05-06-2013, 03:21 PM
FINANCIAL MANAGEMENT ASSIGNMENT HERO HONDA MOTORS LTD
FINANCIAL MANAGEMENT.ppt (Size: 569 KB / Downloads: 40)
1. Is the financing policy of Hero Honda Motors satisfactory? How is the unlevered capital structure of the firm justified?
The financing policy of Hero Honda Motors Ltd. shows that its capital structure is mainly composed of equity and very less debt.
This can be understood from a comparatively low debt-equity ratio of the company. In 2005-2006 it was 0.09, which clearly shows that the amount of debt is only around 9% of equity share capital.
This is a satisfactory policy, as company has lesser liabilities from outside and more of the finances from inside sources only.
Debt Equity Ratio = Total Liabilities/Total Equity
The most common disadvantage to the use of debt is the financial distress that debt can exert on a company. Companies that have a high debt-to-equity ratio in their capital structure may see an increased risk in potential bankruptcy.
2. What are the factors that are favoring a zero debt capital for the company? Is it always beneficial to have a low debt in the capital structure?
A Zero debt company is one which has not borrowed any money from banks, financial institutions or others for long or medium term requirements or for working capital. Since there's no debt, the company will have no commitment for repayment or servicing of interest
The financing mix of Hero Honda has decreased from 2001 to 2006, which shows the company is doing quietly very well, whereas the debt equity ratio of competitive company Bajaj auto limited has shown increase in the successive years.
A company's reasonable, proportional use of debt and equity to support its assets is a key indicator of balance sheet strength. 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.
3. Is investment policy driving the growth of the firm? What are the key issues that the investment policy of the company is trying to address?
Yes, we can say that investment policy is driving the growth of Hero Honda; as we observed from the case that finance managers use different combinations of various polices to meet the financial requirements of the company at least cost and risk and for the long term benefit of the company like expansion , increasing the plant capacity in case of to meet the market demand and sustain its market share and leadership in the automobile sector of India
The key issues that the investment polices of the company addresses are:
Meeting the current growing market demand in short term.
Increasing the plant capacity for expansion.
Establishment of new plants in the country keeping in mind the long term demand in future.
To improve its efficiency and to cut down the cost, by investing for augmenting its welding capacity.
Investment in new and latest technology will enable, the company to cater to future market demand and consolidate its market.