external environment of an industry and find out the consistency and inconsistency
between theoretical practical knowledge that we acquired from an industry that is live.
We also try to adjust with the gap to be competent at the modern job market.
The areas on which we will give emphasis are:
 To find out the the financial policies & programs of Ratanpur Steel Re-Rolling
Mills Ltd.
 To evaluate financial structure & performance of RSRM.
 To analyze financing of financial structure of Ratanpur Steel Re-Rolling Mills
Ltd.
 To examine the determinants of capital structure of RSRM .
 To find out problems associated with financial structure of RSRM.
 To give some suggestion about overall financial system of RSRM.
 To know about capital management of Ratanpur Steel Re-Rolling Mills Ltd
and to find out the problem in this regard.
 Lastly, find out the industry related problems and recommends their solution.
2.5 Scope of the Study
The study has covered for three years of financial statements of RSRM.
2.6 Methodology of the Study
The industrial tour is conclusive as well as descriptive in nature. Necessary statistical

tools have been applied to carry out the assigned study.
2.6.1 Collection of Primary Data: For collection of Primary data the researcher has
done following-
 Making a formal questionnaire.

 Questionnaire has been designed through department wise.
 Discussion with high officials.
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 Practical experience gained by studying & visiting.
2.6.2 Collection of Secondary Data: The researcher has collected the secondary
data from the following-
 Prospectus
 Annual Report of RSRM
 Websites
 Finally, the collected data are classified, tabulated, interpreted, analyzed and
presented in the form of research report thereafter.
The information to be present on this report has also been collected from their website
http://www.rsrmbd.com/.
2.7 Organization of the Study
The study has been segmented into seven chapters. The first chapter includes Prelude,
Review of literature, objectives of the study, methodology, organization of the study,
limitation of the study.
The second chapter includes financial policies and practices of RSRM, financial
programs of RSRM. The third chapter includes evaluation of capital structure of
RSRM, evaluation of proforma financial structure, evaluation of financial ratios,
evaluation of leverage impact of financial structure on profitability of RSRM.
The fourth chapter includes mode of financing of RSRM, valuation of capital

structure techniques.
The fifth chapter includes identification of determinants of capital structure of RSRM.
The six chapter includes problems associated with financial structure of RSRM.
The seven chapter includes summary of the findings, policy implication and
suggestions.
2.8 Limitation of the Study
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I tried my best to collect the maximum information from Ratanpur Steel Re-Rolling
Mills Limited. But this report is not free from short faults. While I am preparing this
report I faced some problems. These are as follows:
 My industrial tour is for only one day that is not enough to make a study
successfully.
 Lack of adequate time also caused some constraints to my study.
 The rate of success of my study may be limited, as we may have failed to
collect proper information due to lack of our experience.
 Time is not sufficient for such type research.
 My personal limitation also contributes greatly in making the study less
perfect then desired.
I, therefore, hope that the study will be evaluated subject to the recognition of the
above-mentioned shortcomings.
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CHAPTER 03
FINANCIAL POLICIES & PROGRAMS OF RSRM STEELS LTD.
3.1 Introduction
Financial policies and programs of steel and re-rolling mills should be designed in
order to maximize the value of the firm or, equivalently, the value of the firm’s stock.
Financial managers must choose the appropriate financial structure that Is consistent
with the firm’s funding needs, given the uncertainty of future operating earnings
Maintains the firm’s access to capital markets Maximizes shareholder value by
borrowing at the lowest cost of capital The choice of the firm’s optimal financing mix
is usually based on a tradeoff between the benefits and costs of choosing debt vs.
equity
The design of financial (or capital structure) policy of steel and re-rolling mills must
be viewed from three perspectives:
 The perspective of the firm’s marginal investor

 The perspective of the firm’s competitive position in its industry
 The internal perspective
From the perspective of the firm’s stockholders, the choice of the firm’s financial
structure must maximize shareholder wealth, Maximize the value of the firm,
Minimize the firm’s cost of capital. Failure to achieve these goals may lead to a
reaction from the markets, which could potentially include a takeover. Financial
managers must examine alternative financial structures and evaluate their impact on
firm value.
The evaluation of alternative capital structure must take into consideration the firm’s
cost of debt, the firm’s cost of equity, the debt/equity mix and its impact on the
WACC.A comparison of the firm’s P/E ratio, market-to-book ratio, and EBIT
multiples to those of comparable firms. The firm’s bond rating, the firm’s current
ownership structure and the potential actions of large shareholders Bottom line :
Financial managers must “think like investors”.
From a competitive perspective, the firm’s choice of capital structure must be
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compared to those of the firm’s competitors to identify any potential advantages or

disadvantages ,given that any firm’s capital structure will most likely differ from
those of its competitors, the goal is to examine and understand those differences:
What is the competitors’ historical pattern of capital structure? Why has there been a
recent change in the capital structure of one or more of the competitor firms?
From the internal perspective, the choice of capital structure must be consistent with
the firm’s future goals and expectations. The idea is that the firm should not run out of
cash if it has plans for future growth given the firm’s dividend policy. Using forecasts
of cash flows, financial statements and sources-and-uses-of-funds statements help the
financial manager decide on what is the best capital structure given the alternative
scenarios.
The financial manager would like to estimate/consider the unused debt capacity
associated with the firm’s current rating and debt level, the cost of capital associated
with each credit rating and whether the firm’s chosen debt-equity mix achieves the
lowest cost of capital,
3.2 Financial Policies & Practices of RSRM Steels Ltd.
RSRM follows traditional approach for deciding capital structure. Traditional

approach is an intermediate approach between the net income approach and net
operating income approach.
According to this approach,
(1) An optimum capital structure does exist.

(2) Market value of the firm can be increased and average cost of capital can be
reduced through a prudent manipulation of leverage.
(3) The cost of debt capital increases if debts are increases beyond a definite limit.
This is because the greater the risk of business the higher the rate of interest the
creditors would ask for. The rate of equity capitalization will also increase with it.
Thus there remains no benefit of leverage when debts are increased beyond a certain
limit. The cost of capital also goes up.
Thus at a definite level of mixture of debts to equity capital, average cost of capital
also increases. The capital structure is optimum at this level of the mix of debts to
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equity capital.
The effect of change in capital structure on the overall cost of capital can be divided
into three stages as follows;
First stage
In the first stage the overall cost of capital falls and the value of the firm increases
with the increase in leverage. This leverage has beneficial effect as debts as debts are
less expensive. The cost of equity remains constant or increases negligibly. The
proportion of risk is less in such a firm.
Second stage
A stage is reached when increase in leverage has no effect on the value or the cost of
capital, of the firm. Neither the cost of capital falls nor the value of the firm rises. This
is because the increase in the cost of equity due to the assed financial risk offsets the
advantage of low cost debt. This is the stage wherein the value of the firm is
maximum and cost of capital minimum.
Third stage
Beyond a definite limit of leverage the cost of capital increases with leverage and the
value of the firm decreases with leverage. This is because with the increase in debts
investors begin to realize the degree of financial risk and hence they desire to earn a
higher rate of return on equity shares. The resultant increase in equity capitalization
rate will more than offset the advantage of low-cost debt.
It follows that the cost of capital is a function of the degree of leverage. Hence, an
optimum capital structure can be achieved by establishing an appropriate degree of
leverage in capital structure.
3.3 Financial Programs of RSRM Steels Ltd.
RSRM has the following financial programs
 It has borrowed from banks for raising fund.

 RSRM is planning for expansion. Therefore, it is planning to raise fund.
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CHAPTER 04
WORKING CAPITAL MANAGEMENT
4.1 Introduction of working capital management
Management is a process of anticipating and preparing for risks, uncertainties and

overcoming obstacles. An essential precondition for sound and consistent assets
management is establishing the sound and consistent assets management policies
covering fixed as well as current assets. In modern financial management, efficient
allocation of funds has a great scope, in finance and profit planning, for the most
effective utilization of enterprise resources, the fixed and current assets have to be
combined in optimum proportions. Working capital in simple terms means the amount
of funds that a company requires for financing its day-to-day operations. Finance
manager should develop sound techniques of managing current assets.
Working Capital is the key difference between the long terms financial management
and short term financial management in terms of the timing of cash. Long term
finance involves the cash flow over the extended period of time i.e. 5 to 15 years,
while short term financial decisions involve cash flow within a year or within
operating cycle.
Composition of working capital
Major Current Assets
1) Cash
2) Accounts Receivables
3) Inventory
4) Marketable Securities
Major Current Liabilities
1) Bank Overdraft
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2) Outstanding Expenses
3) Accounts Payable
4) Bills Payable
The Goal of Capital Management is to manage the firm s current assets & liabilities,
so that the satisfactory level of working capital is maintained. If the firm can not
maintain the satisfactory level of working capital, it is likely to become insolvent &
may be forced into bankruptcy. To maintain the margin of safety current asset should
be large enough to cover its current assets.
Main theme of the theory of working capital management is interaction between the
current assets & current liabilities.
(Sources: Frederick C. Scher, modern working capital text & Cases, Chap.-1,
pp.1-2 and Scott Besley, university of South Florida, essential of M. finance, 13 th
edition, chap.-13, pp.549-552 )
4.2 Definition of working capital management:
In general, working capital management is concerned with the management of the

current assets and current liabilities.
Broadly, working capital management is a short term financial management or is

concerned with the problems that arise in attempting to manage the current assets, the
current liabilities and the inter relationship that exists between them. The current
assets refer to that asset s which can be easily converted into cash in ordinary course
of business, without disrupting the operations of the firm.Working capital
management ensures a firm has sufficient cash flow in order to meet its short-term
debt obligations and operating expenses. The goal of working capital management is
to ensure that the firm is able to continue its operationsand that it has sufficient cash
flow to satisfy both maturing short-term debt and upcoming operational expenses.
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(Sources: Frederick C. Scher, modern working capital text & Cases, Chap.-1, pp.1-3
and Scott Besley, university of South Florida, essential of M. finance, 13th edition,
chap.-13, pp.549-552 )
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4.3 Importance of working capital management:
Working capital may be regarded as the lifeblood of the business. Without insufficient
working capital, any business organization cannot run smoothly or successfully. In the
business the working capital is comparable to the blood of the human body. Therefore
the study of working capital is of major importance to the internal and external
analysis because of its close relationship with the current day to day operations of a
business. The inadequacy or mismanagement of working capital is the leading cause
of business failures.
To meet the current requirement of a business enterprise such as the purchases of

services, raw materials etc. working capital is essential. It is also pointed out that
working capital is nothing but one segment of the capital structure of a business.
1. In short, the cash and credit in the business, is comparable to the blood in the
human body like finance’s life and strength i.e. profit of solvency to the business
enterprise. Financial management is called upon to maintain always the right cash
balances so that flow of fund is maintained at a desirable speed not allowing slow
down. Thus enterprise can have a balance between liquidity and profitability.
Therefore the management of working capital is essential in each and every activity.
(Sources: Frederick C. Scher, modern working capital text & Cases, Chap.-1, pp.1-6
and Khan et al., (1998): Theory and problem of Financial Management, Sixth reprint,
Tata McGraw Hill publishing co. Ltd. pp.59-61)
4.4 Theoretical Framework of W.K.M
Concept of working capital:
There are 2 concepts:
 Gross working capital
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 Net working capital
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Gross working capital:
It is referred as total current assets. Focuses on,
 Optimum investment in current assets: An excessive investment impairs

firm’s profitability, as idle investments earn nothing. Inadequate working
capital can threaten solvency of the firm because of its inability to meet its
current obligations. Therefore there should be adequate investment in current
assets.
 Financing of current assets: Whenever the need for working capital funds
arises, agreement should be made quickly. If surplus funds are available they
should be invested in short term securities.
Net Working Capital: Net working capital can be defined in 2 ways,
 Difference between current assets and current liabilities

