Impact of Dividend Policy And Capital Structure Decision on Firm Value
Section I
Introduction
Business Finance is concerned with the determination of funds necessary for a firm, acquisition of the funds and utilization of the funds for achieving the goal of finance, which is maximizing firm value. And in order to do this, a finance manager must understand the impact of financial decisions on firm value so that he can make decisions that optimize the firm value.
Among all the decisions, a finance manager makes, dividend policy decision, and capital structure decision are perhaps the two most important decisions that affect the both the performance and image of a firm. So, in current dynamic business world, it has become increasingly important to understand the impact of dividend policy decision and capital structure decision on firm value.
Pharmaceuticals industry is one of the fast growing industries of Bangladesh. And Renata limited is one of the major competing companies in this sector. As instructed by our course teacher, in this report we have tried to identify the impact of dividend policy decision and capital structure decision of the company on its value. In addition, we have tried to find out the changes in firm’s value and risk due to changes in these decisions. Finally, we have tried to determine the impact of these decisions on the future performance of the company.
Objectives
The objectives of this report is to
 Determine the dividend policy of the Renata limited
 Determine the value of the firm
 Determine the capital structure of Renata limited
 Estimate cost of financial distress
 Determine whether capital structure decisions has any impact on firm value
 Match our results with expectations and draw conclusions
Methodology
Data collection: For preparing this report, we have collected data from the following sources:
 Primary data: we have collected several primary data on the company as well as the pharmaceuticals industry from the management of the company.
 Secondary data: the secondary data sources were
 Annual reports: from the company.
 Interest rate & other information: Dhaka stock exchange and daily newspapers.
Techniques applied: the techniques we applied to prepare this report are
 Dividend policy: trend analysis
 Possibility of financial distress: Altman’s zscore
 Firm value: market capitalization, Growth analysis
 Ratio analysis and other financial & statistical techniques
 Graphical methods
Scope and Limitations
Our study covers financial information of Renata limited from year 1996 to year 2004 (9 years).
However, we faced some limitations in preparing this report. These are
v Unavailability of financial information on market price for year 1996 and 1997
v Inadequate disclosures on certain items of financial statements
v Time limitations
v Lack of statistical knowledge etc.
Despite these limitations, we tried to make the report a good one and we would be gratified if this report serves its purpose.
Section IICompany Profile
Overview of the Renata limited
Company Background:
The firm was incorporated in 1972 as Pfizer laboratories (Bangladesh) limited, subsidiary of Pfizer corporations, USA. Later, in1993 the company was renamed as Renata limited after divestment of shareholdings of Pfizer corporations, USA. Since its establishment, it has been one of the leading companies in pharmaceuticals. Although it lost some market share due to heavy competition in 19982001 periods, it has been able to recover from it and now is experiencing a high growth in business. Because of its good performance, it has already achieved top position in animal health products and is competing with the market leaders in pharmaceuticals products.
Business pattern:

The company operates it’s business in Pharmaceutical, Animal Health Products, Nutritionals And Vaccines 

Renata limited manufactures Oral Saline For BRAC And Social Marketing Company (SMC) 

Renata achieved trademark assignment From Pfizer and Hoechst with manufacturing technology 

Renata’s 10 products have been licensed to m/s. DeuraliJanata pharmaceuticals pvt. Ltd., Nepal for manufacture, marketing, and distribution in Nepal. Renata limited is giving technical assistance for upgrading their manufacturing plant to WHO GMP standards. 

Renata’s Manufacturing plant received iso9001 certificate in 1999 

Renata possesses the marketing and distribution rights for the following products

BASF, Germany for animal health nutrition products  

Related parties & offices:
Corporate headquarters:
House No. 450, Road No. 31
New DOHS,
Mohakhali
Dhaka 1206
Factory:
Section7, Mirpur,
Dhaka1206
Bankers:
Agrani Bank, Dhaka
American Express Bank Ltd. Dhaka
Sonali Bank Dhaka
Standard Chartered Bank Ltd, Dhaka
The Hongkong And Shanghai Banking Corporation Ltd., Dhaka
Eastern Bank Ltd., Dhaka
Mutual Trust Bank Ltd., Dhaka
Citi Bank, N.A., Dhaka
Auditors
Rahman Rahman Huq, Chartered Accountants
Legal Advisor:
Dr. M. Zahir And Associates
Board of directors:
 S. H. Kabir Chairman
 Syed S. Kaiser Kabir Managing Director
 Dr. Sarwar Ali Director
 Sajida Humayun Kabir Director
 Md. Ziaul Haque Khondker Director
 A. Hasanat Khan Director
Ownership pattern:
Although Renata limited is a public limited company, most of its shares (approximately 76%) are held by two shareholders; namely Sajida foundation and International Business Research Corp. Inc. so the company is closely held in private hands.
The ownership pattern of the company can better be understood from the following information:
Majority shareholders:
% Of total shareholdings 

