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Presention of acc
 

Presention of acc

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    Presention of acc Presention of acc Presentation Transcript

    • Definition:-Capital Structure refers to thecombination or mix of debt andequity which a company uses tofinance its long-term operations.
    •  By David Durand According to this theory a firm can increase the value of firm and reduce the over all cost of capital by increasing the proportion of debt in its capital structure to the max. possible extent.
    •  First there are no taxes. Second the cost of debt is less than the cost of equity. Third the cost of debt capital and cost of equity capital remain constant.
    •  A company’s expected annual EBIT is Rs. 50000. The company has Rs 2,00,000, 10% debenture. The cost of equity of the company is 12.5%.
    • Net Operating Income (EBIT) Rs 50,000 Less: Interest on debentures (I) 20,000 ---------------------------Earnings available to equity holders (EBT) 30,000Equity Capitalization Rate (ke) 0.125Market Value of Equity (S) = EBT/Ke ---------------------------- 2,40,000Market Value of Debt (D) 2,00,000Total Value of the firm (S+D) = V ------------------------------ 4,40,000Overall cost of capital = Ko = EBIT/V (%) 11.36
    •  By David Durand Net Operating Income (NOI) approach is the exact opposite of the Net Income (NI) approach. According to this theory , the total market value of the firm (V) is not affected by change in the capital structure and the overall cost of capital(Ko) remain fixed irrespective of the debt equity mix.
    •  Overall cost of capital is constant. The income tax does not exist. The business risk at each level of debt-equity mix remain constant.
    •  A company’s expected annual EBIT is Rs. 50000. The company has Rs 2,00,000, 10% debenture. The cost of equity of the company is 12.5%. Ko = (EBIT – I)/(V – D) or EBT/S = Earning available to equity holders/Total market value of equity shares
    • Net Operating Income (EBIT) Rs. 50,000capitalisation rate (Ke) 0.125 -----------------------------Total market value of the firm (V) = EBIT/Ke Rs 4,00,000Total Value of Debt Rs 2,00,000Total Market Value of Debt (S) = (V – D) Rs 2,00,000 Ko= 50,000 - 30,000 / 2,00,000 = 0.1 or 10%
    •  By Ezra Soloman According to this theory a firm can reduce the overall cost of capital(Ko) or increase the total value of firm(V) of the firm by increasing the debt proportion in its capital structure to a certain limit .
    • EBIT = Rs. 150,000, presently 100% equity finance with Ke = 16%. Introduction of debt tothe extent of Rs. 300,000 @ 10% interest rate or Rs. 500,000 @ 12%.For case I, Ke = 17% and for case II, Ke = 20%. Find the value of firm and the WACC m.
    • Particulars Presently case I case IIDebt component - 300,000 500,000Rate of interest 0% 10% 12%EBIT 150,000 150,000 150,000(-) Interest - 30,000 60,000EBT 150,000 120,000 90,000Cost of equity (Ke) 16% 17% 20%Value of Equity(S= EBT / Ke) 937,500 705,882 450,000Total Value of Firm ( S + D) 937,500 1,005,882 950,000Ko =EBIT / V * 100 16.00% 14.91% 15.79%
    • THANK YOUPRESENTED TO: PRESENTED BY: Mr. VIKAS Ranjini VermaJAIN Sonu Sanklecha (SIR) Preety Kashyap Rajani Kumari Nidhi Vats