CHAPTER-I

INTRODUCTION

1.1 ​Background of the study

Capital is an important and critical resource for all companies. The capital resources can be
divided into two main categories, namely equity and debt. Equity arises when companies sell
some of its ownership rights to gain funds for operation and investing activities. Debt is a
contractual agreement, whereby companies borrow an amount of money and repay it with
interest within a stimulated time frame. There are many definitions given to capital structure
of companies. Brealey and Myers (1991) defined capital structure as comprising of debt,
equity or hybrid securities issued by the firm. Schlosser (1989) defined capital structure as
the proportion of debt to the total capital of the firms. Haugen and Senbet (1988) defined
capital structure as a choice of firms between internal and external financial instruments. Bos
and Fetherston (1993) pointed out that capital structure, being total debt to total asset at book
value, influences both profitability and riskiness of the firm. From the definitions given by
many previous researchers, capital structure can be referred to as “the mixture of sources of
funds a firm uses” (debt, preferred shares, and ordinary shares). The amount of debt that a
firm uses to finance its assets is called leverage​. A firm with a lot of debt in its capital
structure is said to be highly levered. A firm with no debt is said to be unlevered. When
financial leverage increases, it may bring better returns to some existing shareholders but its
risk also increases as it causes financial distress and agency costs (Jensen and Meckling,
1976). The cost of financial distress can be both direct and indirect. The bankruptcy cost is
an example of direct financial distress cost while extraordinary 2 administrative costs, loss of
trade credit, loss of sales and key personnel are examples of indirect financial distress costs.
Therefore, optimal capital structure is determined by the trade-off between benefits and costs
of debt financing. The benefits are typically tax savings and the costs are financial distress
and agency costs (Titman and Tsyplakov, 2004). An appropriate capital structure is a critical
decision for any business organization. The decision is important not only because of the
need to maximize returns to the shareholders, but it is also important because of the impact of
such decision on an organization’s ability to deal with its competitive environment (Simerly
and Li, 2002). Over the past several decades, theories on a firm’s capital structure choice
have evolved along many directions, with many models being built to explain a firm’s
financing behavior. The theories suggest that firms select capital structure depending on
attributes that determine the various costs and benefits associated with debt and equity
financing. Prior to 1958, the traditional capital structure theory ( the Naïve Theory ) was
based on the idea of weighted average cost of capital (WACC) principle, which states that
companies issue debt in order to reduce their WACC as debt is considered less costly than
equity (Prace, 2004). The modern capital structure theory was later developed since the
publication of capital structure irrelevancy framework by Modigliani and Miller1 (American
Economic Review, 1958). They argued that a firm couldn’t change the value of its
outstanding securities by changing the proportions of its capital structure. Modigliani and
Miller concluded that in a world without taxes, the value of the firm and also its overall costs
of capital were independent of its choice of capital structure. A later study in 1963 by MM
concluded that by incorporating corporate tax, the market value of a firm is increased and the
overall cost of capital is reduced to the point of interest being tax deductible.
1“Capital structure is the composition of the debt and equity security and is considered as
financing decision undertaking by the financial manager. The financial manager must strive
to obtain the best financing mix or optimum capital structure for his\her firm. The firm
attains capital structure where the debt equity proposition maximizes the market value of the
shares. The uses of debt affect the return and risk of the equity shareholders. It increases the
return on equity fund and at the same time it also increases risk. A proper balance must be
strike between the risk and return in order to maximize.
A firm’s total assets are financed from equity and debt. Equity capital is owners’ money and
consists of common stock, paid in capital and retained earningss. Debt is borrows money and
can be classified as short-term debt and long-term debt. thus, liabilities and equity section of
balance sheet is composed of short-term debt ,long-term debt and equity. The composition of
short-term debt, long term debt and equity is called financial structure. In other words, the
financial structure is the mix of short-term debt, long-term debt, preferred stock and common
equity. Thus, it consists of the entire tems in liabilities and equity side of balance sheet of a
firm.

The term capital structure is used to refer the mix of long-term source of capital. Long-term
debt and equity capital are the long-term source of capital. In other words, capital structure is
the composition of long term sources of financing. We can for the explanation, the concept of
financial structure and capital structure of a firm from the balance sheet of a hypothetical
firm.

Origin and Evaluation of Banks:

The term bank derives from the Italian World Bank refers to the bench on which the banker
would keep its money for lending and exchanging. Some person tract its or origin from the
Latin word Bancus which refers to the bench on which the banker would keep its money and
his record it is believed that the ancestors of modern banking system were merchants
goldsmiths and money lenders. Modern banking showed its seed in the medieval Italy despite
strong Christian prohibitions against charging interest. The first bans called the bank of
Venice were established in Venice Italiyan 1157 A.D to finance bank of Genoa was establish
in 1401 and 1408 respectively. After that bank of Amsterdam was established in 1609A.D
when the bank of England was established in 1940 it played the vital role for the
development of modern banking.
Banking History of Nepal

On the modern time bank is one of the important financial institution dealing with money
credit and financial assets. In other words, it is an institution which deals with money by
accepting various types of deposit from the depositor under various deposit schemes thereby
allowing interest on them and also lending loans as mortgage to deficit unit for productive
use by charging interest bank accepts various types of deposits from depositor which are
repayable on demand on the short notice. Thus it helps in Mobilization of cash from saver
groups to user groups (Rana,2009)

