1RubySharma,CBS,Landran
 Financial architecture of a business housedescribes the strategy how the businesshouse going to architect its finance. E...
Sr . No. DEBT EQUITY1 Fixed Claim Residual claim2 High priority on cashflowLowest priority on cashflow3 Tax deductible Not...
Before taking decision about Financial architectureof firm, following steps must be considered:InvestmentdecisionRaisingfu...
FlexibilityFinancial slackLess RiskyGenerateIncomeMore tangibleAssetsMinimumchances ofloosing control5RubySharma,CBS,Landran
EBIT-EPS AnalysisValuation analysisRatio AnalysisRubySharma,CBS,Landran 6
 Under this, we analyze the different financingmix on the shareholder’s wealth. Firmconsiders the variability in EBIT & i...
 The financing mix should be such that itenhances the value of firm.The debt portion infinancing mix is up to that level ...
 Value represents the market value of thefirm.Value of the firm is maximized when thecost of capital is minimized.V=EBIT(...
Source Market value Cost (%)Equity 1500000 16Debt 1000000 11If the tax rate is 40%,calculate WACC?We=1500000/1500000+10000...
 Interest Coverage ratio=EBIT/Interest Fixed charges coverage ratio=EBIT/(interestloan+repayment/1-tax rate) Fixed asse...
 Recapitalization Divestiture To finance new investments By buying back sharesBy adopting any of the above strategy, f...
13RubySharma,CBS,Landran
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Financial architecture by Ruby Sharma

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Financial architecture by Ruby Sharma

  1. 1. 1RubySharma,CBS,Landran
  2. 2.  Financial architecture of a business housedescribes the strategy how the businesshouse going to architect its finance. Everybusiness house finances its investment eitherfrom equity or from debt.Weightage of debt& equity in the finance mix effect the value ofthe firm.The left hand side of the balancesheet, consisting liabilities & equities,represents the financial architecture of thefirm. 2RubySharma,CBS,Landran
  3. 3. Sr . No. DEBT EQUITY1 Fixed Claim Residual claim2 High priority on cashflowLowest priority on cashflow3 Tax deductible Not tax deductible4 Fixed maturity Infinite life5 No managementcontrolManagement control3RubySharma,CBS,Landran
  4. 4. Before taking decision about Financial architectureof firm, following steps must be considered:InvestmentdecisionRaisingfundsFinancialarchitectureOptimumfinancialarchitecture4RubySharma,CBS,Landran
  5. 5. FlexibilityFinancial slackLess RiskyGenerateIncomeMore tangibleAssetsMinimumchances ofloosing control5RubySharma,CBS,Landran
  6. 6. EBIT-EPS AnalysisValuation analysisRatio AnalysisRubySharma,CBS,Landran 6
  7. 7.  Under this, we analyze the different financingmix on the shareholder’s wealth. Firmconsiders the variability in EBIT & its impact onEPS under different financial architetures.EPS& EBIT are directly proportional to each other:EPS=(EBIT-Interest)(1-Tax)/N7RubySharma,CBS,Landran
  8. 8.  The financing mix should be such that itenhances the value of firm.The debt portion infinancing mix is up to that level where themarginal benefit & costs are equal.The value oflevered & unlevered firms differs because of theinterest tax shield. FinancialArchitecture of firm can berepresented in terms of Fixed debt to valueratio.8RubySharma,CBS,Landran
  9. 9.  Value represents the market value of thefirm.Value of the firm is maximized when thecost of capital is minimized.V=EBIT(1-T)/WACCWACC-it is weighted average of all types ofsources of funds that we categorize underdebt & equity.WACC=We Ke +Wd Kd (1-t)9RubySharma,CBS,Landran
  10. 10. Source Market value Cost (%)Equity 1500000 16Debt 1000000 11If the tax rate is 40%,calculate WACC?We=1500000/1500000+1000000We=.60Wd=1000000/1500000+1000000Wd=.40Putting values in the formulaWACC=(0.60*.16)+(.40*11)(1-.40)WACC=12.24%10RubySharma,CBS,Landran
  11. 11.  Interest Coverage ratio=EBIT/Interest Fixed charges coverage ratio=EBIT/(interestloan+repayment/1-tax rate) Fixed assets coverage ratio=Fixedassets/term loans11RubySharma,CBS,Landran
  12. 12.  Recapitalization Divestiture To finance new investments By buying back sharesBy adopting any of the above strategy, firmcan change its financing mix which furtherleads to change in debt/equity ratio.12RubySharma,CBS,Landran
  13. 13. 13RubySharma,CBS,Landran

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