1997  1998  1999  2000  2001  2002  2003  2004  
Sajida foundation  51.00  51.00  51.00  51.00  51.00  51.00  51.00  51.00 
Business research international corp. inc.  25.33  25.33  25.33  25.33  25.33  25.33  25.33  25.33 
ICB unit fund  13.02  12.51  12.29  12.17  12.16  11.05  8.29  8.90 
First ICB mutual fund  0.71  0.71  0.71  0.71  0.71  0.71  0.71  0.71 
Shadharan Bima corporation  4.38  4.38  4.38  4.38  4.38  4.38  4.37  4.37 
Other local shareholders  5.56  6.08  6.29  6.42  6.42  7.53  10.30  9.69 
Total  100.00  100.00  100.00  100.00  100.00  100.00  100.00  100.00 
Figure 1 Distribution of shareholdings in Renata limited
Subsidiaries:
Though the firm was established as a subsidiary to Pfizer Corporation, after being renamed, it was operating as a single firm. But after attaining a significant growth in year 2002,2003, and 2004, the company looked forward to diversifying, and with this view, has established two subsidiary companies in 20032004, namely Renata agro limited and Purnava limited.
Business capital:
The business capital of Renata pharmaceuticals were as follows
Year

Authorized capital

Issued, subscribed & paid up 
Net working capital

Mid and long term loans

Retained earnings (Unappropriated profit) 
Total (in Tk.) 

Shares issued for cash  Shares issued for other consideration  Issued as fully paid Bonus share  
1996 
100,000,000 
12,942,600 
17,244,900 
12,075,000 
50,020,549 
0 
10,179,931 
102,462,980 
1997 
100,000,000 
12,942,600 
17,244,900 
12,075,000 
58,660,015 
0 
28,376,419 
129,298,934 
1998 
100,000,000 
12,942,600 
17,244,900 
16,301,200 
52,508,432 
0 
28,443,550 
127,440,682 
1999 
100,000,000 
12,942,600 
17,244,900 
16,301,200 
65,034,178 
0 
39,571,674 
151,094,552 
2000 
100,000,000 
12,942,600 
17,244,900 
16,301,200 
73,812,760 
0 
59,117,419 
179,418,879 
2001 
100,000,000 
12,942,600 
17,244,900 
16,301,200 
118,823,883 
0 
120,505,000 
285,817,583 
2002 
100,000,000 
12,942,600 
17,244,900 
16,301,200 
167,538,678 
17,500,008 
152,689,300 
384,216,686 
2003 
100,000,000 
12,942,600 
17,244,900 
16,301,200 
168,945,660 
7,500,008 
216,735,815 
439,670,183 
2004 
100,000,000 
12,942,600 
17,244,900 
25,598,900 
216,018,791 
0 
313,458,030 
585,263,221 
Section IIICompany Policies
Capital structure
Capital structure refers to the longterm asset mix of the firm, i.e. the mix of equity capital and debt capital. It shows the longterm sources of funds for the firm and is one of the major concerns of the finance manager.
And the capital structure of Renata pharmaceuticals is as follows
Capital Structure 
Position 