According to (Basnet,2007), The initiation of formal banking system in Nepal commenced

with the establishment in 1937 of Nepal Bank Limited (NBL), the first Nepalese commercial
Bank. The county's central bank, Nepal Rastra Bank(NRB) was established in 1956 by Act of
1955, after nearly two decades of NBL having been in existence. A decade after the
establishment of NRB, Rastriya Banijya Bank(RBB), a commercial bank under the
(HMG/N) was established. Thereafter, HMG/N adopted open and liberalized policies in the
mid-1980s reflected by the structural adjustment process, which included privatization, tariff
adjustments, liberalization of industrial licensing, easing of terms of foreign investment and
more liberal trade and foreign development of the domestic financial system both in terms of
number of financial institutions reached 17 and their branches numbered 375. A total of 60
finance companies and other Development Banks and numerous credit cooperatives have
also been established. Total financial assets in 2004/2005 reached around 54.09 percent of
GDP and the M2/GDP ratio, which shows the financial sector development of financial
deepening increased from in 12.4 percent in 1975 to 50.9 percent in 2000.

In the context of banking development, the 1980s saw a major structural change in financial
sector policies, regulations and institutional developments. HMG/N emphasized the role of
the private sector for the investment in the financial sector. The financial sector
liberalization, started already in the early eighties with the liberalization of the interest rates,
encompassed further deregulation of interest rates, relaxation of entry barriers for domestic
and foreign banks, their portfolio management. These policies opened the doors for
foreigners to enter into banking sector under joint venture. Consequently, the third
commercial bank in Nepal, or the first foreign joint venture bank, was set up as Nepal Arab
Bank Ltd (now called as NAMIL Bank Ltd.)in 1984.
Growth of Banks

According to (Sapkota, 2012), As Nepalese financial sector expanded, financial institutions

felt a need to differentiate form each other. As a result, the degree of homogeneity in the
market gradually declined. The expansion of financial market can be credited to some major
communication and computation, as well as the cost of acquiring, processing, and storing
information. Deregulation has removed artificial barriers preventing entry of competition
between products, institutions, markets and jurisdictions. Finally, the as the banking sector
expanded and new avenues opened up in the financial market, there was rapid credit growth
especially from the year 2006-07 to 2009-10. It is no coincidence that the increase in number
of financial institutions such as development banks and finance companies occurred at the
same time as the increase in credit. Large number of banks popped in the later years to
complete for the rising amount of remittance flowing to the country. As the income flowing
from outside the country increased, the financial sector opened up to new levels to exploit the
money and make profits.

Concept of Commercial Banks in Nepal

The commercial banks are those banks, which are established to accept deposits and grant
loan to the industries, individual and traders with a view to earn profit. Apart from financing,
they also render services like collection of bills and cheques, safekeeping of valuables,
financial advising etc. to their cistomers. Although bank can be categorized into different
types on the on the basis of its functions of commercial bank all over the world are same of
Basic functions are various types of deposits facility namely currently saving and fixed safety
of public money remittance of money guarantee locker facilities letter of credit loans serving
as agent of credit foreign exchange etc.(Sapkota, 2012)

The commercial banks of Nepal also do all these functions. Mainstream function of
commercial bank remains the mobilization rigid and scattered saving of public for providing
credit to needy firm industry of people to get productive use. All other function can be said
as auxiliary function. Commercial banks is a profit oriented financial service institution
certain of the interest is given to the deposits and certain rate of interest is charge by the bank
in the loan facility. The second charge interest rate is higher than the first . It is the main
earnings of the bank.(The project report for college 2011).

According to Nepal company act 2031 BS A commercial bank refers to such

type of bank which deal in money exchange accepting deposit advance loan and commercial
transaction expect specific banking related to co-operative agriculture industry and other.

Profile of sample organization.

NIC ASIA BANK LTD.

NIC ASIA Bank has its antecedents in NIC Bank which was established on 21​st July 1998.
The Bank was rechristened as NIC ASIA Bank after the merger of NIC Bank with Bank of
Asia Nepal on 30​th June 2013. This was a historic merger in the annals of Nepalese financial
landscape as the first of its kind merger between two successful commercial banks in the
country. Today, NIC ASIA has established itself as one of the most successful commercial
banks in Nepal. During the post-merger integration phase, NIC ASIA managed the transition
very smoothly receiving accolades from the regulators as well as the stakeholders, paving the
way for other mergers and consolidation in the Nepalese financial sector. After the merger,
NIC ASIA was recognized as ”​Bank of the Year 2013-Nepal” by The Banker, Financial
Times, UK. This is the second time that the Bank was recognized with this prestigious
award, the previous occasion being in 2007. NIC ASIA Bank is now, one of the largest
private sector commercial banks in the country in terms of capital base, balance-sheet size,
number of branches, ATM network and customer base. The Bank has 270 branches,
37 extension counters, 22 branch less banking and 289 ATMs across Nepal with a network
covering all major financial centers of the country. The Bank strongly believes in
Meritocracy, Transparency, Professionalism, Team spirit and Service Excellence. These core
values are internalized by all functions within the Bank and are reflected in all actions the
Bank takes during the course of its business.

NIC ASIA Capital Limited is a 100% subsidiary of NIC ASIA Bank Limited. NIC ASIA
Capital was incorporated under the Companies Act 2007 of Nepal and is licensed by the
Securities Board of Nepal to undertake Merchant Banking activities which includes services
like Issue Management and Underwriting, Registrar to Share, Depositary Participant and
Portfolio Management.