 Net working is that portion of current assets which is financed with long term
funds.
If the working capital is efficiently managed then liquidity and profitability both will
improve. Working capital is basically related with the question of profitability versus
liquidity and related aspects of risk.
Net Working Capital = Current Assets – Current Liabilities
Implications of Net Working Capital:
Net working capital is crucial because the cash out flows and inflows do not match. In
general the cash outflows from payments of current liability are relatively predictable
but the cash inflows are difficult to predict. It will be necessary to maintain current
assets at level adequate to cover current liabilities that are there must be NWC where
the cash inflows are uncertain.
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For evaluating NWC position, an important consideration is trade off between

probability and risk. The term profitability is measured by profit after expenses. The
term risk is defined as the profitability that a firm will become technically insolvent so
that it will not be able to meet its obligations when they become due for payment. The
risk of becoming technically insolvent is measured by NWC.If the firm wants to
increase profitability, the risk will definitely increase. If firm wants to reduce the risk,
the profitability will decrease.
4.5 Planning of working capital:
Working capital is necessary to run day to day business operations. Firms differ in
their requirement of working capital. Firm’s aim is to maximize the wealth of share
holders and to earn sufficient return from its operations. Working capital is a
significant facet of financial management. Its importance stems from two reasons:
 Investment in current asset represents a substantial portion of total investment.

 Investment in current assets and level of current liability has to be geared
quickly to change in sales.Business undertaking required funds for two
reasons:
 To create productive capacity through purchase of fixed assets
 To finance current assets required for running of the business.
The importance of working capital management is reflected in the fact that financial
managers spend a great deal of time in managing current assets and current liabilities.
The extent of profit can be earned is really dependent upon the magnitude of sales.
Sales are required for earning profits. On the other hand, Sales can’t convert into cash
instantly; there is invariably a time interval between sale of goods and the acceptance
of cash. Working capital management influence the profitability and liquidity of the
firm which are inversely proportional to each other, hence proper balance should be
maintained between two.
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To convert the sale of goods into cash, there is need for WC in the form of current
asset to deal with the problem arising out of immediate realization of cash against
good sold. Sufficient WC is necessary to sustain sales activity. This is referred to as
the operating or cash cycle.
4.6 Working capital cycle:
FINISHED
Debtor
GOODS
WORK IN
Cash
PROGRESS
RAW
MATERIAL
A firm requires many years to recover initial investment in fixed assets. On contrary
the investment in current asset is turned over many times a year. Investment in such
current assets is realized during the operating cycle of the firm.
Each component of working capital (namely inventory, receivables and payables) has
two dimensions (Time and Money). When it comes to managing working capital than
Time is money. If we can get money to move faster around the cycle (e.g. collect dues
from debtors more quickly) ore reduce the amount of money tied up (e.g. reduce
inventory levels relative to sales), the business will generate more cash or it will need
to borrow less money to fund working capital. As a consequence, we could reduce the
cost of bank interest.
4.6.1Operating cycle:
The working capital refers to the length of time between the firms paying the cash for
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materials, etc. entering into production process/ stock and the inflow of cash from
debtors( sales), suppose a company has certain amount of cash it will need raw
materials. Some raw material will be available on credit but cash will be paid out for
the other part immediately. Then it has to pay labour costs and incurs factory
overheads. These three combined together will constitute work in progress. After the
production cycle is complete, work in progress will get converted into sundry debtors.
Sundry debtors will be realized in cash after the expiry of the credit period. This cash
can be again used for financing raw material, work in progress etc. thus there is
complete cycle from cash to cash wherein cash gets converted into raw material, work
in progress, finished goods and finally into cash again. Short term funds are required
to meet the requirements or funds during this time period. This time period is
dependent upon the length cycle is also known as operating cycle or cash cycle.
Injection Cash Cash

withdrawals
Cash
Goods & Payments-

Sold
Working capital cycle can be determined by adding the number of days required for
each stage in the cycle. For example, company holds raw material on average for 60
days. It gets credit from the supplier for 15 days, finished goods are held for 30 days
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and 30 days credit is extended to debtors. The total days are 120, i.e. 60-
15+15+30+30 days is the total or working capital.
Therefore the working capital cycle assists in the estimate, control and management
of working capital. In light of the facts discusses above we can broadly classify the
operating cycle of a firm into three phases viz.
 Acquisition of resources
 Manufacture of the product and
 Sales of the product(cash or credit)
1st and 2nd phase of the operating cycle result in cash outflow, and be predicted with
reliability once the production targets and cost or inputs are known. On the other
hand, the third phase results in cash inflows which are not certain because sales and
collection which give rise to cash inflows are difficult to forecast accurately. 4.6.2
4.6.2 Operating cycle includes of the following:
 Conversion of cash into raw-materials(R);

 Conversion of raw-material into work –in- progress(W)
 Conversion of work-in-progress into finished stock(F)
 Conversion of finished stock into accounts receivable through(D) sales and
 Conversion of accounts receivable into cash(C).
So, operating cycle process in the form of equation can be expressed as follows:
Operating cycle=R+W+F+D-C
Operating cycle for manufacturing firm:
( Sources: Modern W.K.M text by F.C. Scherr, Chap.1st, p-12)
24
Work-in-progress
Finished goods stock

Raw
Wages &
materials
overheads Sales
stock
Trade
Trade debtors
creditors Cash
Taxation Shareholders
Loan creditors
Fixed assets
Lease payments
Therefore the RBSM steel firm is required to invest in current assets for smooth and
uninterrupted functioning.
 RMCP—Raw material conversion period

 WIPCP—Work in progress conversion period
 FGCP—Finished goods conversion period
 ICP—Inventory conversion period
 RCP—Receivables conversion period
 PDP—Payables Deferral period
 NOC—Net operating cycle
 GOC—Gross Operating cycle
Here, the length of Gross operating cycle is the sum of inventory conversion period
and receivables conversion period. Shortly, the working capital position is directly
proportional to the Net operating cycle.
Net operating cycle
Here, the need for current assets arises because of the operating cycle. The operating
cycle is a continuous process and, therefore, the need for current assets is felt
constantly. But the magnitude of current assets needed is not always a minimum level
25
of current assets when is continuously required by the firm to carry on its business
operations. This minimum level of current assets is referred to as permanent or fixed
working capital. While temporary working capital is fluctuating – sometimes
increasing and sometimes decreasing. However, the permanent capital is difference
between permanent and temporary working capital can be depicted through figure.
Balanced working capital position in the firm:
The firm should maintain a sound capital position. It should have adequate working
capital to run its business operations. Both excessive as well as inadequate working
capital positions are dangerous from the firm’s point of view.
The dangers of excessive working capital are as follows:
 It is an indication of defective credit policy stack collections period.

Consequently, higher incidence of bad debts results, which adversely affects
profits.
 Excessive working capital makes management complacent which degenerates into
managerial inefficiency.Inadequate working capital is also bad and has the
following dangers:
 It becomes difficult for the firm to undertake profitable projects of being stagnated
growth for non- availability of working capital funds.
 It is difficult to implement operating plans and achieve the firm’s profit target.
 The firm’s profitability would deteriorate if fixed assets are not efficiently utilized
for the lack of working capital funds.
 The firm becomes lose its reputation when it is not in a position to honor its short-
term obligations.
Consequently, the firm faces tight credit terms. An enlightened management should
maintain the right amount of working capital on a continuous basis. Only then a
proper functioning of business operations will be ensured. A firm’s net working
capital position is not only important as an index of liquidity but it is also used as a
measure of the firm’s risk.
26
4.7 Requirements of funds of RSRM steel:
 Fixed capital –Preliminary expenses

- Purchase of fixed assets
- Establishment work exp.
- Fixed working capital
 Working capital—Raw material

-Inventories
-Goods in process
-Others
4.8 Sources of working capital of RSRM steel:
 Long term source---a) Loan from financial institution

b) Floating of debentures
c) Accepting public deposits
d) Issue of shares
e) Cash credit
f) Commercial paper
 Short term source—a) Factoring

b) Bill discounting
c) Bank overdraft
d) Trade credit
4.9 CASH MANAGEMENT
The term cash management is one of the vital areas of working capital management.
It is the most liquid asset which is the common denominator to which all current
assets, that is, receivables and inventory get eventually converted into cash.
27
Cash is maintained for three motives:
 Transaction motive
 Precautionary motive
 Speculative motive
4.9.1 Objectives of cash management:
1) Meeting the cash disbursement needs- In the normal course of business

firms have to make payment of cash on a continuous and regular basis to the
supplier of goods, employees and so on.
2) Minimizing the funds committed to cash balances- Initially if we keep high
cash balance, it will ensure prompt payment together with all the advantages.
In contrast, low cash balance mean failure to meet payment schedule.
Therefore we should have optimum level of cash balance.
4.9.2 Determining the cash needs:
Cash needs can be determined by preparing cash budget for year, month, week etc.
Cash reports are also helpful in controlling and revising cash forecasts on a continual
basis. The important cash reports are as follow:
 The daily cash reports