Year  Long Term Liability  Equity  Equity %  Debt %  
1996 
0 
276218829 
100% 
0% 
UNLEVERED 
1997 
0 
285962817 
100% 
0% 
UNLEVERED 
1998 
0 
295619287 
100% 
0% 
UNLEVERED 
1999 
0 
307678722 
100% 
0% 
UNLEVERED 
2000 
0 
331292043 
100% 
0% 
UNLEVERED 
2001 
0 
397851819 
100% 
0% 
UNLEVERED 
2002 
17500008 
446535829 
96.23% 
3.77% 
LEVERED 
2003 
7500008 
467671954 
98.42% 
1.58% 
LEVERED 
2004 
0 
581841450 
100% 
0% 
UNLEVERED 
Figure 2 CAPITAL STRUCTURE OF RENATA LIMITED
Dividend policy
Dividend means any distribution of the earnings of the firm to its stockholders that result in a cash inflow to the investors. Dividend can be of many forms; i.e. cash dividend, liquidating dividend, stock dividend etc.
Dividend policy refers to making decisions on whether to pay dividend or to retain earnings and if pay dividend, then the amount and timing of dividend. Since dividend represents a cash flow to the shareholders from the firm, the manager have to pay careful attention to this policy.
Usually profitable and high growth firms pay less dividend as they have to retain earnings for investing in growth opportunities. But contrary to that, Renata limited have been paying quite high rate of dividend although enjoying a high growth. The historical dividend pattern of the firm is as follows
Dividend pattern of Renata limited 

Year 
1996 
1997 
1998 
1999 
2000 
2001 
2002 
2003 
2004 
Cash Dividend Total Tk. 
0 
8,452,500 
11,622,175 
11,622,175 
13,946,610 
18,595,480 
23,244,350 
23,244,350 
27,893,200 
Stock Dividend Total Tk. 
0 
0 
0 
0 
0 
0 
0 
9,297,740 
11,157,300 
Total Dividend Total Tk. 
0 
8,452,500 
11,622,175 
11,622,175 
13,946,610 
18,595,480 
23,244,350 
32,542,090 
39,050,500 
Cash Dividend Per Share 
0 
20 
25 
25 
30 
40 
50 
50 
50 
Stock Dividend Per Share 
0 
0 
0 
0 
0 
0 
0 
20 
20 
Total Dividend Per Share 
0 
20 
25 
25 
30 
40 
50 
70 
70 
The dividend pattern of the company can be better understood form the following charts:
Figure 3 CASH AND STOCK DIVIDEND OF RENATA LIMITED (PER SHARE)
Figure 4 TOTAL DIVIDEND PAYMENTS BY RENATA LIMITED (PER SHARE)
Market capitalization
Market capitalization refers to the market value of total outstanding shares of a firm. It is calculated by multiplying share price with number of outstanding shares. Since share price is the indicator of performance of a company, market capitalization is very important in determining the value of the firm.
The historical market capitalization of Renata limited is as follows
Market capitalization 

Year 
1996 
1997 
1998 
1999 
2000 
2001 
2002 
2003 
2004 
Share Capital  
Authorized 
100000 
100000 
100000 
100000 
100000 
100000 
100000 
100000 
100000 
Issued, Subscribed & Paid Up 
422625 
422625 
464887 
464887 
464887 
464887 
464887 
464887 
557864 
Market Price 
Not Found 
Not Found 
375 
435 
431.5 
615.25 
650.00 
1,216.00 
3,200.00 
Market Capitalization 
174,332,625 
202,225,845 
200,598,741 
286,021,727 
302,176,550 
565,302,592 
1,785,164,800 