NIC ASIA Bank Limited, one of the parent company, is a "A" Class financial institution
licensed by Nepal Rastra Bank. NIC ASIA Bank is one of the largest private sector
commercial banks in the country in terms of capital base, balance-sheet size and number of
branches, ATM network and customer base. The Bank has more than 255 branches across
Nepal with a network covering all major financial centers of the country. The Bank has also
added a Microfinance Company, "NIC ASIA Microfinance" in its ecosystem. The Bank
strongly believes in meritocracy, transparency, professionalism, team spirit and service
excellence. These core values are internalized by all functions within the Bank and its
subsidiaries that include NIC Asia Capital Limited.

Board of Director

The Directors of NIC ASIA Capital have proven track record of providing clear strategic
direction and enabling precise implementation. Along with carrying the vision of the Bank
towards providing high-value, customer-centric Merchant Banking solutions, the Board also
exert high commitment towards integrity, transparency and security of customer information.
The Board of NIC ASIA Capital Ltd. seeks to drive solutions through well maintained
system that will not only differentiate NIC ASIA Capital but will also help to improve the
service standards of Merchant Banking Industry of Nepal as a whole.

The Board of NIC ASIA Capital comprises of the following directors:

 Mr. Bishal Sigdel Chairman

Mr. Dinesh Bhari Director

Mr. Bimal Lamsal Director

Mr. Suman Dangol, FCA Independent Director

Mr. Rabin Sapkota, FCA Independent Director

Mission and vision

Vision: ​" To become one of the leading Investment and Merchant Bank in Nepal."

Mission: ​" To provide innovative and best investment solution and excellent growth
opportunities as a good corporate.

1.2 Statement of the Problems

Financial institution and market are mostly affected by the globalization. NRB has recently
invited the International Wholesale Financial Service Provider from different part of the world to
install their branches in Nepal and this activity soon takes place after 2010 AD. By the same time
NRB has also promoted the policy of Bank Merging by which two or more banks of the country
unites so that they can reduce their overhead costs and other expenses and compete strongly with
such banks maintaining their status as before.

All the above contents explains here the importance of financial analysis. The uses of financial
ratios and their significant. The importance of this analysis is equally even from every aspect.
Shareholders analyze these statements to have information about the earning of the company,
 similarly stakeholder shows great concern about the overall strength and weakness of the firm.
Thus the whole study is a systematic analysis of these questions:

1. Is liquidity ratio has impact on profitability?

2. What is liquidity ratio?

3. What is profitability ratio?

4. What is debt management ratio?

5. What is the position of deposits and lending?

1.3 Objectives of the study.

The main objective of this study is to analyze the capital structure and its effects on the risk
and returns of the NIC ASIA Bank in the context of Nepal. The specific objectives are given
below:-
1. To measure the relationship between debt and equity capital of the NIC ASIA Bank.
2. To know the ideal capital structure for NIC ASIA Bank Ltd.
3. To know the impact of capital structure in its per share earnings.
1.4 Rationale of the study
The study has multidimensional significance which can be defined into four broader
heading.

▪ Its important to the shareholders: ​The study will helpful to aware the shareholders
regarding the financial performance of their banks.

▪ Its importance to the management: ​The study will helpful to go deep into the matters as to
why the performance of their banks is better than their competitor.

▪ Its importance to the policy makers: ​Policy makers have referred to the government and
Nepal Rastra Bank and management. The study will helpful to them while formulating the
policy regarding commercial banks.
 ▪ Its importance to outsiders: ​Among outsiders, mainly the customers, financing agencies,
stock exchange and stock traders are interested in the performance of banks and the
customers both can identity to which banks they could go. The financial agencies can
understand where the funds are more secured and stock exchanges, stock broker can find the
relative worth of stock of each bank.

1.5 Literature Review

This chapter deals with review of literature. Review of literature means reviewing research
studies or other relevant propositions in the related area of the study so that all the past
studies their conclusions and deficiencies may be known and further research can be
conducted. Since completely new and original problems are rare. It is necessary to show how
the problem under investigation relates to previous research work done under similar topic,
however a previous study not be exactly replicated. It is believed that the review of literature
is literature which is helpful to show the need of research work and to justify the work. It
tries to clear the conceptual through and bank related terms. This chapter is dividing into
different parts which arrange into the following order:-
conceptual review
review of previous work
research gap

1.5.1Conceptual review
This section is discussed briefly about theoretical concept regarding the theories capital
structure.
1.5.2 Review of previous work
Capital structure of a company consists of debts and equity securities which provide funds
for a firm. A simple capital structure consists of equity shares and preference share. But a
 complex capital structure consists of multi securities as equity, preference shares, debentures,
bonds etc.
“Capital structure of the firm is the permanent financing representing by long term debt,
preferred stock and shareholder's equity. Thus, a firm’s capital structure is only part of its
financial structure (Weston and Brigham 1978:565)

“Sound capital structure is requiring operating business smoothly and achieving the business
goal. Capital structure is concerned with analyzing the capital composition of the company”
(Weston and Brigham 1978:555)

“capital structure refers to the mix of long term sources of fund, such as debenture, long term
debt, preference shares capital and equity share capital including reserves and surplus i.e.
retained earnings”(pandey 1999:718)]

Debt capital
It includes all long term borrowing incurred by the firm. Debenture, bonds, long term loan
etc. are major sources of debt or borrowed capital. A firm employs subtotal amount of debt
capital of tax deductibility of interest payments, flexibility, and lower effective cost.
However excess amount of debt exposes high risk.
Equity capital
It consists of the long term fund provided by the firm’s owners, the stock holders. In other
words, equity capital includes common stock, paid in capital of share premium, reserve and
surplus and retains earnings. Joint Stock Company can be established with no equity
financing, preferred stock is neither purely a debt nor equity.