 Daily treasury reports
 The monthly cash report
4.9.3 Optimal cash balance:
It has to sell its marketable securities more frequently if a firm maintains a small cash
balance. In addition, the opportunity costs of maintaining cash rise as the cash balance
increases. From the figure, the total costs of holding cash are at a minimum when the
size of the cash balance is “C”. It shows optimal cash balance.
28
4.9.4 Debtors Management:
The credit worthiness of customer for assessing:
Before providing credit to a customer, the supplier of firm analyzes the five Cs of
credit worthiness. These are given as follows:
 Capital: It is an analysis of the applicant firm’s financial position. What are the
applicant firm’s financial strengths? What is its weakness? Overall, it is
stronger than other firms that the seller believes are creditworthy?
 Character: Here, the credit analyst considers all the information that relates to
willingness to pay by the applicant’s management. What is the applicant’s
history of payments to the trade? Are they of high integrity? What are their
personalities like?
 Collateral: What is the scope for including appropriate security in return for
extending credit to the customer?
 Capacity: How large is the customer’s business capital? What is the financial
health of the customer? Is it a liquid and profitable concern, able to make
payments on time?
 Conditions: What are the prevailing economic conditions? How are these
likely to impact on the customer’s ability to pay promptly?
The major sources of information for the firm in assessing customers’ credit
worthiness are:
 Bank references
 Trade references
 Financial accounts
 Personal contact
 Credit agencies
 Past experience
 General sources of information
 Credit terms granted to customers
 Market position
 Order size and frequency
29
 Profitability
 Financial resources of the respective business
 Industry income
 Business objectives
Elements of a trade policy of this Firm:
 Terms of trade
 Cash discounts
 Collection policy
4.10 PROBLEMS IN COLLECTING DEBTS:
Problems in collecting debts in this firm can arise in spite of the best effort of
companies to research the firm. These are over invoices, late payment, and deduction
of discounts where late and troublesome issue of bad debts is.
Conclusion: Working capital management is of crucial importance to all firms. It is

sure that sufficient liquid resources are available to the firm is a pre-requisite for
corporate survival. This firm must strike a balance between minimizing the risk of
insolvency with the need to maximize the return on assets which demand as far less
conservative outlook.
4.11 CREDITORS MANAGEMENT:
Creditors are an important part of effective cash management and should be carefully
managed to enhance the cash position.
It is clear that purchasing creates cash out flow and an over –zealous purchasing
function can create liquidity problem. Here, it is considering the followings:
 Who authorizes purchasing in your firm – is it carefully managed or spread

among a number of people?
30
 Are purchase quantities geared to demand forecasts?

 Do you know the cost to the firm of carrying stock?
 Do you have alternative sources of supply?
 How many of your suppliers have a return policy?
 Can you arrange to have delivery of supplies staggered or on a just-in-time
basis?
Management of creditors and suppliers are just as vital as the management of debtors.
It is important to look after creditors that the firm is efficient or in trouble.
4.12 INVENTORY MANAGEMENT:
Managing inventory is a crucial act that excessive stocks can place a heavy burden on
the cash resources of a business. Insufficient stocks can result in lost sales for
customers etc.
Nowadays, many large manufactures operate on a just-in-time basis. It helps to

minimize manufacturing costs as JIT stocks take up little space, minimize stock
holding and virtually eliminate the risks of obsolete or damaged stock. Because just in
time hold stock for a very short time. They are able to conserve substantial cash.
Therefore, just in time is a good model to strive for as it embraces all the principles of
prudent stock management.
4.13 FACTORS WHEN DETERMINING OPTIMUM STOCK LEVELS:
 What are the projected sales of each product?

 How long does it take for delivery by supplier?
 Can you remove show movers from your product range without compromising
sellers?
 How widely available are raw materials, components etc.?
( Sources: Frederick C. Scher, modern working capital text & Cases, Chap.-1,
31
pp.1-6 andKhan et al., (1998): Theory and problem of Financial Management,

Sixth reprint, Tata McGraw Hill publishing co. Ltd. pp.59-61 and Pandey, I M,
(2002): Financial Management, fourth Edition, Pearson Education Pte. Ltd,
pp.209-217)
32
CHAPTER 05
FINANCING FINANCIAL STRUCTURE OF RSRM STEELS LTD.
5.1 INTRODUCTION
There are various theories of designing capital structure of a company. Some of them
are described below:
Net Income Theory of Capital Structure
This theory gives the idea for increasing market value of firm and decreasing overall cost of
capital. A firm can choose a degree of capital structure in which debt is more than equity
share capital. It will be helpful to increase the market value of firm and decrease the value
of overall cost of capital. Debt is cheap source of finance because its interest is deductible
from net profit before taxes. After deduction of interest company has to pay less tax and
thus, it will decrease the weighted average cost of capital.
for example if you have equity debt mix is 50:50 but if you increase it as 20: 80, it will
increase the market value of firm and its positive effect on the value of per share.
High debt content mixture of equity debt mix ratio is also called financial leverage.
Increasing of financial leverage will be helpful to for maximize the firm's value.
.Net Operating Income Theory of Capital Structure:

Net operating income theory or approach does not accept the idea of increasing the
financial leverage under NI approach. It means to change the capital structure does
not affect overall cost of capital and market value of firm. At each and every level of
capital structure, market value of firm will be same.
Modigliani and Miller Theory:

MM theory or approach is fully opposite of traditional approach. This approach says
that there is not any relationship between capital structure and cost of capital. There
will not effect of increasing debt on cost of capital.
Value of firm and cost of capital is fully affected from investor's expectations.
33
Investors' expectations may be further affected by large numbers of other factors

which have been ignored by Trade-off theory.
Trade-Off Theory of Capital Structure:
Trade-off theory allows the bankruptcy cost to exist. It states that there is an
advantage to financing with debt (namely, the tax benefits of debt) and that there is a
cost of financing with debt (the bankruptcy costs and the financial distress costs of
debt). The marginal benefit of further increases in debt declines as debt increases,
while the marginal cost increases, so that a firm that is optimizing its overall value
will focus on this trade-off when choosing how much debt and equity to use for
financing. Empirically, this theory may explain differences in D/E ratios between
industries, but it doesn't explain differences within the same industry.
Traditional theory of capital structure:

The theory that when the Weighted Average Cost of Capital (WACC) is minimized,
and the market value of assets are maximized, an optimal structure of capital exists.
The Traditional Theory of Capital Structure says that a firm's value increases to a
certain level of debt capital, after which it tends to remain constant and eventually
begins to decrease.
The Traditional Theory of Capital structure tells us that wealth is not just created
through investments in assets that yield positive return on investment; purchasing
those assets with an optimal blend of equity and debt is just as important.
Trade-off Theory:
The Trade-off Theory is a theory which suggests that companies have an optimal capital
structure based on a trade-off between the benefits and the costs of using debt.
Pecking Order Theory:
34
The Pecking Order Theory – or the ‘Capital Shuffle’ as I call it – suggests that
companies always follow a hierarchical pattern in financing sources such that internal
funds are always preferred to external ones and borrowing is preferred to issuing risky
securities. This theory is based on information asymmetry whereby all relevant
information is not known by all parties interested in knowing it. Information
asymmetry is the battle ground for most fundamental investors as it is involves the
discrepancy between what insiders of a company know (managers) versus what those
external to the company do (such as shareholders and lenders).
5.2 EVALUATION OF PRO-FORMA FINANCIAL STRUCTURE Of RSRM

STEELS LTD.
Capital & Liabilities 2009 2010 2011
Shareholder’s Fund
Equity 15.26% 17.45% 13.76%
Non-Current Liabilities 10.24% 9.79% 4.04%
Current Liabilities 74.50% 72.76% 82.2.%
100% 100% 100%
35
 Comments:
In 2009: The contribution of equity in financial structure is the lowest. On the other
hand the portion of current liabilities is the highest. It indicates a weak financial
structure. It may create high cost of capital and bankruptcy.
In 2010: The contribution of equity has been increased significantly in this year
compared to 2009. On the other hand current liabilities and non-current liabilities
have been decreased. It does not mean that the financial position of RSRM is good
because the current liabilities are much more than equity which shows the weakness
of RSRM.
In 2011: The financial structure of RSRM in 2011 has been changed slightly compare
to 2010. Equity has been reduced by 3.69% and non-current liabilities have also been
decreased by 5.75%. But the current liabilities have been increased by 11.26%. It is
clear to us that the financial structure of RSRM remains the same position like 2009
36
& 2010.
5.3 Evaluation of Financial Structure by Financial Ratios:
Operating Year
Ratios Average
2009 2010 2011
Debt-equity ratio 12.85 0.56 0.29 4.57
Debt capitalization ratio 0.93 0.36 0.23 0.51
Debt ratio 0.99 0.83 0.86 0.89
Current liabilities to Total assets 0.83 0.73 0.82 0.79
Total debt to equity 78.17 4.73 6.27 29.72 times

times times times
37
Debt-Equity Ratio:
Definition:
A measure of a company's financial leverage calculated by dividing its long term
debt by stockholders' equity. It indicates what proportion of equity and debt the
company is using to finance its assets.
Debt-equity ratio=Long term debt/stockholders equity.
Implied Explanation:
A high debt/equity ratio generally means that a company has been aggressive in
financing its growth with debt. This can result in volatile earnings as a result of the
additional interest expense.
If a lot of debt is used to finance increased operations (high debt to equity), the
company could potentially generate more earnings than it would have without
this outside financing. If this were to increase earnings by a greater amount than the
debt cost (interest), then the shareholders benefit as more earnings are being spread
among the same amount of shareholders. However, the cost of this debt financing
may outweigh the return that the company generates on the debt through investment
and business activities and become too much for the company to handle. This can lead
to bankruptcy, which would leave shareholders with nothing.
Findings:
Debt-equity ratio of SRM is explained below:
Operating year
38
In the diagram, we see that in 2009 the Debt-equity ratio is much higher than average.
In 2010 the debt- equity is 0.56 due to significant increase in equity. In 2011 there
has been further increase in equity which has reduced the debt-equity ratio to 0.29.
Debt Capitalization Ratio

