Business Studies class XII

1. BASIC
REQUIREMENTS
TO START
A BUSINESS

2. MACHINE
MATERIAL
MONEY
MEN

3. MOST IMPORTANT OF ABOVE FOUR IS

4. WHAT ARE THE
DIFFERENT SOURCES
OF FINANCE??
Owner’s
Fund
Borrowe
d Fund

5. WHAT SHOULD BE THE
IDEAL PROPORTION OF
‘DEBT’ & ‘EQUITY’
IN THE TOTAL CAPITAL
EMPLOYED?

6. CAPITAL
STRUCTURE

7. ‘CAPITAL STRUCTURE’
REFERS TO THE MIX
BETWEEN OWNERS AND
BORROWED FUNDS.

8. CALCULATION OF CAPITAL STRUCTURE
It can be
calculated as
debt-equity ratio
Debt
Equity
It can also be
calculated as the
proportion of debt
out of the total
capital
Debt

9. THE LOW COST ‘DEBT’
•The lender’s risk is lower than the equity
shareholder’s risk
•Interest paid on debt is a deductible
expense for computation of tax liability

10. THE RISKY ‘DEBT’
•The payment of interest and repayment of
principal is obligatory for the business
•Any default in meeting these commitments
may force the business to go into
liquidation

11. Capital structure of a company affects
both, the profitability and the financial risk.
A capital structure will be said to be
optimal when the proportion of debt and
equity is such that it results in an increase
in the value of the equity share.
The proportion of debt in the overall
capital is also called financial leverage.

12. WHAT SHOULD BE THE
IDEAL PROPORTION OF
‘DEBT’ & ‘EQUITY’
IN THE TOTAL CAPITAL
EMPLOYED?

13. When the cost of debt is lower than the
return on investment (RoI), the company
may increase the DEBT component to
increase earning per share (EPS) or
shareholders’ wealth.
Cost of Debt < Return on Investment (ROI)
increase of the DEBT component in the
Capital Structure will increase earning per
share (EPS) as well as shareholders’ wealth.

14. When the cost of debt is higher than the
return on investment (RoI), the company
should reduce the DEBT component to
increase earning per share (EPS) or
shareholders’ wealth.
Cost of Debt > Return on Investment (ROI)
increase of the DEBT component in the
Capital Structure will reduce earning per
share (EPS) as well as shareholders’ wealth.

15. TRADING ON EQUITY

16. TRADING ON EQUITY
Trading on Equity means deployment of more
cheaper debt in the capital structure of the
company to enhance the EPS.
Companies often try to the increase in profit
earned by the equity shareholders due to the
presence of fixed financial charges like interest.

17. THANK
YOU