Assumption of capial structure

To explain the different theories, the assumptions of capital structure are:
i) The ratio of debt to equity for a firm is changed by issuing debt to repurchase stock or
issuing stock to pay off debt.
ii) The firm has a policy of paying 100% of it’s earnings in dividends. I.e. no retain earnings.
Thus we abstract from the dividend decision.

iii) The expected value of the subjective probability distribution of expected future operating
earnings for each company is the same for all investors in the market.

iv) The operating earnings of the firms is not expected to grow. The expected value of the
probability distributions of expected operating earnings for all future periods are the same as
present operating(VH.2002:2053\54)

v) There are only two sources of funds under by a firm’s perpetual risk less debt and ordinary
shares.

vi) The total financing remains constant. The firm can change its degree of leverage (capital
structure) either by selling shares and use the proceeds to retire debenture of by raising more
debt and reduce the equity capital.

1.5.3 ​Research gap

Today’s world is marketed by rapid changes and developments, as such researchers

conducted a few years back may not be adequate to explain current phenomena. Thus
continuous attempt needs to be taken and new researcher and conducted to build our existing
knowledge base, interpret and analyze events in the face of dynamism. Most of the past
research studies about profit planning system are basically related to the profit planning
system of manufacturing organization or production oriented activities. The researcher could
find some study so far that has been related to profit planning system of commercial bank in
NIC ASIA Bank, Himalayan bank, Rastriya Banijya Bank, Nepal Investment Bank, Standard
Chartered Bank, Nabil bank This study may be a new study in this field as no study has been
made profit planning of NBBL. In the past financial institution were depends only the
interest margin in present economic dynamism only the interest margin is not sufficient to
 improve profitability so this researcher has tried to analyzed the extra ordinary items of
income generation in financial institution. To find the new developments and to bridge the
gap between the past research and the present situation, I set out to conduct the research in
this stimulating topic. I have been through many literature reviews and given my best to
fulfill this work. In my research effort had been made to understand the Profit Planning and
control in commercial bank and I hope this research will be fruitful for future researchers as
reference.

To explain different theories, following assumptions are of the capital structure:-

1. The ratio of debt to equity for a firm is changed by issuing debt to repurchase
stock or issuing stock to pay off debt.

2. The firm has a policy of paying 100% of it’s earnings in dividends. I.e. no
retain earnings. Thus we abstract from the dividend decision.

3. The expected value of the subjective probability distribution of expected future

operating earnings for each company is the same for all investors in the market.

4. The operating earnings of the firms is not expected to grow. The expected
value of the probability distributions of expected operating earnings for all future periods are
the same as present operating(VH.2002:2053\54)

5. There are only two sources of funds under by a firm’s perpetual risk less debt
and ordinary shares.

6. The total financing remains constant. The firm can change its degree of
leverage (capital structure) either by selling shares and use the proceeds to retire debenture of
by raising more debt and reduce the equity capital.

1.6 Research Method

1.6.1 Types of research
Basically there are different types of research and they are basic research, applied research,
descriptive research, exploratory research, experimental research, historical research,
grounded theory research etc. Mainly categories on two part are.
A) Basic or fundamental research
B) Applied research

A) Basic or fundamental research

This research is con​ducted largely for the enhancement of knowledge, and is research which
does not have immediate commercial potential. The research which is done for human
welfare, animal welfare and plant kingdom welfare. It is called basic, pure, fundamental
research. The main motivation here is to expand knowledge of man, not to create invent
something. According to Travers,’’ basic Research is designed to add to an organized body
of scientific knowledge and does not necessarily produce result of immediate practical
value.’’
B) Applied research
Applied research is designed to solve practical problems of modern work rather than to
acquire knowledge’s sake .The goal of applied research is to improve the human condition
.It focuses on analysis and solving social and real life problem. This research is generally
conducted on a large scale basis and expensive. As such, it is often conducted with the
support of some financing agency like the national government, public corporation, world
bank, UNICEF, UCG, etc. According to Pauline V. Young’’ Generating knowledge that
could aid in the betterment of human benefit is term as applied research.

1.6.2 Population and sample

NIC ASIA Bank
 At present there are 28 commercial banks operating in Nepal. Among them, NIC ASIA Bank
Limited has been taken as a sample for the study. This sample bank is the pioneer leading
bank. Financial statements of last five fiscal years from F/Y 2070/071 to 2074/075 have been
taken as sample data for evaluating working capital management.

1.6.3 Types of data

Data collection is the most essential factor in report writing. Data collections are the most
important thing for the project work, which we compile and convert them into one sole repot.
These data can be obtained either from the primary or secondary sources.

A) Primary data

The data, which are originally collected by the investigator or an agent for the purpose of
statistical enquiry, are known as primary data. These data are obtained by study specially
designed to fulfill the data needs. Primary data can obtain by applying the following
interviews:

-​ Direct Personal interviews

- Indirect interviews

- Information from correspondence

- Mailed questionnaire methods etc.