Definition:
The capitalization ratio compares total debt to total capitalization (capital structure). The
capitalization ratio reflects the extent to which a company is operating on its equity.
The capitalization ratio is calculated by dividing the long-term debt by the total
shareholder’s equity and long–term debt. This can be expressed as:
Capitalization Ratio = Long-Term Debt / (Long-Term Debt + Shareholder’s Equity)
Capitalization ratio is also known as the financial leverage ratio. It tells the investors
about the extent to which the company is using its equity to support its operations and
growth. This ratio helps in the assessment of risk. The companies with high
capitalization ratio are considered to be risky because they are at a risk of insolvency
if they fail to repay their debt on time. Companies with a high capitalization ratio may
also find it difficult to get more loans in the future.
A high capitalization ratio is not always bad, however, higher financial leverage can
increase the return on a shareholder’s investment because usually there are tax
advantages associated with the borrowings.
Findings:
Debt capitalization ratio of RSRM is explained below:
In the diagram, we see that then debt capitalization ratio is much higher than average
39
in 2009. But in 2010 the ratio has declined due to increase in equity and retirement of
long term debt. In 2011 equity has further increased and long term debt has further
been retired which have reduced the ratio further.
Debt Ratio:
Definition:
A ratio that indicates what proportion of debt a company has relative to its assets. The
measure gives an idea to the leverage of the company along with the potential risks
the company faces in terms of its debt-load.
Implied explanation:
A debt ratio of greater than 1 indicates that a company has more debt than assets,
meanwhile, a debt ratio of less than 1 indicates that a company has more assets than
debt. Used in conjunction with other measures of financial health, the debt ratio can
help investors determine a company's level of risk.
Findings:
The debt ratio RSRM is explained below:
In the diagram, we see that the debt ratio in 2009 is higher than average. Due to the
retirement of debt the ratio has declined in 2010.But in 2011 the ratio has increased
due to newer loans.
40
Current Liabilities to Total Assets:
Definition:
A ratio that indicates what proportion of current liabilities a company has relative to
its assets. The measure gives an idea to the amount of assets financed by current
liabilities. The ratio is calculated using the following formula:
Findings:
Current liabilities to Total assets ratio of RSRM is explained below:
In the figure, we see that the ratio has declined from 2009 to 2010. It has again
increased in 2011 due to dramatic increase in current liability.
Total Debt to Equity:
Definition:
A measure of a company's financial leverage calculated by dividing its total
liabilities by stockholders' equity. It indicates what proportion of equity and debt the
company is using to finance its assets.
A high debt/equity ratio generally means that a company has been aggressive in
financing its growth with debt. This can result in volatile earnings as a result of the
additional interest expense.
If a lot of debt is used to finance increased operations (high debt to equity), the
41
company could potentially generate more earnings than it would have without
this outside financing. If this were to increase earnings by a greater amount than the
debt cost (interest), then the shareholders benefit as more earnings are being spread
among the same amount of shareholders. However, the cost of this debt financing
may outweigh the return that the company generates on the debt through investment
and business activities and become too much for the company to handle. This can lead
to bankruptcy, which would leave shareholders with nothing.
Findings:
Total debt to equity ratio RSRM is explained below:
In the diagram, we see that in 2009 the total Debt-equity ratio is much higher than
average. In 2010 the ratio has declined significantly due to increase in equity and
reduction in debt .In 2011 the ratio slightly increased due to increase in current
liability.
5.4 EVALUATION Of LEVERAGE
Operating Year
Ratios Average
2009 2010 2011
Debt-equity ratio 12.85 0.56 0.29 4.57
Debt capitalization ratio 0.93 0.36 0.23 0.51
Degree of financial leverage 2.29 1.53 1.42 1.75
Time Interest Earned 1.78 2.9 3.39 2.69
42
Debt-equity ratio & Debt capitalization ratio have been explained earlier.
43
Degree of Financial Leverage (DFL):
Definition:
The degree of financial leverage (DFL) is the leverage ratio that sums up the effect of
an amount of financial leverage on the earning per share of a company. The degree of
financial leverage or DFL makes use of fixed cost to provide finance to the firm and
also includes the expenses before interest and taxes. If the Degree of Financial
Leverage is high, the Earnings Per Share or EPS would be more unpredictable while
all other factors would remain the same.
The Degree of Financial Leverage (DFL) can be calculated with the following
formula:
DFL = % Change in EPS / % Change in EBIT
Where EPS is the Earnings per Share and EBIT is the Earnings before interest and
Taxes.
The degree of financial leverage or DFL helps in calculating the comparative change
in net income caused by a change in the capital structure of business. This ratio would
help in determining the fate of net income of the business. This ratio also helps in
determining the suitable financial leverage which is to be used to achieve the business
goal. The higher the leverage of the company, the more risk it has, and a business
should try and balance it as leverage is similar to having a debt.This formula can be
even used to compare data of many companies that can help an investor in deciding
which company to invest in, based on the result of how much risk is attached with
each companies capital structures. It would help an investor to strike a great deal as
when the there is an economic decline the losses of the company can be substantiated
with this investment and during the rise in the economic conditions the volume of
sales would be well compensated.
44
Findings:
The Degree of Financial Leverage (DFL) of RSRM is explained below:
In the diagram, we see that in 2009 the Degree of Financial Leverage (DFL)is higher
than average. In 2010, it has reduced significantly .In 2o11, it has decreased again but
still it is below the average.
Times Interest Earned (TIE):
Definition:
A metric used to measure a company's ability to meet its debt obligations. It is
calculated by taking a company's earnings before interest and taxes (EBIT) and
dividing it by the total interest payable on bonds and other contractual debt. It is
usually quoted as a ratio and indicates how many times a company can cover its
interest charges on a pretax basis. Failing to meet these obligations could force a
company into bankruptcy. IT is also referred to as "interest coverage ratio" and
"fixed-charged coverage."
Ensuring interest payments to debt holders and preventing bankruptcy depends mainly
on a company's ability to sustain earnings. However, a high ratio can indicate that a
company has an undesirable lack of debt or is paying down too much debt with
earnings that could be used for other projects. The rationale is that a company would
yield greater returns by investing its earnings into other projects and borrowing at a
lower cost of capital than what it is currently paying to meet its debt obligations.
Findings:
45
The times interest earned ratio is explained below:
In the diagram, we see that the times interest earned ratio below average in 2009. It
has increased in 2010. It has again increased in 2011.
Impact of Financial Structure on Profitability of RSRM:
 Multiple Regression Analysis:

Y (ROTA) = x1 (Debt/Equity) x2 (Debt Capitalization ratio) x3 (Total
debt/equity)
2009 0.14 12.85 0.93 78.17

times
2010 0.13 0.56 0.36 4.73 times
2011 0.06 0.29 0.23 6.27 times
YEAR ROTA DE
2009 0.14 12.85
2010 0.13 0.56
2011 0.06 0.29
46
47
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.61104223
R Square 0.373372607
Adjusted R Square -0.253254787
Standard Error 0.048797378
Observations 3
ANOVA
Significance
df SS MS F F
Regression 1 0.001418816 0.001419 0.595845 0.581501098
Residual 1 0.002381184 0.002381
Total 2 0.0038
Standard Upper Lower Upper

Coefficients Error t Stat P-value Lower 95% 95% 95.0% 95.0%
- -
Intercept 0.093047464 0.03572183 2.604779 0.233359 0.360841424 0.5469364 0.36084142 0.546936352
- -
DE 0.003712234 0.004809156 0.77191 0.581501 0.057393881 0.0648183 0.05739388 0.06481835
YEAR ROTA DC
48
2009 0.14 0.93
2010 0.13 0.36
2011 0.06 0.23
SUMMARY OUTPUT
R Square 0.528618975
Adjusted R Square 0.057237949
Observations 3
49
ANOVA
df SS MS F Significance F
Regression 1 0.002008752 0.002008752 1.121426079 0.481770632
Residual 1 0.001791248 0.001791248
Total 2 0.0038
Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
- -
Intercept 0.066874249 0.047492461 1.408102411 0.393127123 0.536574682 0.67032318 0.5365747 0.67032318
- -
DC 0.085116615 0.080376486 1.058974069 0.481770632 0.936163474 1.106396703 0.9361635 1.106396703
YEAR ROTA TDE
2009 0.14 78.17
2010 0.13 4.73
2011 0.06 6.27
SUMMARY OUTPUT
R Square 0.337799745
50
Adjusted R Square -0.32440051
Observations 3
51
ANOVA
Significance
df SS MS F F
Regression 1 0.001283639 0.0012836 0.51011721 0.60516255
Residual 1 0.002516361 0.0025164
Total 2 0.0038
Standard Lower Upper

Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
- -
Intercept 0.092055295 0.038341085 2.400957 0.25124174 0.395114384 0.579224975 0.395114384 0.57922
- -
TDE 0.000603724 0.000845286 0.7142249 0.60516255 0.010136656 0.011344105 0.010136656 0.01134
52
CHAPTER-06
DETERMINANTS OF CAPITAL STRUCTURE
6.1 Identification of Determinants of Capital Structure of RSRM Steels Ltd.
Determinants Response
Internal Factors :
 Get the firms share listed 

 Ownership structure and 
managerial control
 Tax economy related to factors 
other than debt financing
 Size of free cash flow 
 Earnings per share (avoid earning 
dilution)
 Historical performance of firm’s 
share
 Dividend policy 
 Investment policy/ growth 
opportunity
 Financial viability of strategic 
objective
 Assets’ risk 
 Tax economies associated with 
debt financing
 Correct mispricing in past security 
issues
 Issuing cost 
 Firm size 
 avoid mispricing in future security 
issues
 Covenants in debt financing 
contract
 Rates of taxation on investors’ 
income
 Risk and cost of financial distress 
and insolvency
 Managerial expectation on banks 
future performance
 Firm’s reputation 
 Changes in level of profitability
53
External Factors :
 Possibility of takeover bid ---

 Change in the ratio of public ---
deficit to gross domestic product
 Change in the regulation and 
supervision framework
 Private consumption behavior 
 Currency market behavior 
 Capital market performance 
 World economy performance 
 National economy performance 
 Political instability 
 Change in the dynamics credit 
demand
 Change in firms’ and investors’ 
income taxation
 Legal restriction on share 
repurchase
 Interest rate change 
54
CHAPTER 07
PROBLEMS ASSOCIATED WITH FINANCIAL STRUCTURE OF RSRM

STEELS LTD.
7.1 INTRODUCTION
It has already been stated that the cost of capitalis one of the most crucial factors in
most financial management decisions. However, the determination of the cost of
capital of a firm is not an easy task. The finance manager is confronted with a large
number of problems, both conceptual and practical, while determining the cost of
capital of a firm. From the financial structure of RSRM, it is seen that current and non
current liabilities have conquered a larger portion compared to equity. By examining
the financial structure of RSRM, some problems have been found. These problems
can briefly be summarized as follows:
7.2 Problem Associated with Financial Structure of RSRM Steels Ltd.
The most crucial problems that are presently faced by RSRM Steel Limited and
needed to overcome are-
 Working Capital Problem: -Working capital is the life blood of a business

which is found by subtracting current liabilities from current assets. Due to
the shortage of it the operation of a business is interrupted and leads a firm to
bankruptcy. By analyzing the financial statement of RSRM Steels Limited I
have found that the working capital position of this firm is negative from year
2009 to 2011. Although it doesn’t create any problem in the short run but it
may be the major concern for huge amount of loss in the long run if it is left
unturned.
 Agency Problem: -An agency problem is a potential conflict of interest

between either shareholder and manager or shareholder and bondholder. In
order to mitigate it a firm needs to incur agency cost. If management cannot
able to maintain good agency relationship with shareholders, then they will
55
leave the firm by selling their shares. As a result there arises the question of
existence of the firm. On the other hand if the firm is not able to maintain
better agency relationship with the debt holder, it will be very much costly for
the firm due to rising interest rates and complex loan covenant. By analyzing
the financial statements of RSRM Steels Limited I have found that the
management body doesn’t work in a better way for the wellbeing of the
shareholders since its performance measurement tool i.e. Earnings per Share
in a declining position from 2009 to 2011.
 High Cost of Debt: -The loan portfolio of RSRM Steels Ltd. is large from
various financial and non-institutions of Bangladesh. Due to large volume of
interest payment the net operating income attributable to shareholders
decline. As a result value of firm is not maximized as expected.
 Trend of Dividend Payment: -In general, payment of cash dividend means

the firm has no investable opportunity. By this time, we know from industry
life cycle that a firm gives no dividend in the development stage, stock
dividend in the growth stage, moderate cash & stock dividend in the
expansion stage and high cash dividend in the maturity stage. By analyzing
the trend of dividend payment, I have found that RSRM Steel Limited exists
in between expansion and maturity stage. Hence if corrective action is not
taken immediately then in near future it has to lose its market share and may
force to bankruptcy.
 Controversy Regarding the Dependence of Cost of Capital upon the