Changes In Value 
16.00% 
0.80% 
42.58% 
5.65% 
87.08% 
215.79% 

Growth Rate 
59.24% 
Acceleration Rate 
28.45% 
Figure 5 historical market capitalizations
Debt financing & Financial risk
From our study of the firm, we have found that the company has enjoyed significant growth and its profitability is quite good. Since profitable firms use less debt as they have greater internal financing, we expect the firm to use less debt in its capital structure. Again, since growth offsets the tax advantage of debt, this also strengthens the argument for using less debt financing. As a result, we see that the firm stayed UNLEVERED for years 19972001 and 2004. And in 2003 and 2002, when the company changed its capital structure from Unlevered to Levered the amount of debts was very small in relation to equity.
However, we have found that the company depends quite heavily on shortterm debts for operations. And since debt create financial risk, it is important to identify the level of financial risk of the company as these plays an important role on value of the firm.
Here for determining financial risk level of Renata limited, we are using Altman’s zscore model that provides an index of possibility of bankruptcy. Since Renata is a manufacturing company, the appropriate formula for determining the zscore will be
Zscore = 3.3*(EBIT/Total assets)+1.2*(Net working capital/Total assets) + 1.0*(Sales/Total assets) +0.6*(Market value of equity/Book value of debt) +1.4*(Accumulated retained earnings/Total assets)
Using this formula, the zscore for Renata limited is determined below
year  EBIT  total assets  net working capital  turnover  market value of equity  book value of debt  accumulated retained earnings  Altman’s zscore 
1998 
14922309 
518380614 
52805432 
530303730 
174332625 
222761327 
28443550 
1.79 
1999 
18910705 
560274106 
65034178 
580764244 
202225845 
252595384 
39571674 
1.87 
2000 
41263182 
626483232 
73812760 
663641921 
200598741 
295191189 
59117419 
1.96 
2001 
92781312 
730818054 
118823883 
822795535 
286021727 
332966235 
120505565 
2.49 
2002 
77043909 
746465939 
167538678 
911593846 
302176550 
299930110 
152689300 
2.72 
2003 
131235497 
862709160 
168945660 
1110041348 
565302592 
395037206 
216734815 
3.23 
2004 
183707312 
1049725014 
216018791 
1351797184 
1785164800 
467883564 
313458030 
4.82 
Decision:
 if zscore is more than 2.99, it predicts no bankruptcy.
 if zscore is between 1.23 and 2.99, it states that the firm possesses some possibility of being bankrupt.
 if zscore is less than 1.23, it predicts a certain bankruptcy.
Our conclusion: here the zscore of the firm has always been greater than 1.23 and increased over the years and finally have surpassed the 2.99 level. So, we can say that the firm has improved its position and has reduced costs of financial distress over the years.
Renata Limited: Ratio Analysis
Calculation of ratios
Year  Net profit ratio  ROA  Roe  PE ratio  EPS  Debt equity ratio  Times interest earned  Assets turnover ratio  Sponsor shareholding ratio 
1996 
0.069 
0 
0 