B) Secondary data
The data, which are originally collected but obtained from pre-published or already listed
sources, are secondary data. In this project all the secondary data are used to calculate the
different ratios by using financial tools are given in chapter two. Mainly in our project only
the secondary data are used.
 This study will be conducted on the basis of the secondary data for the characteristic study
annual report of selected banks. The annual report submitted by different commercial banks
to Nepal Rastra Bank is taken as a secondary data. From the website of Nepal Rastra Bank
www.nrb.gov.np​. Some other data are directly taken the website of respective bank of their
own. These data are published by respective banks. The secondary data published by the
bank in respective website of purpose bank. Some of the website we have taken data are :–
NIC ASIA Bank Limited www.nicasiabank.com.
From the above's sources organization description financial statement (Viz. Balance sheet
and P\L a\c ) are taken from the purpose of study.
Supporting data and information will be obtained from the head office of selected banks,
booklets, documents, other published and unpublished material, thesis, newspaper an-mail
internet, financial statement, annuals reports and from Nepal stock exchange, security
exchange board and other related office.

1.6.4 Data collection procedure

Particularly the study will base on the data available from NIC ASIA Bank. Such a
concentration for this bank only is simply because of easy access upon their reliable data. For
example my own class mates are working as staff in NIC ASIA Bank,.

The study will be based on secondary data provided by bank and other relevant sources. The
data will be collected from the balance sheet, profit and loss a\c, stock exchange, security
board, Nepal Rastra Bank and informal enquires from the bank’s personnel. The Problem of
the study lies on the issues related to the position of capital structure of NIC ASIA Bank.
Because of liberal policy adopted by the government, financial institution has been emerging
in the country. The sampled banks have been facing threats from such institutions. Therefore,
the study has been conducted to examine the effects of capital structure of the bank.
 For the purpose, various data are required. With the view of obtaining the data, researcher
made several visits of the sampled bank, in first visit, the researcher consulted the concerned
authority of the bank and explained about above mentioned problem, objectives of the study.
Here, the required data have been collected from the secondary sources. Needed information
was given by the concerned staff of NIC ASIA Bank. Furthermore, list of questions was also
given to them which helped me to get necessary data, facts and figures. Not only was this, for
the study direct questions also asked.

1.6.5 Instruments
As mention earlier this study will be confined to analysis of capital structure of NIC ASIA
Bank. To research the objective the collected data will be computed and analyzed using
financial ratio like long term debt total assets ratio, total debt to total assets ratio, total debt to
total equity ratio, total equity to total assets ratio. Microsoft word, Microsoft excel is used to
perform calculation and presentation for the analysis.

1.6.6 Techniques of Analysis

As mention earlier this study will be confined to analysis of capital structure of the few
selected commercial banks in Nepal. To research the objective the collected data will be
computed and analyzed using financial and statistical tools but in this project only the
financial tool is used which is as follows-
A) Financial tool
B) Statistical tools
This study is confined to examine effects of capital structure position of NIC ASIA Bank.
Therefore the data have been collected accordingly and managed, analyzed and presented
in suitable tables, formats, diagrams, graphs, and charts. Such presentation have been
interpreted and explained wherever necessary. Financial, mathematical and statistical tools
 are used to analyze the presented data, which includes ratio analysis, percentage,
regression analysis, Test of goodness of fit of the regression estimates, correlation, mean,
standard deviation, coefficient of variance etc.

A) Financial tools
Financial tools are those, which are used for the analysis and interpretation of financial data.
These tools can be used to get the precise knowledge of a bank, which in turn, are
meaningful in exploring effects and profitability position of current assets and liabilities. In
this research study various financial tools are employed for the analysis. The main focus will
be on Ratio Analysis. Ratio analysis is the most important tools of the financial analysis,
which help to ascertain the financial conditions of the organizations. Profitability ratios are
employed and grouped for the analysis of profitability position of Himalayan bank.
Following financial tools have been used to analyze the data in this study:
● Ratio Analysis:
Ratio analysis helps to summarize the large quantities of financial data and to make
quantitative judgments about the firm's capital structure profitability position of bank. By
ratio analysis we study the arithmetical relationship of two data, in this study, we have of the
Bank.

# Long Term Debt to Total Assets Ratio

​# Total Debt to Total Assets Ratio

​# Total Debt to Total Assets Ratio

# Total Equity to Total Assets Ratio

# Analysis of Weighted Average Cost Of Capital

1.7 Limitations
 This study is mainly covered in the activity of NIC ASIA Bank. With related Ratio analysis.
Comparative study of Ratio has been also mentioned. This study is not free from limitation.
Here, following are major limitation of study.

1. The study is based on the published annual report of NIC ASIA Bank.
2. The field work report can't be precise because almost all the data are secondary.
3. The study period covers only fiscal year of 2070/71 to 2074/2075.
4. Study is mainly depended on ratio analysis.
5. The study has not paid any attention towards the fund flow and cash flow.
6. This study is conducted financially rather technically.

CHAPTER-II

RESULTS AND ANALYSIS

2.1 Data presentation And Analysis

This is the most important chapter of the study. This chapter constitutes the most crucial part
of the study. In this chapter the data collected will be analyzed and presented mathematically.
All the above mentioned financial and statistical tools will be used to present the data. It
provides mechanism for meeting the basic objectives stated earlier in the metrology
described in the first chapter in order to attain the objectives.

2.1.1 ​Long term debt to total assets ratio

The long term debt to total assets ratio measures the percentage of long term debt to total
assets used in the bank. So, it is the percentage of long term debt among the total assets of the
bank. The long term debt to total assets ratio is calculated as:

Long term debt to total assets ratio=

Table 2.1.1: Long term debt to total assets ratio

Long term debt

Fiscal years Long term debt Total assets T otal assets

2074/75 3487908815 99863008080 3.49%

2073/74 20,87,37,639 99265724246 0.02%
2072/73 50,00,00,000 80456519759 0.62%
2071/72 50,00,00,000 80456519759 0.82%
2070/71 2214747197 51500485800 4.30%
Figure 2.1.1: Long term debt to total assets ratio

In the above figure no. 2.1.1 the long term debt to total assets ratio measures the percentage
of long term debt to total assets used in the bank. So, it is the percentage of long term debt
among the total assets of the bank. The long term debt to total assets ratio are
3.49%,0.02%,0.62%,0.82%,4.30% respectively. Finally we found that highest ratio in fiscal
year 2070/71 and lowest ratioin fiscal year 2073/074.