Method and Level of Financing: There is a, major controversy whether or
not the cost of capital dependent upon the method and level of financing by
the company. According to the traditional theorists, the cost of capital of a
firm depends upon the method and level of financing. In other words,
according to them, a firm can change its overall cost of capital by changing
its debt-equity mix. On the other hand, the modern theorists such as
Modigliani and Miller argue that the firm’s total cost of capital is independent
of the method and level of financing. In other words, the change in the debt-
equity ratio does not affect the total cost of capital. An important assumption
underlying MM approach is that there is perfect capital market. Since perfect
capital market does not exist in practice, hence the approach is not of much
56
practical utility.
 Computation of Cost of Equity: The determination of the cost of equity

capital is another problem. In theory, the cost of equity capital may be defined
as the minimum rate of return that accompany must earn on that portion of its
capital employed, which is financed by equity capital so that the market price
of the shares of the company remains unchanged. In other words, it is the rate
of return which the equity shareholders expect from the shares of the company
which will maintain the present market price of the equity shares of the
company. This means that determination of the cost of equity capital will
require quantification of the expectations of the equity shareholders. This is a
difficult task because the equity shareholders value the equity shares on the
basis of a large number of factors, financial as well as psychological. Different
authorities have tried in different ways to quantify the expectations of the
equity shareholders. Their methods and calculations differ.
 Computation of Cost of Retained Earnings and Depreciation Funds: The
cost of capital raised through these sources will depend upon the approach
adopted for computing the cost of equity capital. Since there are different
views, therefore, a finance manager has to face difficult task in subscribing
and selecting an appropriate approach.
 Future Costs Versus Historical Costs: It is argued that for decision-making
purposes, the historical cost is not relevant. The future costs should be
considered. It, therefore, creates another problem whether to consider marginal
cost of capital, i.e., cost of additional funds or the average cost of capital, i.e.,
the cost of total funds.
 Problem of Weights: The assignment of weights to each type of funds is a

complex issue. The finance manager has to make a choice between the risk
value of each source of funds and the market value of each source of funds.
The results would be different in each case. It is clear from the above
discussion that it is difficult to calculate the cost of capital with precision. It
can never be a single given figure. At the most it can be estimated with a
57
reasonable range of accuracy. Since the cost of capital is an important factor

affecting managerial decisions, it is imperative for the finance manager to
identify the range within which his cost of capital lies.
 Ownership and Control: Debt holders have no voting power and therefore
cannot influence decisions of the company. A company that finances its
operation through use of debt protects its shareholders from dilution of
ownership interest. Dilution occurs when a company issues more equity
shares, which reduces the percentage ownership of the original shareholders. If
the company pays regular dividends, this will reduce the proportion of
dividend payments that flow to original stockholders.
 Bankruptcy Risk: Debt obligations, such as payment of interest and

principal, can put pressure on the company. Failure by the management to
ensure sound cash management policies may make the company unable to
meet its obligations. Debt holders are legally entitled to interest and principal
payments. If the company does not pay as promised, creditors may decide to
sue the company. The ultimate distress forces the company to file for
bankruptcy, where ownership of the company's assets is transferred from the
stockholders to debt holders.
58
CHAPTER-08:
SUMMARY POLICY IMPLICATION & SUGGESTIONS.
8.1 INTRODUCTION
The present study has been undertaken for evaluating the financial structure of
RSRM. RSRM use as sample because it is one and only publicly traded steel and re-
rolling company. Various sources are used to make the report more informative. The
direct interview method has followed as the primary source and annual reports of
RSRM, the website of RSRM, various journals related to financial and capital
structure, magazine are used as a secondary source of data collection. The study has
used financial ratio like debt ratio, debt equity ratio, statistical measures like simple
linear regression. The study has been segmented into seven chapters according to the
objectives. Those objectives help to make the summary and decision of the main
objective that is evaluating the financial structure of RSRM.
8.2 SUMMARY Of THE ALL FINDINGS:
From the previous discussion, calculation and analysis it has been founded some
issues which is shown as a summary of the finding in below:-
Financial policy is the combination of all the financial activities of an

organization.
RSRM has various financial policies to perform their day to day activities as well as
to achieve their long term goal. RSRM communicates their financial policy to the
owners, the management and other stakeholders make them clear about financial
operations. RSRM has a lot of opportunity to use and diversify their financial policies
and programs with growth and expansion.
Financial structure of RSRM shows a vulnerable position of the firm.
From common size statement it is shown that the equity portion is less than optimal
59
level but it is increasing during the observed years. The current liabilities are high,
this shows that use of more working capital for the operation. Average financial ratios
of RSRM show high value which is not good for financial viability of the firm. The
values of Average leverage ratios indicate that BSRM uses high levels of leverage as
a mode of financing which may cause a lack of future funds. Financial ratios have
significant effects on profitability of RSRM.
Finance is blood for any business entity.
At present there are multi options of financing. RSRM uses all common modes of
finance except preference share, bond & debentures etc. But still RSRM efficiently
manage its source of fund. RSRM practice only cost of capital and value of the firm’s
to evaluate its capital structure. Value of the firm’s in share issue process and cost of
capital in financial decision makings.
Financial structure of RSRM consists of various components.
Every component of RSRM is affected by external as well as internal factors. With

the change of this factor the financial structure of RSRM also changes. From the
discussion it is shown that external factors influence the growth, expansion &
competition of the RSRM. And internal factors influence the financial structure
formation, availability of fund & efficient uses of the financial structure of RSRM.
The financial structure is the combination of a firm’s capital structure and

current liabilities.
In earlier it is shown that excess equity portion and the excess debt portion both are
bad for firms. For this reason optimal structure has to maintain. It is also shown that
RSRM has excess debt and RSRM does not follow the optimal capital structure. For
this reason RSRM faces discussed problems with its financial structure formation,
execution and maintenance.
60
61
8.3 POLICY IMPLICATION
From the above summary of the findings various suggestions and policies is given
below:
 Financial policy and programs is the prerequisite for a healthy financial

structure of a firm. Financial policies and programs help to formulate an
optimal financial structure. Though RSRM is at growth stage of industry life
cycle it should restructure and make its future financial policy and programs
more flexible and relevant to the competitive environment. Strong policies and
programs will help RSRM to make its position strong in steel and re-rolling
industry.
 RSRM is growing with its market demand that why it is quite impossible to
formulate and maintain an optimal capital structure. The main goal of RSRM
is to maximize value of the firm and minimize the cost of capital. Without an
optimal capital structure it is impossible to achieve goals within a target
period. So in future RSRM should make an optimal capital structure which
will enable protect the interest of shareholders as well as directors of RSRM.
 Finance is the blood for a business entity. RSRM uses funding from various
sources of equity as well as debt. It is good to use debt source of the fund at
growing and expansion stage by at a certain level. With the increase of debt
finance RSRM should increase the level of equity finance. Because without
equity support the debt finance will be difficult to procure. So RSRM should
increase its equity finance with equivalent to increase its debt finance. RSRM
should issue preference share as an alternative of debt and practice new
innovation such future, forward, option & swap.
 Financial structure of business entity affected by various determinants.

Financial structure of RSRM also affected by external factors as well as
internal factors which are cause of business risk for RSRM. Most of the
external factors of RSRM are unavoidable. RSRM should adopt various
measures to face and minimize the impact of those external factors. Measures
such as insurance, contract, non-insurance transfers etc. Most of the internal
factors of RSRM are avoidable. RSRM can finish the impact of those internal
62
factors by taking effective measures. Measures such innovative management,

effective and efficient use of material, labour& capital resource and effective
managerial process of RSRM.
 The financial structure of RSRM associated with various problem. RSRM

financial structure is not on based on optimal standard. For this reason excess
debt creates over pressure on the financial structure of RSRM and under level
of equity creates uncertainty for shareholders. To overcome those problems
RSRM has to construct optimal capital structure, effective financial policies
and programs and less costly source of finance.
8.4 CONCLUSION
Financial structure works as mirror for any business entity. It shows what is position
the business entity actually reflects. The report tries to show the real face of the
financial structure of RSRM and to find out the issues and the facts behind the face.
RSRM’s financial structure position is vulnerable according to the finding of the
research. Behind the fact is BSRM is in the growth &expansion stage of industry life
cycle. The accumulated loss of pre-production hides the strong position of RSRM
during the observed years. The high debt creates more interest expense as well as high
business risk for the equity owners of the firm. Lower owner’s equity creates the
default risk to the creditors of the firm. But still RSRM is on top position in the steel
and re- rolling industry and financial viable. Behind the scene is RSRM’s turnover
that is increasing with market demand. According to the report RSRM should
formulate an optimal financial structure. Which helps RSRM to use financial resource
and opportunity more effectively and efficiently for achieving its desire goal.
References
Harris, Milton &Raviv, Artur. Capital structure and the informational role of debt.
63
The Journal of Finance, Vol. 45, No. 2. (Jun., 1990), pp. 321-349
Li, D. David & Li, Shan.A theory of corporate scope and financial structure.The
Journal of Finance.Vol. LI, No 2 (June, 1996), pp. 691-709.
Ferri, G. Michael & Jones, H. Wesley. Determinants of Financial Structure: A new

methodological approach. The Journal of Finance, Vol. 34, No. 3.(Jun., 1979),
pp. 631-644.
Taggart, A. Robert Jr. A model of corporate financing decisions.The Journal of

Finance, Vol. 32, No. 5.(Dec., 1977), pp. 1467-1484.
Myers, C. Stewart. Capital structure. The Journal of Economic Perspective, Vol. 15,
No.2. (Spring, 2001), pp. 81-102.
Myers, C. Stewart. Financing of corporations.Handbook of the Economics of Finance