1997 
0.041 
0 
0 

1998 
0.066 
0.067 
0.118 
8.193 
0.458 
0 
1.490 
1.023 
0.51 
1999 
0.064 
0.067 
0.122 
8.539 
0.509 
0 
1.043 
1.037 
0.51 
2000 
0.084 
0.089 
0.168 
5.341 
0.808 
0 
2.932 
1.059 
0.51 
2001 
0.129 
0.145 
0.266 
4.124 
1.492 
0 
3.484 
1.126 
0.51 
2002 
0.104 
0.127 
0.212 
4.164 
1.561 
0.058 
3.200 
1.221 
0.51 
2003 
0.136 
0.174 
0.322 
5.355 
2.271 
0.013 
5.749 
1.287 
0.51 
2004 
0.154 
0.198 
0.358 
12.270 
2.608 
0 
3.976 
1.288 
0.51 
Interpretations:
Net profit ratio: the net profit ratio shows the proportion of sales revenue that the company earns as net profit. The more the profit is the better is the company’s profitability and efficiency. Although the pharmaceuticals industry is enjoying a high growth, it also observes a hard competition among companies. As a result, much of the company’s earnings are spent for marketing purposes. Keeping this point in mind, we find the company in quite a profitable position.
 Return on equity: it shows the percentage of return shareholders gets for each Tk. of earnings. Here the ratio shows that the company is improving its position year by year and the shareholders are expected to get more in the coming years
 EPS ratio: the EPS ratio states the per share earnings to an investor. The greater the ratio is, the better will be the company’s position. Here we see that the company has increased its EPS ratio from 45.80% in 1998 to 260.8% in 2004. So the firm has maximized its value over the years
 PE ratio: it shows by how many times price of the shares exceeds earnings per share. The greater the ratio the better the company’s financial position. Due to market changes the ratio of the company dropped to near, 4 during 2002 but the company regained and improved it ratio during 2004.
 Debt equity ratio: it shows the financial structure of the company Here the company’s ratio shows that the company stayed UNLEVERED for years 19962001 and year 2004. And in 20022003, the company’s total debt is very small than total equity. So, the company can use its borrowing capacity for further expansion and thus try to maximize firm value.
 Times interest earned: it shows the company’s ability to meet interest payments. And Renata’s TIE ratio states that the company now generates enough money to cover interest payments and indicates the firm’s ability to bear more debt.
 Return on assets (ROA): it shows how much the investor of the company is earning as return from investing on firm’s assets. This ratio is of particular interest to stakeholders in determining value of the firm. And the company’s ROA is fair in relation to the industry.
 Assets turnover ratio: this states whether the company is earning enough to justify its assets. And from the ratio of Renata limited, we conclude that the company is earning enough to justify their assets.
 Sponsor shareholding ratio; it shows the proportion of shares held by the sponsor. This is used to indicate the controlling position of the sponsors. If this ratio is more than needed to control the firm, it provides an indication of less agency costs. Here, the ratio for Renata limited is 51%, which indicates that the sponsors are controlling the firm activities, which in turn, asserts less agency costs to the company.
Firm value
According to the pie model, firm’s value = value of shares + value of debt + tax + cost of financial distress.
Using this model, the value of Renata limited is determined below
Calculation of Firm value  
Year  Stock  Debt  Tax  Cfd  Value 
1998 
174,332,625 
0 
13,600,000 
0 
187932625 
1999 
202,225,845 
0 
13,763,000 
0 
215988845 
2000 
200,598,741 
0 
18,250,000 
0 
218848741 
2001 
286,021,727 
0 
36,499,324 
0 
322521051 
2002 
302,176,550 
17,500,008 
22,029,962 
341709.937 
341709937 
2003 
565,302,592 
7,500,008 
44,873,677 
617682.454 
617682454 
2004 
1,785,164,800 
0 
62,820,892 
0 
1847985692 
Firm value components
Firm value components (%)  
year  stock  debt  tax  cfd 
1998 
92.8% 
0.0% 
7.2% 
0.0% 
1999 
93.6% 
0.0% 
6.4% 
0.0% 
2000 
91.7% 
0.0% 
8.3% 
0.0% 
2001 
88.7% 
0.0% 
11.3% 
0.0% 
2002 
88.4% 
5.1% 
6.4% 
0.1% 
2003 
91.5% 
1.2% 
7.3% 
0.1% 
2004 
96.6% 
0.0% 
3.4% 
0.0% 
Figure 6 COMPONENTS OF VALUE OF RENATA LIMITED
Section IVCapital Structure & Value
Impact of capital structure on firm value
As we have mentioned previously, a finance manager must know whether the financial decisions are affecting firm value and if do, to what extent in order to achieve the goal of the firm. And among the finance decisions, capital structure decision is one of the most important decisions.
Now, since firm’s size may vary in periods, it would be inappropriate to determine impact of capital structure decision considering financing components in absolute terms. So we are using debt equity ratio, times interest earned ratio and asset turnover ratio for this purpose, since they reflect capital structure and its impacts.
Again, there are several parties related to a firm and they value the firm from different viewpoints. For example, while managers view the firm’s value in terms of profitability, the shareholders may value the firm in terms of returns on equity. For these differences, we are using net profit ratio, return on assets ratio, return on equity ratio and price earnings ratio to represent firm value from various viewpoints. Finally, with the help of regression analysis, we are trying to figure out whether there is a RELATIONSHIP between ratios representing capital structure decision and ratios representing firm value to assess whether the value of the firm is affected by capital structure decisions.
Required information are given below:
Year 
Debt Equity Ratio 
Times Interest Earned 
Assets Turnover Ratio 
Net Profit Ratio 
ROA 
ROE 
PE RATIO 
1998 
0.0000 
1.4896 
1.0230 
0.0658 
0.0673 
0.1180 
8.1931 
1999 
0.0000 
1.0433 
1.0366 
0.0645 
0.0668 
0.1217 
8.5395 
2000 
0.0000 
2.9320 
1.0593 
0.0841 
0.0891 
0.1685 
5.3410 
2001 
0.0000 
3.4841 
1.1259 
0.1286 
0.1448 
0.2660 
4.1245 
2002 
0.0579 
3.1998 
1.2212 
0.1038 
0.1267 
0.2118 
4.1643 
2003 
0.0133 
5.7492 
1.2867 
0.1355 
0.1744 
0.3217 
5.3552 
2004 
0.0000 
3.9756 
1.2878 
0.1541 
0.1984 
0.3580 
12.2704 
Using these information, we get the following results
Regression Result 

Coefficients 
F Statistic 
Significance 

Intercept (a) 
Debt Equity Ratio (b_{1}) 
Times Interest Earned Ratio (b_{2}) 
Assets Turnover Ratio (b_{3}) 