2.1.2 ​Total debt to total assets ratio

This ratio measures the extent to which borrowed fund have been used to finance the
company’s assets. It is related to calculate to the total assets of the firm. The total debt
includes long term debt and current liabilities. The total assets consist of permanent assets
and other assets. It is calculated as:

Total Debt to Total Assets Ratio = T ​ otal Debt

Total Assets
Table 2.1.2: Total Debt to total assets ratio

T otal debt
Fiscal year Total assets Total debt T otal debt
2074/75 99,86,30,08,080 1,10,41,74,094 1.10%

2073/74 99265724246 69,58,73,089 0.70%

2072/73 80456519759 67,45,67,098 0.83%

2071/72 80456519759 65,34,43,067 0.81%

2070/71 51500485800 62,67,89,132 1.21%

Figure 2.1.2: Total Debt to total assets ratio

above figure no. 2.1.2 the total debt to total assets ratio measures the percentage of total debt
to total assets used in the bank. So, it is the percentage of total debt among the total assets of
the bank. The debt ratio are 1.10%,0.70%,0.83%,0.81%,1.21%respectively. Finally we
found that highest ratio in fiscal year 2070/71 and lowest ratio in fiscal year 2073/74.
2.1.3 Debt to Equity Ratio

The debt to equity ratio measures the long term components of capital structure. Long term
debt and share holder’s equity are used in financing assets of the companies. So, it reflects
the relative claims of creditors and shareholders against the assets of the firm. Debt to equity
ratio indicates the relative proportions of debt and equity. The relationship between outsiders
claim and owner’s capital can be show by debt – equity ratio. It is calculated as:

Debt to Equity Ratio =

This ratio is also known as debt to net worth ratio. A higher debt equity ratio indicates that
the claims of the creditors are greater then that of share holders of owners of the company. It
is calculated as:

Table 2.1.3: Debt to equity ratio

Fiscal years Equity debt

2074/75 8031116998 3487908815 43.42%

2073/74 8031116998 20,87,37,639 2.60%

2072/73 5776254430 50,00,00,000 8.65%

2071/72 3695015872 50,00,00,000 13.53%

2070/71 2658284800 221474719 8.33%

 Figure 2.1.3: Debt to equity ratio

Above figure no. 2.1.3 the total debt to equity ratio measures the percentage of total debt to
total equity used in the bank. So, it is the percentage of total debt among the equity of the
bank. The total to total equity ratio are 43.42%,2.60%,8.65%,13.53%,8.33% respectively.
Finally we found that highest ratio in fiscal year 2074/075 and lowest ratio in fiscal year
2073/74.

2.1.4 Equity ratio

The total equity to total assets ratio measures the percentage of equity used in the bank. So,
it is the percentage of equity among the total assets of the bank. The equity ratio is
calculated as:

Equity ratio=

Fiscal years Equity Total assets

2074/75 8031116998 99863008080 8.04%

2073/74 8031116998 99265724246 8.09%

2072/73 5776254430 80456519759 7.1%

2071/72 3695015872 60519399215 6.10%

2070/71 2658284800 51500485800 5.16%

Figure 2.1.4: Equity ratio

In the above figure no. 2.1.4 the total equity to total assets ratio measures the percentage of
total equity to total assets used in the bank. So, it is the percentage of total equity among

the total assets of the bank. The total equity to total assets ratio are
8.04%,8.09%,7.1%,6.10%,5.16% respectively. Finally we found that highest ratio in fiscal
year 2073/074 and lowest ratio in fiscal year 2070/71.
2.1.5 Analysis of Weighted Average Cost Of Capital

On the basis of the cost of debt and the cost of equity the WACC is determined by following
way:

Table 2.1.5: Analysis of WACC

Fiscal years Equity Debt WACC

2074/75 8031116998 3487908815 10.12%

2073/74 8031116998 20,87,37,639 10.02%

2072/73 5776254430 50,00,00,000 10%

2071/72 3695015872 50,00,00,000 10.08%

2070/71 2658284800 2214747197 12.16%

 Figure 2.1.5: Analysis of WACC

In the above figure no. 2.1.5 Analysis of Weighted Average Cost Of Capital measure the
total cost of whole capital structure used in the bank. So, it is the percentage of the cost of
capital.

The WACC of the bank are 10.12%, 10.02%, 10%, 10.08% and 12.16% respectively. Finally
we Found that highest WACC in fiscal year 2070/71 and lowest WACC in fiscal year
2072/73.

Thus, the ideas capital structure is in fiscal year 2072/73, because its WACC is lower
among than other compositions.

2.1.6 EPS Analysis

The composition of equity and debt capital directly effect on the EPS of the company. It also
effect on the value of the Company. In different structure the EPS determined by given way:
 Table 2.1.6 Analysis of EPS

Fiscal years Equity Debt EPS(Rs.)

2074/75 8031116998 3487908815 8

2073/74 8031116998 20,87,37,639 8.45

2072/73 5776254430 50,00,00,000 9

2071/72 3695015872 50,00,00,000 8.12

2070/71 2658284800 2214747197 7.89

Figure 2.1.6 EPS Analysis

In the above figure no. 2.1.6 presents the EPS of the bank on different capital structure of
different fiscal year.