(Aug, 2002).
Myers, C. Stewart &Majulf, S. Nicolas. Corporate financing and investment decisions

when firms have information that investors do not have. Journal of Financial
Economics, Vol. 13. (1984), pp. 187-221.
Ball, Ray, Lev, Baruch & Watts, Ross.Income variation and balance sheet
compositions.Journal of Accounting Research, Vol. 14, No. 1. (Spring, 1976),
pp. 1-9.
Stowe, D. John, Watson, G. Collin & Robertson, D. Terry. Relationships between the
two sides of the balance sheet: a canonical correlation analysis. The Journal of
Finance, Vol. 35, No. 4.(Sep., 1980), pp. 973-980.
Chen, Shuping, Defond, L. Mark & Park, W. Chul. Voluntary disclosure of balance
sheet information in quarterly earnings announcements.Journal of Accounting
and Economics, Vol. 33. (2002). Pp. 229-251.
Marsh, Paul. The choice between equity and debt: an empirical study. The Journal of
Finance, Vol. 37, No. 1. (Mar., 1982), pp. 121-144
64
Deloof, Mark. Does working capital management affect profitability of Belgian

firms? Journal of Business and Accounting, Vol. 30 (3) & (4), (April/May,
2003), 0306-686X.
Miller, H. Merton. Debt and taxes.The Journal of Finance, Vol. 32, No. 2.(May,
1977), pp. 261-275.
http://www.sba.gov/content/working-capital
http://www.investinganswers.com/financial-dictionary/stock-valuation/cost-capital-
112
http://www.netmba.com/econ/micro/cost/opportunity/
http://www.businessdictionary.com/definition/financial-structure.html
http://www.investopedia.com/terms/c/capitalstructure.asp#axzz23ViYxKAo
http://www.investopedia.com/terms/r/ratioanalysis.asp#axzz258zsic9T
5.6 Marketing Problem

In marketing the company has to face many marketing problem. These are:
(i) Sometimes govt. rules & regulations restrict normal processing operation.
The govt. of Bangladesh keeps close eyes on its activities. For changing
prices, new plant installation, importing raw materials the company has to
seek necessary permission from the govt. obviously the govt. cannot
always meet its expectations.
(ii) Political instability is another serious operational concern for RSRM.
Particularly we have to see that Bangladesh witnessed frequently changes
in govt. policies & regulations.
(iii) Then suppliers sometimes fail to honor commitment in delivery raw
materials for political instability for which expected time to produce is
delayed.
(iv) Labor unrest absenteeism is also hazardous.
5.7Comparison of marketing aspects among BSRM, RSRM and KSRM
65
5.7.1 Product
Point of
comparison
BSRM RSRM KSRM
Product Xtreme500W Deformed bar( 40 Deformed bar

category grade, 60 grade and
Deformed bar M.S. Angles
x power)
M.S. Angles M.S. Bar
M.S.Channels
Wire rods
Shaft
I. Beam
Rail
Spring Steel
Others
Product feature High strength product 20% more Produce high

powerful quality deformed
High elongation
bar which follow
Less expensive
High durability and the
Strong but easy to
Weld able ASTM A 615 82
bend
Code
Easy to welding
Future plan for Feel Confidential Consistency Depth

product line
expansion
Expected time End of this year 2 years 1 year

to implement
66
Ownership Wholly Ownership Wholly Ownership Wholly Ownership

or partnership
Brand equity Excellent High High
Brand name Manufacturers Brand Manufacturers Manufacturers

Brand Brand
Branding Multi brand Multi brand Line Extension

strategy
Product support Yes Yes Yes

service
Steps to follow Survey, Assessing Assessing cost of Assessing cost of

for product cost of service service service
support service
From the above comparison, we want to mention here that there is not so much
different in case of product name. But there is much different in brand name. BSRM
is the brand name (BSRM xtreme). RSRM is one of potential steel mill among the
graded bar producer because they have huge financial strength and long experience in
producing no graded bar. There is no much option available without producing new
capable product because many companies already use TMT technology.
5.7.2 Price
Point of BSRM RSRM KSRM

comparison
Policy for pricing Fixed price policy Dynamic price Dynamic price
deformed bar policy policy
Objective of Quality leadership Quality leadership, Adjustment with

pricing Market Share competitor price
67
increase
Pricing approach Cost based Cost based pricing Competition based

pricing
Consumer Competition based Competition based Competition based

perception for pricing pricing pricing
pricing
Price adjust with Some time Discount and Discount and

Discount and Allowance pricing Allowance pricing
Allowance pricing and Promotional and Promotional
pricing. But now pricing
steps are taking as
for no adjustment
Price of deform 40 43000 40 43000- 40 grade 42000

bar ranges from grade grade 46000
60 46000 60 47000- 60 grade 46000

grade grade 49000
and
xtreme
Every marketer always tries to determine the appropriate price for his or her product.
Steel market is no exception from other market. As BSRM is the market leader, other
firm sometimes follows them. RSRM sometimes determine price that is higher than
BSRM, but they never consider about product quality. RSRM sometimes follow some
illegal activities to capture the market. Developers always design their plan with the
graded bar. But for getting price advantage, customers are habituated with using no
graded bar and varied in using different types of graded bar.
5.7.3 Place
68
comparison
Channel for Direct channel and Direct channel and Direct channel
distributing Indirect channel Indirect channel
product
Marketing Hybrid Marketing Hybrid Marketing Vertical Marketing

system System System System (corporate)
Steps to 1.Analyzing consumer 1.Identifying major Not applicable

follow in service needs alternatives
channel 2.Setting channel 2.Evaluating the major
design objective and constraint Alternatives
decision 3.Identifying major
alternatives
4.Evaluating the major
Alternatives
Sales force 50 23 26
Type of Exclusive distributor Exclusive distributor Thinking zonal

industrial office and market
distributor representative
Factors to Business turnover, Business turnover, Not applicable

consider for Goodwill, Area Goodwill, Area coverage,
selecting coverage, Financial Financial solvency,
dealer solvency,
Experience,
Warehouse size,
Tax Identification
Number
Warehouse cleanliness
Motivation Positive Commissi Positive Commission Not applicable
for dealer on Recognition
69
Negative Reducing Negative End

Marketing relationship
support
Division in Dhaka, Chittagong, Dhaka, Chittagong, Dhaka,

which have Sylhet, Rajshahi, Sylhet, Rajshahi, Bogora, Chittagong, Sylhet
warehouses Bogora, Khulna Khulna
No. of All over the country. All over the including Few dealer
dealer Majority of the dealer Bogura. Majority of the
centered in Chittagong dealer centered in Dhaka
JIT Not possible Not possible Not possible
Major Individuals Developers Developers

source of
customers
Marketing is the most important organizational function performed by any type of

organization. Production is not the end result of any organization. Distribution and
sales is the main motto for earning revenue. Dhaka division is no one deformed bar
user among all other division (almost 65%), followed by Chittagong (20%) and Sylhet
(12%). RSRM wants to start their journey for distributing their product outside the
Chittagong by opening new zonal office. RSRM almost cover all big cities including
five divisions. BSRM cover all the districts with exclusive dealer and agent. RSRM
wants to reduce the delivery time by setting big DIPU in that area where they have big
clients.
5.7.4Promotion

Comparison
Marketing Advertising Advertising Advertising

communication
70
tools Personal selling Personal selling Personal selling
Sales promotion Sales promotion Sales promotion
Public relation Public relation Public relation
Direct marketing Direct marketing
Communication No comment Awareness Purchase

stage
Objective of Attention and Attention Obtain action

communication
Obtain action 50%Hold interest
50%Arose desire
Obtain action
Theme of desire Rational Rational Emotional

response
Emotional
Message No comment Drawing conclusion or One side argument or

structure letting buyer come into two side argument
own conclusion
Budget for More than 2 core More than 2 core More than 2 core
promotion
Budget based Objective and Objective and task Objective and task
on task method method method
Promotion tools Sales contest Sales contest Convention and trade

show
Convention and Convention and trade
trade show show
Allowance
Type of public Press relation Press relation Product publicity
71
relation Product publicity Product publicity Lobbying
Public affair Public affair Development
Development Lobbying
Development
Promotion is another important aspect of marketing. Last year BSRM expense 9.50
core for promoting their product RSRM also now in the track for promoting their
product with following all types of promotional activities. BSRM telecast the
advertisement in different electronics media. RSRM also take the same initiative.
RSRM wants to expand their marketing activities following BSRM as a base. They
want to expense proper money for promotional purpose which mainly based on
objective and task method.
5.1HR Practices in RSRM
5.1.1 Human Resource Philosophy
RSRM recognizes the contributions of its employees and treats each individual
employee fairly and consistently in all matters, with a uniform application of the
following human resources philosophies:
 Human resources are best allocated to achieve optimum productivity and
efficiency.
 Pay and benefits offered are fair, equitable and competitive.
 Employees are always encouraged to well-equip themselves for the present job
and future development of RSRM.
 Reward is based on merit. High performers are given priority to take up more
responsible positions.
 Two-way communications between employees and the management are
72
promoted as a means of building mutual understanding and trust.

 Workplace safety is given top priority to protect human health and enable
employees to deliver their best performance.
 The protection of human rights in employment is supported, as guided by
relevant internationally accepted principles such as those in the Universal
Declaration of Human Rights and is reflected in our Employment Policy and
Equal Opportunities Policy. Employees’ freedom of speech and association
are respected as long as they are within the legal boundaries.
5.2 Employment Policy
It is the policy of RSRM to recruit the best qualified people and to maintain a pool of
human resources according to the manpower requirement and planning of RSRM.
It is also the policy of RSRM to transfer or promote well performing and capable
employees to fill vacancies so that employees are provided with opportunities to
widen their exposure and further their career development within RSRM.
All applicants have equal opportunities of employment irrespective of their age, sex,
marital status, pregnancy, family status, disability, race, nationality or religion
(provided that these do not impede the abilities of the prospective appointees to carry
out normal job duties or affect the health and safety of fellow employees). Job
applicants are treated fairly and equally. Employment is offered only to the best
qualified applicants with reference to their merits and abilities to meet the
requirements of the jobs irrespective of whether they are referrals or direct applicants.
The Human Resources Department provides recruitment advice and services to all
Divisions/Departments and is responsible for the entire process leading to
employment. RSRM will not be bound by offers of employment other than by the
Human Resources Department.
5.3 Recruitment
The purpose of recruitment of RSRM is to acquire, in a cost effective manner, the
optimum number of high quality employees for the operations and development of
RSRM. In order to appoint the most appropriate persons for the positions, it is crucial
that potential candidates are drawn from a wide pool and equal opportunities are
ensured for all candidates. The following guidelines seek to ensure transparency and
fairness throughout the recruitment process and maximize the diversity of applicants.
5.3.1 Selection Committee
73
Selection Committees of different compositions shall be constituted by the Board to

shortlist and interview the prospective candidates for the positions of CE and senior
management staff.
5.3.1.1 Sourcing Methods
Generally, one or more of the following recruitment approaches, to be decided by the
Selection Committee, can be adopted to identify interested and suitable candidates.
Advertising the Post Advertising the post helps communicate clearly and openly to
the public the requirements of the position and the selection criteria which apply. The
methods for advertising the post shall include:
A. Advertising in the local press and/or
B. Advertising on RSRM website and/or recruitment websites
Executive Search Recruitment consultants can tap into private sector networks and are
skilled at promoting opportunities to potential candidates. They can reach a wide pool
of candidates, and can reduce the time burden on the Selection Committee. In using
executive search, the following points shall be considered:
A. In selecting the search consultant, international search firm with good

reputation, extensive global search experience and proven track record shall be
considered;
B. The consultant should show a commitment to diversity and equality issues,
and demonstrate how such commitment is reflected in its practice and
approach; and
C. Precise job descriptions and person specifications should be agreed between
the consultant and the Selection Committee.
5.3.1.2 Selection Guideline and Criteria

