Capital Structure Decisions In Financial Management 7 November

Leasing,Venture Capital & Export Financing AFTERSCHO☺OL – DEVELOPING CHANGE MAKERS CENTRE FOR SOCIAL ENTREPRENEURSHIP PGPSE PROGRAMME – World’s Most Comprehensive programmes in social entrepreneurship & spiritual entrepreneurship OPEN FOR ALL FREE FOR ALL

CAPITAL STRUCTURE DECISIONS IN FINANCIAL MANAGEMENT Dr. T.K. Jain. AFTERSCHO☺OL Centre for social entrepreneurship Bikaner M: 9414430763 [email_address] www.afterschool.tk , www.afterschoool.tk

What is leveraging? ,[object Object],[object Object]

If there are two companies, one with leverage of 1 and other with leverage of 20 ,which one will you select for investments (you are risk averse investor)? ,[object Object]

A Company produces and sells 10,000 shirts. The selling price per shirt is Rs. 500. Variable cost is Rs. 200 per shirt and fixed operating cost is Rs. 25,00,000. (a) Calculate operating leverage. (b) If sales are up by 10%, then what is the impact on EBIT?

Solution ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

What will happen if sales are up by 10%, then what is the impact on EBIT? ,[object Object],[object Object],[object Object],[object Object]

Suppose there are 2 firms with the same operating leverage, business risk and probability of EBIT and only differ with respect to their use of debt. ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

In the previous statement, if EBIT is between $ 2000 to 4000 with equal probability, what are the possibilities? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Analysis ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

APPLYING PROBABILITY ,[object Object],[object Object]

EXPECTED VALUES OF BEP,ROE,DSCR ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Jitu Global Productions has following details: ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Solution ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Find the combined leverage 20,000 Total 20,000 5,000 Debt (20%) 10,000 15,000 Equity 10,000 B A Financial Plan 20000 Under Situation-il 15000 Under Situation I Fixed Cost: 15 per unit Variable Cost 30 per unit Selling Price 75% Actual Production and Sales 4000 units installed Capacity

Solution – operating leverage in plan A and plan B. ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Solution – Financial leverage in plan A and plan B. ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Question on NI approach ,[object Object],[object Object],[object Object],[object Object]

Solution ,[object Object],[object Object],[object Object],[object Object]

Solution … ,[object Object],[object Object],[object Object],[object Object],[object Object]

Ramesh Ltd’s. operating income is $ 5,00,000. The firms cost of debt is 10% firm employs $ 15,00,000 of debt. The overall cost of capital of the firm is 15%. What is total value of the firm. & Cost of equity as per NOI approach. ,[object Object]

There are two firms – Goti International & Ramesh Global. Goti International is leveraged company having debt of $ 100,000 @ 7%. Cost of equity of both the companies is 11.5% and 10% respectively.analyse using MM approach. EBIT = $20000 ,[object Object]

Analysis ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Arbitrage process ,[object Object],[object Object],[object Object],[object Object]

Vinod Bhugari Continental has EBIT of $ 100000. Company has 10% debentures of $ 5 Lakhs and equity capitalisation rate is 15%. What is the value of the firm as per traditional approach ? ,[object Object],[object Object],[object Object],[object Object]

Sarika Consultants & Pankaj Baid Consultants are two firms. Having NOI of $ 15 lakhs each.Pankaj Baid consultants have taken ECB of $7 lakhs @11%. Tax rate = 33% Equity of Sarika consultants $ 13 lakhs and that of Pankaj Consultants is $6 lakhs

Solution ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

In the previous question, what will happen if cost of equity is given as 20% in both the cases? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

In the previous question, what will happen, if market capitalises operting income as a whole @ 20%? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Operating leverage… ,[object Object],[object Object]

Financial leverage… ,[object Object],[object Object],[object Object]

Alternate formulaes ,[object Object],[object Object],[object Object],[object Object]

What is capital structure? ,[object Object]

How do you design capital structure? ,[object Object],[object Object],[object Object],[object Object],[object Object]

What are the risks associated with capital structure decisions? ,[object Object],[object Object],[object Object]

Degree of financial leverage? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

EBIT - EPS analysis ,[object Object]

Formula ,[object Object],[object Object],[object Object],[object Object]

What do you understand from trading on equity? ,[object Object]

What is coverage ratio or DSCR? ,[object Object],[object Object],[object Object],[object Object]

Theory of optimal capital structure? ,[object Object],[object Object]

Solve the following ,[object Object],[object Object],[object Object]

Solution ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Analysis ,[object Object],[object Object],[object Object]

Theories of capital structures . . ,[object Object],[object Object],[object Object],[object Object],[object Object]

Assumptions in capital structure theories ….. ,[object Object],[object Object],[object Object],[object Object],[object Object]

NI approach (net income approach) ,[object Object],[object Object],[object Object],[object Object]

NOI approach (Net operating income approach) ,[object Object]

Traditional approach ,[object Object]

ABOUT AFTERSCHO☺OL ,[object Object]

Why such a programme? ,[object Object],[object Object],[object Object],[object Object]

Who are our supporters? ,[object Object],[object Object]

About AFTERSCHO☺OL PGPSE – the best programme for developing great entrepreneurs ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Workshops from AFTERSCHO☺OL ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Flexible Specialisations: ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Salient features: ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Components ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Pedagogy ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Basic values at AFTERSCHO☺OL ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

www.afterschoool.tk social entrepreneurship for better society

Capital Structure Decisions In Financial Management 7 November

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Capital Structure Decisions In Financial Management 7 November