The EPS of the bank are RS.8 Rs.8.45, Rs.9, Rs.8.12, and Rs.7.89 respectively. Finally we
found that the highest Eps in fiscal year 2072/73 and the lowest EPS in fiscal year 2070/71.

Thus, the ideal capital structure is in fiscal year 2072/73, because its EPS is higher than
among than other compositions.
 2.2 ​Major Findings

In the above figure no. 2.1.1 the long trem debt to total assets ratio measures the percentage
of long trem debt to total assets used in the bank. So, it is the percentage of long trem debt
among the total assets of the bank. The long trem debt to total assets ratio are
3.49%,0.02%,0.62%,0.82%,4.30% respectively. Finally we found that highest ratio in fiscal
year 2068/069 and lowest ratio in fiscal year 2072/073

In the above figure no. 2.1.2 the total debt to total assets ratio measures the percentage
of total debt to total assets used in the bank. So, it is the percentage of total debt among the
total assets of the bank. The debt ratio are .10%,0.70%,0.83%,0.81%,1.21 respectively.
Finally we found that highest ratio in fiscal year 2074/75 and lowest ratio in fiscal year
2073/74.

In the Above figure no. 2.1.3 the total debt to equity ratio measures the percentage of total
debt to total equity used in the bank. So, it is the percentage of total debt among the equity of
the bank. The total to total equity ratio are 43.42%,2.60%,8.65%,13.53%,8.33%
respectively. Finally we found that highest ratio in fiscal year 2074/075 and lowest ratio in
fiscal year 2073/74.

In the above figure no. 2.1.4 the total equity to total assets ratio measures the percentage of
total equity to total assets used in the bank. So, it is the percentage of total equity among the
total assets of the bank. The total equity to total assets ratio are
8.04%,8.09%,7.1%,6.10%,5.16%respectively. Finally we found that highest ratio in fiscal
year 2073/074 and lowest ratio in fiscal year 2070/71.

In the above figure no. 2.1.5 Analysis of Weighted Average Cost Of Capital measure the
total cost of whole capital structure used in the bank. So, it is the percentage of the cost of
capital.The WACC of the bank are 10.12%, 10.02%, 10%, 10.08% and 12.16% respectively.
Finally we Found that highest WACC in fiscal year 2070/71 and lowest WACC in fiscal
year 2072/73.
Thus, the ideas capital structure is in fiscal year 2072/73, because its WACC is lower
among than other compositions.

In the above figure no. 2.1.6 presents the EPS of the bank on different capital structure of
different fiscal year.

The EPS of the bank are RS.8 Rs.8.45, Rs.9, Rs.8.12, and Rs.7.89 respectively. Finally we
found that the highest Eps in fiscal year 2072/73 and the lowest EPS in fiscal year 2070/71.

Thus, the ideal capital structure is in fiscal year 2072/73, because its EPS is higher than
among than other compositions.
 CHAPTER III
SUMMERY & CONCLUSION

This is the concluding chapter of this study. This chapter is divided into two sections:
Discussion and Conclusion. In this chapter, we summarize the study in brief. In the last
section of this chapter, some discussion have given, which are useful to stakeholders and to
concerned companies as well. They can use this discussion to take some corrective actions to
draw conclusion.

3.1 Summary

In this study to analyze about capital structure, one commercial bank have been chosen. The
bank Nepal NIC ASIA BANK, the bank is listed in NEPSE. To make the study more
reliable, the whole study has been divided into three chapters. The summaries of each chapter
are presented below.

First Chapter: First chapter starts with historical background of the study. In this chapter an
introduction to banking industry in Nepal, introduction of the banks selected for the study,
description of the capital structure is presented briefly. This study endeavors to evaluate
capital structure of commercial banks with reference to NIC ASIA Bank Ltd. The main
questions presented as the "focus of study" are what is the condition of capital structure of
this commercial bank of Nepal? Whether or not they are using an appropriate financial mix?
If not, what may be the suggested to improve or to make appropriate capital structure? Does
capital structure help to maximize the value of the firm in the context of Nepalese firms?
'The statement of the problems' deals with the effect of the capital structure on the growth of
the firm, the content to which the capital structure policy is followed by the commercial
banks, and the main problems faced by the commercial banks in developing and
implementing the capital structure.

Finally, The study' are all presented in the first chapter are as follows.

1.1 Background of The Study

1.2 Profile of selected organization
1.3 Objective of this study
1.4 Rationale of this study
1.5 Review of literature
1.6 Methods
1.7 Limitations

Second Chapter:​ The data mentioned in the third chapter are presented and analyzed in this
chapter using methods mentioned in the chapter third above such as ratios, capital structure
analysis and probable errors. Details calculations are presented in this chapter are shown as
annexure which is presented after Third chapter.

Third Chapter:​ In this chapter, discussion and conclusion and implementation of the study
are presented in brief to understand the whole get about the study instantly after which
conclusion of the study are presented.

3.2 Conclusion and implementation

In conclusion we can explain the major finding what kind of results are to be seems we
conclude as follows:

In the above figure no. 2.2.1 is drawn by from table no. 2.1.1 it presents the fiscal
years and percentage of the long term debt to total assets ratio of NIC ASIA from 2070/71to
2074/75 ‘s data. That shows the’3.49%,0.02%,0.62%,0.82%,4.30% respectively past five
year from now. Normally it seems in fluctuation ratio.

