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Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
Capital Structure-B.V.Raghunandan
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Capital Structure-B.V.Raghunandan

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the study of debt-equity ratio, leverages

the study of debt-equity ratio, leverages

Published in: Economy & Finance
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  • 1. Chapter II-Capital Structure
  • 2. Meaning & Definition of Capital Structure
    Capital Structure is, ”the permanent financing of the firm represented by long-term debt, preferred stock and networth”
    -Weston & Brigham
  • 3. Debt
    Any source that gives the funding agency the creditorship status
    In the horizontal form of Corporate Balance Sheet, it is the sum of III and IV items(Secured Loans and Unsecured Loans) on the Liabilities side of the Balance Sheet
    In the vertical format, it is the II item (which again contains Secured Loans and Unsecured Loans) on the side of Sources of Funds
  • 4. Features of Debt
    Compulsory Payment of Interest
    Compulsory Repayment
    Only Fixed Interest
    No Annual Reports
    No Voting Rights
  • 5. Merits of Debt
    Benefit of Leverage
    Cost of Raising Funds
    Tax Advantage
    Managerial Stability
    Easier SEBI Norms
    Flexible Features
    Stable Market for Securities
    Manageable Administrative Expenses
    Flexible Repayment
    Easier Regulatory Compliance
  • 6. Demerits of Debt
    Compulsory Payment of Interest
    Solvency Affected
    Compulsory Redemption
    Charge on Assets
    Credit Rate Shopping
  • 7. Equity
    Shareholders Fund or Ownership Capital
    Compulsory Component of the Capital Structure
    Sum of Equity Share Capital, Preference Share Capital and Reserves and Surplus
    Preference Shares are not a Popular Instrument
  • 8. Equity Shares
    Common Stock/Ordinary Shares
    Full Fledged Ownership
    Total Entitlement to the Assets
    Repayment After the Satisfaction of Every Other Claim
    Preemptive Right
    Entitlement for Dividend, Bonus Shares and Other Such Rewards
  • 9. Benefits of Equity Shares
    Basic for Capital Structure
    Better Solvency
    Gestation Period
    No Redemption
    No Charge on Assets
    No Shopping for Credit Rating
    Evaluation of Share Value
    Better Image
    Creation of Value
    Public Knowledge of Financial Information
  • 10. Demerits of Equity Shares
    Tax Implication
    Management Control
    High Rates of Dividend
    Lack of Flexibility
    Stringent SEBI Norms
    Huge Issue Expenses
    High Volatility in the Stock Market
    Speculation
    Complex Shareholder- Management Relation
    Rigid Corporate Governance
  • 11. DE Ratio=Long Term Debt: NetworthDE Mix=
  • 12. Long-Term Debt=Secured Loans + Unsecured Loans
    Long-Term Debt= Debentures +Bonds + Long Term Loans
  • 13. Networth=Shareholders’ Funds
    Networth = Share Capital +
    Reserves & Surplus –
    Fictitious Assets
  • 14. Calculate Debt Equity Ratio of Abacus Limited whose Balance Sheet as on March 31, 2004 was as given below
  • 15. Best Systems Limited had the following Balance Sheet as on 31-3-2004. Calculate Debt Equity Ratio.
  • 16. 2.3 Calculate Debt Equity Ratio of Arunodaya Chemicals 2000-01. Comment on the variation in the debt equity ratio from the year 2000 to the year 2001.
  • 17. Solution for Arunodaya Chemicals2.3
    For 2000: Long Term Debt = Deb + LT Loans
    = 9,00,000 + 6,00,000= 15,00,000
    Equity = Eq.Shares + P&L A/c + Reserves
    = 3,00,000 + 1,19,800 + 80,200
    = 5,00,000
    Debt Equity Ratio = 15,00,000 : 5,00,000
    = 3:1
  • 18. De Ratio for 2001
    LT Debt = 6,00,000 + 8,00,000 = 14,00,000
    Equity = 4,00,000 + 1,82,500 + 1,17,500
    = 7,00,000
    DE Ratio = 14,00,000 : 7,00,000 = 2:1
    De Ratio has come down due to lesser component of Debentures even though Lt Loan has gone up. Every component of equity has also gone up.
  • 19. Debt Equity Mix
    Significance of a High Debt Equity Mix: Reduced Tax Liability, Higher EPS
    Significance of a Low Debt Equity Mix: Better Risk Management
    Zero Debt Capital Structure and Its Relevance
    -Reducing Corporate Tax Rates
    -Equity Tied Image
    -Opportunity for Mergers & Acquisitions
    -Other Benefits
    Trading on Equity
  • 20. Preparation of Statement of Income
    Leverages: Operating Leverage, Financial Leverage and Combined Leverage
    Degree of Leverages
    Significance of Each Leverage:
    -Sales-EBIT-EPS Relation
    -Measurement of Risk Levels
    -Behaviour of Costs

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