5.3.1.2.1 Shortlist Criteria
In short listing candidates for interviews, the following factors should be considered:
 Academic, professional and technical qualifications;
 working experience;
 Job knowledge and technical know-how; and
 Management experience for managerial positions.
There should be no discrimination on the grounds of age, sex, marital status,
74
pregnancy, family status, disability, race, nationality or religion unless these will
impede the prospective appointees' abilities to carry out normal job duties. All
candidates will be assessed fairly and equally irrespective of whether they are
referrals or direct applicants.
5.3.1.2.2 Information Gathering during Interviews

During the interviews, interviewers should only ask questions that relate directly to
the job requirements. Where it is necessary to assess whether personal circumstances
will affect job performance, interviewers should discuss these objectively without
questioning the candidates about their age, marital status, pregnancy, family status,
race, nationality or religion.
In case of a disabled applicant, job-related information on disability and medical
history can be asked to determine the applicant's ability, and the need for special
services and facilities, to carry out normal Employment – Recruitment Section 2-3
Page 7 of 9 March 2010 duties. It is however unlawful to request medical information
for the purpose of discriminating against applicants on the basis of pregnancy or
disability.
Assessment of the candidates and due recommendation of the interviewers should be
properly documented on the Interview Assessment Form after interviews. All forms
and documents containing personal data of applicants should be returned to Human
Resources Department for further handling, irrespective of whether the applicants are
appointed.
5.3.1.2.3 Final Selection Criteria

Judging from information gathered through interviews, the final selection criteria
including desirable personal attributes, potential for further development, past
performance, job expectation and career aspiration are applied to further evaluate the
suitability of the candidates to the job.
If all things are equal, preference will be given to internal candidates taking into
consideration the recommendation of their Heads of Division/Department in addition
to all other criteria.
5.4 Promotion
5.4.1 Purpose
75
RSRM aims to provide career advancement opportunities for employees to develop

and utilize their potential whenever possible, while at the same time recognizing their
outstanding performance.
The basic principles of promotion in RSRM are equal opportunities, non-
discriminatory and the best person for the job. Selection for promotion should be
based on merit with due consideration of the following factors:
 Job knowledge and technical know-how;
 Competence and potential;
 Performance and quality of work;
 Academic/professional/technical qualifications;
 Honesty, integrity and commitment to work;
 Working attitude and interpersonal skills; and
 Personal attributes and tact. Age, sex, marital status, pregnancy, family status,
disability, race, nationality or religion should not be considerations for
promotion.
5.5 Training
HRD of RSRM arranges various training programs for the purpose of changing the
behavior, increasing the performance, promoting, knowledge, improve the skill and
motivation of present employment requirements.
The main objective of training and development in RSRM is to help develop key
competencies which enable individuals to perform current or future jobs successfully.
In this regard, all training and development programs organized by the Human
Resources Department will be geared towards the following objectives:
 Strengthening the job skills/knowledge of employees;
 Improving operational efficiency and productivity; and or
 Developing the potential of employees for maximizing mutual benefit to
individuals and RSRM.
5.5.1 Policy
The basic policy in administering and implementing any type of training or
development activity is in accordance with the strategic business objectives of RSRM.
The Human Resources Department will work closely with Heads of
Division/Department in assessing areas that need training and development support.
5.5.2 Types of Training and development Activities
76
a) Staff training/development activities can be employer or employee-initiated.

In either case, it has to be approved by the manager in charge of the
department or above with additional endorsement from the Human Resources
Department or the Chief Executive.
b) Employee-initiated training/development activities may include external
programs that are organized by external training institutes or by RSRM or with
other institutes for the general public.
c) Employer-initiated programs may take the form of offering sponsorship for
employees to attend external programs or organizing such programs in-house.
d) Depending on the nature of needs and operational requirements,
training/development programs may also be implemented as job induction, job
rotation, on-the-job coaching, counseling, individual or group projects.
5.6 Benefits
5.6.1 Working Hours
The regular working hour of the employee is minimum 8 hours. If they work behind
this 8 hours then that will be treated as overtime & the payment in overtime is double
to normal time. Overtime is not fixed for RSRM, it based on the consignment delivery
or the peak season. But the management always tries to minimize the overtime.
5.6.2 Leave Policy
The objectives of providing leave benefits by RSRM are to release its employees from
the pressure of work and to provide them time-off under circumstances such as
sickness, marriage and pregnancy. The leave benefits set out in this Section is
applicable to full- time permanent employees. Application for leave is subject to the
approval of RSRM and must be supported by relevant documents proving the
eligibility of the employee to the satisfaction of RSRM.
5.6.3 Leaves & Holidays:
In the year on a total an employee can enjoy 18 days of earned leave. Maternity leave
is not available in RSRM because the entire worker in that sector is men. But the
senior executive said that if they have to give any maternity leave then it will be
according to the govt. rules and regulation that means not less than 6 months.“Sick
leave is a common thing that we have to face each and every working day” said by the
senior HR executive.In a year one permanent employee can enjoy 15 days of sick
leave which is without payment.
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5.6.4 Festival holidays:

In RSRM allowed festival holidays in a year is 12 days. Whereas, weekly holiday is
only the Friday. National and international holidays includes with the festival
holidays.
5.6.5 Compensatory holiday
Compensatory holiday is term many firm ignores that but in RSRM the management
don’t overlooked that. Their ratio of compensatory holiday is 1:1. That means if they
work in a day of leave then he is authorized to enjoy a holiday. But it depends on the
mutual understanding between worker and the management. If the worker wishes to
work on that day then he can work on that particular day.
5.6.6 Procedure to get the leave:
To enjoy a leave every worker should accomplish some steps:
a. Worker should collect the leave form from the HR office.
b. The worker should fill the form in his own hand. Incomplete form will be
rejected.
c. After completing the form the worker should visit HR office & the period of
leave should be written by the authority.
d. After writing the days of leave the prescribed for, it must submitted to the HR
& Admin dept. with the recommendation of section in charge / shift in charge
/ Head of Dept.
e. If the leave is granted then the applicant should collect the pass of leave.
5.7 Retirement
5.7.1 Purpose
RSRM values the contributions made by its employees during their service with
RSRM and provides benefits at their retirement.
5.7.2 Policy
The retirement age for employees of RSRM is 60. Employees will normally retire on
the last day of the calendar month in which they attain age 60. Retirees are entitled to
the normal retirement benefits of the Staff Provident Fund Scheme upon retirement.
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The normal retirement benefits will include a lump sum equal to the full amount of
the member's balance, employer's balance and any prior service balance.
If the amount of the employer's balance plus prior service balance under the Scheme
is less than the long service payment to which the retirees would be entitled under the
Employment Ordinance, they will receive the retirement benefits under the Scheme
plus the difference between their statutory long service payment and their employer's
balance plus prior service balance under the Scheme.
As recognition of retirees' contributions to RSRM a gold medal will be presented to
them on their last working day.
5.8 Disciplinary Action
5.8.1 Policy
Unsatisfactory job performance, misconduct, habitual lateness, absenteeism, failure to
comply with RSRM policies and procedures or any other breaches of
employer/employee relationship may result in disciplinary action.
RSRM policy is that disciplinary action against employees should:
 Be undertaken only in cases where good reason and clear evidence exist;
 Be appropriate to the nature of the offence;
 Be demonstrably fair and consistent with previous action in similar
circumstances;
 Take place only when employees are aware of the standards that are expected
of them or the rules with which they are required to conform;
 Allow employees the right to be accompanied by a colleague of their own
choice;
 Allow employees the right to answer charges against them; and
 Allow employees the right to appeal against any disciplinary action.
5.8.2 Procedure
Depending upon the circumstances, employees may be subject to the following
reprimand or disciplinary actions:
5.8.2.1 Coaching or Counseling

If an employee falls below the normal or acceptable requirements as specified in the
79
Human Resources Manual, coaching and counseling by his supervisor should take
place as soon as practicable to prevent the situation from deteriorating to a more
serious one, or becoming a habit. The supervisor or the Head of Division/Department
should, first of all, find out what causes such behaviors, and assist the employee to
rectify the shortcomings.
5.8.2.2 Verbal Warning

If no improvement is made by the employee after coaching and counseling, a verbal
warning must be given to him. The areas for improvement and the consequences of
failure to make improvement within a specified period of time should be clearly
explained to the employee. The warning should be recorded in a memo,
acknowledged by the Head of Division/Department and a copy of which should be
sent to the Human Resources Department for retention in the employee's personal file.
A verbal warning should be given to employee in the first instance of a minor offence.
5.8.2.3 Written Warning

If there is no improvement after the verbal warning has been given, a written warning
must be given to the employee. He may be accompanied by a colleague of his own
choice when attending the meeting.
The written warning should state the following:

 The nature of the offence with reference to RSRM policy, instruction or
procedure which prohibits it;
 Any past warning or action taken for similar violations;
 The details on disciplinary action being taken;
 The expectations or improvements required of the employee; and
 The future disciplinary action which will be taken against the employee if the
offence is repeated within a specified period of time.
Depending on the situation, the warning may be given by the Head of
Division/Department or his designated officer together with a representative from the
Human Resources Department, if required. The warning letter must be explained
clearly to the employee. He will be requested to acknowledge his understanding of the
warning letter should circumstances warrant. A copy of the written warning should be
80
sent to the Human Resources Department for retention in the employee's personal file.
Improvement by an employee after disciplinary action should be noted in the
employee's personal file. The Head of Division/Department or supervisor must
constantly monitor the performance of the employee to ensure that he maintains a
satisfactory performance over a specified period.
A written warning should be given to the employee in the first instance of a more
serious offence or after repeated minor offences.
5.8.2.5 Suspension of Employment
RSRM may suspend the employment of an employee for a period not exceeding 15
days for investigation of any serious offence that could lead to summary dismissal.
However, where the investigation is of a criminal nature and proper criminal
proceedings cannot be concluded within 15 days, the suspension may be extended till
the conclusion of the criminal proceedings.
During the suspension period, the employee will be paid salary as normal and will be
given an opportunity to state his case. During the hearing of the case, he may be
accompanied by a colleague if he so wishes. In exceptional cases, suspension without
pay may be warranted but this decision can only be made with the approval of the
Head of Division/Department and Head of Human Resources Department.
5.8.2.5 Dismissal
An employee will be dismissed after verbal and written warnings have been given and
if no improvement is made. Details of the policy for Dismissal are provided in the
Section of Termination. The Head of Division/Department should obtain a Personnel
Movement/Contract Renewal/Salary Revision Form, complete and forward it to the
Human Resources Department. The Human Resources Department will confirm the
termination of employment whether by notice/payment in lieu or without
notice/payment in lieu and work out the required compensation in compliance with
the Employment Ordinance.
5.8.2.6 Appeal
An employee may appeal against suspension, dismissal with notice or summary
dismissal to the Head of Human Resources Department within seven days after the
disciplinary action is taken. The meeting to hear the appeal should be attended by a
81
member of the management who is more senior to the one who initiated the
disciplinary action, the employee making the appeal and a colleague of his own
choice if he so wishes. No disciplinary action will be taken until the outcome of the
appeal is known. Subsequent meeting(s) with the parties concerned will be held until
a decision is reached. The management will deliver the decision to the employee and
confirm it in writing. This represents the final decision of RSRM.
82
6.1 Recommendations
The following measures can be recommended for the industry:
 There is no trade union, in the industry. So, trade union should be introduced.
 Separate housing estate should be built up for employees as well as workers.
 The production of the industry should be raised because the production is

lower than the demand of the product. That means, their product has high
demand.
 The company should maintain labor friendly environment.
 The industry should expand its plant.
 The industry should increase its channels of distribution of product.
 The organization should give more emphasis on advertisement of its product.
 Need to take steps for individual customers.
PRODUCTION DEPARTMENT
PRODUCTION SYSTEM OF RSRM
Ratanpur Steel Re-Rolling Mills (RSRM) uses effective but not the latest technology
to produce product of standard quality. The production process is carried on at night
under the supervision of a production manger. The maximum production capacity of
the machine is 10 tons per hour and the production per month is about 1800 tons. The
quantity produced is sold due to high demand in the market
General Overview of the Production Department:
83
Production department maintain all over the production system. The name of the
Production Manager is Syed Aftab Ali. This company has now 125 workers are
working in the production department. Each and every worker is expertise of the
production procedure.
ORGANOGRAM OF PRODUCTION DEPARTMENT
The organ of the production department is given below.
Gr- Gr- Gr-

Direct Oprative on Shift: 1 2 Gr-3 4 G Total
GM - Operation 1 1
Manager Production 1 1
Shift Foreman 1 1 1 1 4
84
Charging Foreman 1 1 1 1 4
Furnace oprator 1 1 1 1 4
Billet Crane#1Oprator for Furnace

Charging 1 1 1 1 4
Rolling mill operator 1 1 1 1 4
Mill Assistant 1 1 1 1 4
Mill Pulpit Operator 1 1 1 1 4
Finish Area Pulpit Operator 1 1 1 1 4
Bundling + Tying Machine Operator 1 1 1 1 4
Bundle Crane#1Operator for Finished

Product 1 1 1 1 4
Reserve 2 2 2 2 8
Billet Crane # 2 Operator for billet

handling 1 1 1 1 4
Water treatment operator 1 1 1 1 4
Assistants Cooling Bed Area 1 1 1 1 4
TOTAL 13 13 13 13 2 54
MILL PREPARATION SHOP:-

Manager 1 1
Guide Shop Technician 2 2 2 6
Stand Assembly Technician 2 2 2 6
Assistant 2 2 2 6
TOTAL 6 6 6 1 19
WORKSHOP (ROLL SHOP):- 0
Roll lathe operator 1 1 1 1 4
85
Lug cutting & Grinding 1 1 1 3
Extra/Reserve 1 1 1 3
TOTAL 2 2 2 1 7
MECHANICAL MAINTENANCE:- 0
Manager, Mechanical 1 1
Foreman/Mechanical Engineer 1 1 1 1 4
Technician 2 2 2 2 8
Assistant 1 1 1 1 4
Reserve/Reviver 1 1 1 1 4
TOTAL 4 4 4 4 1 17
ELECTRICAL MAINTENANCE:- 0
Manager, Electrical 1 1
Foreman/Electrical Engineer 1 1 1 1 4
Software Engineer 1 1
Technician (Software) 1 1
Technician 2 2 2 2 8
Assistant 1 1 1 1 4
Reserve/Reviver 1 1 1 1 4
TOTAL 4 4 4 4 3 19
LABORATORY AND QUALITY

INSPECTION:- 0
Metallurgist/Quality Manager 1 1
86
Laboratory Assistant/Inspector 1 1 1 1 4
Assistant 1 1 1 1 4
TOTAL 2 2 2 2 1 9
PRODUCTION SYSTEM OF RSRM
 Raw materials of the product:
RSRMuses it’s own & imported MS billet as raw materials to produce the re-bar. It
able to re produced the main raw material MS BILLET in its factory from the scraps.
RSRM also imported raw materials from the foreign countries such as UK, China,
Malaysia, Indonesia, Canada, USA, Japan etc.
MS BILLET
 Labor:
RSRM has total 250 direct & indirect labors in its production process & system.
87
Direct labors-100
Indirect labors-150
 Factory:
The factory of RSRM is located at Baizid Bostami Road, Nasirabad Industrial Area,
Chittagong-4000 Bangladesh. The factory is designed very well. There is a three
storied building in the factory used for the functions of production’s officials. Huge
machineries are set around the factory for producing re-bar & billet. There is a place
used as a warehouse. There is also a place which is used for keeping scraps. Two
enter & exit gate are in the factory.
 Technology:
The technology used by RSRM in their production process is fully computerized. All
the machineries are imported from UK.
 Production process/ layout:
The production process of producing re-bar is very complex and fully related with
machine. Human involvement is very limited. The layout of the production process of
RSRM is given bellow:
Reheating Furnace
Roughing mill Inter mill
(1200  - 1220  cent.)
88
75 grade rod Continuous Finishing Finishing
Production (DC motor panel) (AC motor panel)
TWIN Channel Output
(Re-Bar)
CLASSIFICATION OF PRODUCT OF RSRM
The products of Ratanpur Steel Re-Rolling Mills(RSRM) are shown in the

following figure:
89
Industrial Products of RSRM
Deformed Bar Round Bar
Prime Quality Commercial Quality
1. Round Bar: As the name is implies the shape of the product is round
which is 8 mm to 32 mm in size. It is equivalent to ASTM A 615
2. D-Formed Bar :It is more popular at present as it some special qualities.
It is of two types given below:
 Prime Quality D-Formed Bar: It is a product of 60 grade. It is
generally used in multistoried infrastructure. Its length is 12 meter.
 Commercial Quality D-Formed Bar: It is a product 40 grade. Its
length is 15 meter. It is used in all types of constructions.
PROBLEMS OF THE PRODUCTION PROCESS
Ratanpur Steel Re-Rolling Mills(RSRM) uses effective but not the latest
technology to produce product of standard quality. The production process is carried
on at night under the supervision of a production manger. The maximum production
capacity of the machine is 10 tons per hour and the production per month is about
90
1800 tons. The quantity produced is sold due to high demand in the market. Ratanpur
Steel Re-Rolling Mills(RSRM) is facing a number of problems in production:
Electricity Problem:
Electricity is one of the important items for production in the factory. As per
requirement Ratanpur Steel Re-Rolling Mills(RSRM) does not get supply of sufficient
electricity per day, which hampers the production process. Tom solve this problem
Ratanpur Steel Re-Rolling Mills(RSRM) has installed generator machine.
Import of Raw Materials:

For production raw material is most important element. Ratanpur Steel Re-
Rolling Mills(RSRM) mainly depends on imported raw materials. At the time of
import of clinker and Gypsum, sometimes it faces the problem of time gap, bank
credit and harassment in port.
Manpower Problem:
Manpower is very important for any production. Sometimes Ratanpur Steel
Re-Rolling Mills(RSRM) encounters the problem of lack of skilled worker in the
factory.
91

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Financial Structure of RSRM

1.2 Values and Purposes

1.3 Vision and Mission

Debenture, other obligations not due for one year.

2.2 Review of Literature

directly than previously suggested b) A firm’s use of debt is connected with

actual balance sheets of corporations do not represent independence between

2.3 Statement of the Problems

A further important issue of financial structure is working capital. A firm should

2.4 Objective of the Study

2.5 Scope of the Study

2.6 Methodology of the Study

The industrial tour is conclusive as well as descriptive in nature. Necessary statistical

 Making a formal questionnaire.

 Practical experience gained by studying & visiting.

2.7 Organization of the Study

The fourth chapter includes mode of financing of RSRM, valuation of capital

The fifth chapter includes identification of determinants of capital structure of RSRM.

2.8 Limitation of the Study

FINANCIAL POLICIES & PROGRAMS OF RSRM STEELS LTD.

 The perspective of the firm’s marginal investor

From a competitive perspective, the firm’s choice of capital structure must be

compared to those of the firm’s competitors to identify any potential advantages or

3.2 Financial Policies & Practices of RSRM Steels Ltd.

RSRM follows traditional approach for deciding capital structure. Traditional

According to this approach,

(1) An optimum capital structure does exist.

3.3 Financial Programs of RSRM Steels Ltd.

RSRM has the following financial programs

 It has borrowed from banks for raising fund.

WORKING CAPITAL MANAGEMENT

4.1 Introduction of working capital management

Management is a process of anticipating and preparing for risks, uncertainties and

Composition of working capital

Major Current Assets

Major Current Liabilities

4.2 Definition of working capital management:

In general, working capital management is concerned with the management of the

Broadly, working capital management is a short term financial management or is

4.3 Importance of working capital management:

To meet the current requirement of a business enterprise such as the purchases of

4.4 Theoretical Framework of W.K.M

Concept of working capital:

There are 2 concepts:

 Gross working capital

 Net working capital

Gross working capital:

It is referred as total current assets. Focuses on,

 Optimum investment in current assets: An excessive investment impairs

Net Working Capital: Net working capital can be defined in 2 ways,

 Difference between current assets and current liabilities

Net Working Capital = Current Assets – Current Liabilities

Implications of Net Working Capital:

For evaluating NWC position, an important consideration is trade off between

4.5 Planning of working capital:

 Investment in current asset represents a substantial portion of total investment.

4.6 Working capital cycle:

Injection Cash Cash

Goods & Payments-

 Conversion of cash into raw-materials(R);

Operating cycle for manufacturing firm:

( Sources: Modern W.K.M text by F.C. Scherr, Chap.1st, p-12)

Finished goods stock