In the above figure no. 2.1.2 is drawn by from table no. 2.1.2 it presents the fiscal
years and percentage of the total debt to total assets ratio of the NIC ASIA bank from
2070/71 to 2074/75 ‘s data. That shows the ​10% ,0.70%,0.83%,0.81%,1.21% ​,’
respectively. Normally it seems to be also fluctuation ratio.

In the above figure no. 2.1.3 is drawn by from table no. 2.1.3 it presents the fiscal
years and percentage of the total debt to total equity ratio of the NIC ASIA bank from
2070/71 to 2074/75 ‘s data. That shows the 43.42%, 2.60%,8.65%,13.53%,8.33%,’
respectively. Normally it seems to be in fluctuating.

In the above figure no. 2.1.4 the total equity to total assets ratio measures the percentage of
total equity to total assets used in the bank. So, it is the percentage of total equity among the
total assets of the bank. The total equity to total assets ratio are
8.04%,8.09%,7.1%,6.10%,5.16%respectively. Finally we found that highest ratio in fiscal
year 2073/074 and lowest ratio in fiscal year 2070/71.

In the above figure no. 2.1.5 Analysis of Weighted Average Cost Of Capital measure the
total cost of whole capital structure used in the bank. So, it is the percentage of the cost of
capital.

The WACC of the bank are 10.12%, 10.02%, 10%, 10.08% and 12.16% respectively. Finally
we Found that highest WACC in fiscal year 2070/71 and lowest WACC in fiscal year
2072/73.
Thus, the ideas capital structure is in fiscal year 2072/73, because its WACC is lower
among than other compositions.

The implementation phase is the study of few points that can be helpful to stakeholders as
well as to the company to be recommended based upon above calculations and drawn
conclusions. These recommendations are guidelines which would be helpful in taking proper
and appropriate decision about capital structure. These recommendations are given below.

i. First of all, the companies lack the theoretical as well as practical knowledge
regarding the capital structure. They have not given significant attention to the capital
structure matter. Capital structure is a serious matter. It affects EPS, values of the
firm, cost of capital etc. So, it is recommended that these companies should follow the
theoretical and practical aspects of the capital structure. Management or give bit more
attention in this matter and try to manage their activities accordingly.
ii. The capital structure of banks is highly leveraged. The proportion of debt and equity
capital should be decided keeping in mind the efforts of tax advantage and financial
distress. The banks, when it is difficult to pay interest and principle, ultimately lead to
liquidation or bankruptcy. For such, the bank should reduce the ​high use of debt
capital.
iii. The banks suggested that try to reduce long term debt and increase to shareholder
equity in future and balanced use of current liabilities which should not be exceed the
current assets.
Having geared up capital structure position and insufficient returns indicates the weak aspect
of the banks

iv. Ratios like, Long Term Debt to Total Assets Ratio​, Total Debt to Total Assets
Ratio, Total Debt to Total Assets Ratio and Total Equity to Total Assets Ratio.
v. Above discussion on figure 2.1.5 shows that the ideal capital composition
takes banks that in FY 2072/73. It has the lowest cost on this capital structure.
 Bibliography

Books

Asmita Publication, Fundamental of corporate finance (BBS 4th year)

Bhattarai, D.R. (2061), ​“Management Accounting.” Khanal Books and Stationary,

Minbhuwan, Kathmandu.

Bomol, W.T. (1972), ​“Transaction Demand for cash. An Inventory Theoretic approach
Quarterly Journal of Economic LXV.
 Dangol, R.M. and Prajapati K. (2001), ​“Accounting for Financial Analysis and Planning.”
Kathmandu: Taleju Prakashan.

Fred J. Weston and E.F. Brigham (1973), “Essentials of Managerial Finance.” Holt
Rinchart Winston Inc Illinois.

Khan, M.Y. and Jain, P.K. 2​nd edition (1994), ​“Management Accounting.” Tata Mc Graw
Hill India.

Kothari, C.R. (1989), ​“Research Methodology Method and Techniques.” Willeg Eastern
Limited, New Delhi.

Orgler, Y.E. (1970), ​“Cash Management Method and Model.” Wands Worth Publishing
Company Balmont, California.

Pandey, I.M. 8​th​ edition (1999), “Financial Management.” Vikas Publishing House Pvt. Ltd.

Shrestha, M.K. (1980), “Financial Management.” ​Curriculum Development Centre,

Kathmandu.

Websites:

- ​www.nrb.org.np

- ​http://www.nicasiabank.com

- www.google.com

- ​www.wikepedia.com

Appendices
Particulars FY FY FY
2071/72 2072/73 2073/74

Paid Up Capital

1. Opening Paid Up capital of previous 2,658 3,695 5,470

year

2. New Share Issuance - - -

3. Right Share Issuance - 924 1,368

- ​Right Share Ratio 4:1 4:1

4. Bonus Share* 1,037 851 1,179

- ​From profit & retained earningss 585 592 940

- From Capital Reserve 452 259 239

Total Paid Up Capital 3,695 5,470 8,017

 NIC ASIA Bank

Native एन.आई.सी.ए शया बक

name

Type Public Limited

Traded as NEPSE​: ​NICA

Industry Banking​, ​Financial Services

Founded 1998

Area Nepal
served

Key people Roshan K. Neupane (CEO)

Products Consumer banking​, ​corporate

banking​, ​finance and insurance​,
investment banking​, ​mortgage
loans​, ​private banking​, ​private
equity​, savings, ​securities​,
asset management​, ​wealth
management​, credit cards

Number of 2500+
employees

Website www.nicasiabank.com.