Net Profit Ratio (Y_{1}) 
0.19784 
0.52123 
0.002935 
0.261542 
8.139985 
0.059379381 
ROA (Y_{2}) 
0.37491 
0.6937 
0.002151 
0.435384 
17.76649 
0.020545039 
ROE (Y_{3}) 
0.63953 
1.56515 
0.007015 
0.748875 
20.54041 
0.016742682 
P E Ratio (Y_{4}) 
26.5478 
98.4223 
1.45338 
33.36757 
2.519987 
0.233897101 
Result of regressions:
Regression of net profit ratio on debt equity ratio, times interest earned & assets turnover ratio.
Regression equation:
Y_{1} = a + b_{1}X_{1} + b_{2}X_{2} + b_{3}X_{3}
= 0.1978 – 0.5212 X_{1}+0.0029X_{2}+0.2615X_{3}
Here Y_{1} = net profit ratio (NP ratio)
a = constant
X_{1}= debt equity ratio (DE ratio)
X_{2}= times interest earned ratio (TIE ratio)
X_{3} = assets turnover ratio (AT ratio)
b_{1} = coefficient of DE ratio
b_{2} = coefficient of TIE ratio
b_{3} = coefficient of AT ratio
Here b_{1} = 0.5212 implies that, for 1 % change in debt equity ratio, net profit ratio will change inversely by 0.5212%.
b_{2} = 0.0029 implies that for 1% change in TIE ratio, net profit ratio will change by 0.0029%
b_{3} = 0.2615 implies that for 1% change in AT ratio, net profit ratio will change by 0.2615%
Here, The F statistic for regression of net profit ratio on DE ratio, TIE ratio and AT ratio is 8.139985. And the significance of F statistic is 0.059379, which is more than 5% significance level. Therefore, the results from regression model are not statistically significant. Therefore, we can conclude that the net profit ratio of Renata limited is not significantly influenced by DE ratio, TIE ratio and AT ratio. So, profitability of the firm is not affected by the mentioned ratios.
Regression of return on assets ratio on debt equity ratio, times interest earned & assets turnover ratio.
Regression equation:
Y_{2} = a + b_{1}X_{1} + b_{2}X_{2} + b_{3}X_{3}
= 0.3749 0.6937X1+0.0022X2+ 0.4354X3
Here Y_{2} = return on assets ratio (ROA ratio)
a = constant
X_{1}= debt equity ratio (DE ratio)
X_{2}= times interest earned ratio (TIE ratio)
X_{3} = assets turnover ratio (AT ratio)
b_{1} = coefficient of DE ratio
b_{2} = coefficient of TIE ratio
b_{3} = coefficient of AT ratio
Here b_{1} = 0.6937 implies that, for 1 % change in debt equity ratio, ROA ratio will change inversely by 0.6937%.
b_{2} = 0.0022 implies that for 1% change in TIE ratio, ROA ratio will change by 0.0022%
b_{3} = 0.4354 implies that for 1% change in AT ratio, ROA ratio will change by 0.4354%
The F statistic for regression of ROA ratio on DE ratio, TIE ratio and AT ratio is 17.76649. And the significance of F statistic is 0.020545, which is less than 5% significance level. Therefore, the results from regression model are statistically significant. Therefore, we can conclude that the Return on assets of Renata limited is significantly influenced by DE ratio, TIE ratio and AT ratio. Thus, return on assets is influenced by the abovementioned ratios.
Regression of return on equity ratio on debt equity ratio, times interest earned & assets turnover ratio.
Regression equation:
Y_{3} = a + b_{1}X_{1} + b_{2}X_{2} + b_{3}X_{3}
= 0.6395 1.5652X1+0.0070X2+0.7489X3
Here Y_{3} = return on equity ratio (ROE ratio)
a = constant
X_{1}= debt equity ratio (DE ratio)
X_{2}= times interest earned ratio (TIE ratio)
X_{3} = assets turnover ratio (AT ratio)
b_{1} = coefficient of DE ratio
b_{2} = coefficient of TIE ratio
b_{3} = coefficient of AT ratio
Here b_{1} = 1.5652 implies that, for 1 % change in debt equity ratio, ROE ratio will change inversely by 1.5652%.
b_{2} = 0.0070 implies that for 1% change in TIE ratio, ROE ratio will change by 0.0070%
b_{3} = 0.7489 implies that for 1% change in AT ratio, ROE ratio will change by 0.7489%
The F statistic for regression of ROE ratio on DE ratio, TIE ratio and AT ratio is 20.54041. And the significance of F statistic is 0.016743, which is less than 5% significance level. Therefore, the results from regression model are statistically significant. Therefore, we can conclude that the Return on equity of Renata limited is significantly influenced by DE ratio, TIE ratio and AT ratio. Thus, return on equity is influenced by the abovementioned ratios.
Regression of price earning ratio on debt equity ratio, times interest earned & assets turnover ratio.
Regression equation:
Y_{4} = a + b_{1}X_{1} + b_{2}X_{2} + b_{3}X_{3}
= 26.5478 98.4223X1 1.4534X2 +33.3676X3
Here Y_{4} = price earning ratio (PE ratio)
a = constant
X_{1}= debt equity ratio (DE ratio)
X_{2}= times interest earned ratio (TIE ratio)
X_{3} = assets turnover ratio (AT ratio)
b_{1} = coefficient of DE ratio
b_{2} = coefficient of TIE ratio
b_{3} = coefficient of AT ratio.
Here b_{1} = 98.4223 implies that, for 1 % change in debt equity ratio, PE ratio will change inversely by 98.4223%.
b_{2} = 1.4534 implies that for 1% change in TIE ratio, P E ratio will change inversely by 1.4534%
b_{3} = 33.3676 implies that for 1% change in AT ratio, P E ratio will change by 33.3676%
The F statistic for regression of PE ratio on DE ratio, TIE ratio and AT ratio is 2.519987. And the significance of F statistic is 0.233897, which is more than 5% significance level. Therefore, the results from regression model are statistically not significant. Therefore, we can conclude that the PE ratio of Renata limited is not significantly influenced by DE ratio, TIE ratio and AT ratio. And since PE ratio reflects the value of the firm we can say that the value of Renata limited is not significantly influenced by the capital structure decision of the firm.
Findings:
From the above calculations, we have the following findings
i. The capital structure decision of Renata limited has no significant impact on its profitability.
ii. Return on assets is significantly influenced by capital structure decisions. So, capital structure decisions are important to its stakeholders in determining value of the firm in terms of returns on assets.
iii. Capital structure decision has significant impact on return on equity. So, from the viewpoint of equity holders, capital structure decision affects firm value
iv. The price earnings ratio is not significantly affected by capital structure decisions. So, capital structure decisions have very little or insignificant influence on firm value, from the market perspective.
Our over view
In current business world, it is important to decide about a firm’s capital structure and dividend policy in order to achieve the goal of finance. And in case of making financial decisions, we must consider the possible impacts of these decisions on firm value.
Here we have tried to determine several financial aspects of Renata limited. We have also tried to focus on the impacts of financial decisions on firm value. As we have seen from our studies, the firm’s future prospect is quite bright as it enjoys good profitability and a high growth. Its market capitalization is growing @ 59.24% with an acceleration rate of 28.45%. besides, as it is a high growth profitable firm, we found that the firm uses very low level of debt occasionally. Again, due to efficient management of the company, its cost of financial distress is also less. Finally, through several analysis, we have found that the value of the firm is affected by its capital structure decision from the perspective of stakeholders but its profitability is not affected by such decisions.
So, we can say that the capital structure decision of Renata limited has a significant impact on the value of the firm.
Bibliography
 Ross, Westerfield, And Jaffe. “Corporate Finance”, 7^{th} Edition,, P845846.
 Gitman, “Managerial Finance”.
 Weygandt, Kieso, Kimmel, “Accounting Principles”, 6^{th} Edition, P779.
 Arens & Loebbecke, “Auditing: An Integrated Approach”,7^{th} Edition, P198202.
Glossary
 Business capital: business capital refers the amount of capital that a firm uses to conduct business. Usually it consists of paid up capital, net working capital, retained earnings, mid & short term loans and paid up preferred capital.
 Capital structure: the longterm assets mix of a firm, i.e. the mix of equity and debt capital.
 Dividend: any type of earnings distribution to shareholders that result in additional cash flow to shareholders.
 Market capitalization: total market price of outstanding shares
 Unlevered firm: firm that uses no debt capital.
 Levered firm: firm that uses debt in it’s capital structure
 Financial risk: risk of becoming unable to meet debt obligations.
 Costs of financial distress: risk of having financial distress due to debt financing
 Net profit ratio: net profit / turnover
 ROA : turnover/ total assets
 ROE: turnover / total equity
 EPS: earnings to shareholders / number of outstanding share
 PE ratio: price per share / earnings per share