The document discusses capital structure and the Modigliani-Miller approach. It provides definitions of capital structure and optimal capital structure. It then outlines the key assumptions of the Modigliani-Miller approach, including perfect capital markets, no taxes, 100% dividend payout, and constant business risk. The document explains the Modigliani-Miller propositions that the market value and cost of capital of a firm are independent of its capital structure. It provides an example to demonstrate how arbitrage would eliminate any differences in market values between levered and unlevered firms.
This presentation is an overview of Capital Structure Theories.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
This analysis is an important tool used to optimize the capital structure for highest earnings for shareholders
It helps in understanding the sensitivity of EPS at given level of Earning before Interest & Tax under different sources of financing
It helps in analyzing how capital structure decision is important to raise the value of firm
An optimal financing structure minimizes the cost of capital and maximizes the earnings
Earning Per Share under different Capital structure plans
Plan 1 ( Only Equity Shares )
EPS = (EBIT (1−Tax rate))/(No. of Outstanding Shares)
Plan 2 ( Equity Shares & Debt )
EPS = ((EBIT −Interest) (1−Tax rate))/(No. of Outstanding Shares)
Plan 3 (Equity, Debt & Preference Shares)
EPS = ((EBIT −Interest) (1−Tax rate)−Pref. Dividend)/(No. of Outstanding Shares)
Plan 4 (Equity shares & Preference Shares)
EPS = (EBIT (1−Tax rate)−Pref. Dividend)/(No. of Outstanding Shares)
Thank You For Waching
Subscribe to DevTech Finance
This presentation is an overview of Capital Structure Theories.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
This analysis is an important tool used to optimize the capital structure for highest earnings for shareholders
It helps in understanding the sensitivity of EPS at given level of Earning before Interest & Tax under different sources of financing
It helps in analyzing how capital structure decision is important to raise the value of firm
An optimal financing structure minimizes the cost of capital and maximizes the earnings
Earning Per Share under different Capital structure plans
Plan 1 ( Only Equity Shares )
EPS = (EBIT (1−Tax rate))/(No. of Outstanding Shares)
Plan 2 ( Equity Shares & Debt )
EPS = ((EBIT −Interest) (1−Tax rate))/(No. of Outstanding Shares)
Plan 3 (Equity, Debt & Preference Shares)
EPS = ((EBIT −Interest) (1−Tax rate)−Pref. Dividend)/(No. of Outstanding Shares)
Plan 4 (Equity shares & Preference Shares)
EPS = (EBIT (1−Tax rate)−Pref. Dividend)/(No. of Outstanding Shares)
Thank You For Waching
Subscribe to DevTech Finance
Financial system and markets:
objectives of financial system-
Concepts of financial system-
Financial concepts-
Development of financial systems in India-
Weakness of Indian financial system
This PPT contains the full detail of topic leverage in financial management
it covers following topics :-
Meaning of Leverage
Types of Leverage
Operating Leverage
Financial Leverage
Difference between Operating & Financial Leverage
Combined Leverage
Illustrations
Exercise
Presentation on "Capital Market"
1.definition and characteristics
2.function and players
3.importance/role and types
4.factor and structure
5.reforms and development
Financial system and markets:
objectives of financial system-
Concepts of financial system-
Financial concepts-
Development of financial systems in India-
Weakness of Indian financial system
This PPT contains the full detail of topic leverage in financial management
it covers following topics :-
Meaning of Leverage
Types of Leverage
Operating Leverage
Financial Leverage
Difference between Operating & Financial Leverage
Combined Leverage
Illustrations
Exercise
Presentation on "Capital Market"
1.definition and characteristics
2.function and players
3.importance/role and types
4.factor and structure
5.reforms and development
Analyst presentation 1st quarter 2014 results. ING records 1Q14 underlying net profit of EUR 988 million. Press release available at http://www.ing.com/Newsroom/All-news/Press-releases/PR/ING-records-1Q14-underlying-net-profit-of-EUR-988-million-1.htm
Video with ING CEO Ralph Hamers talking about ING's 1Q 2014 results, ING's restructuring, the economic outlook and more available at http://youtu.be/N65aXMZoUGs
Franco Modigliani and Merton H Miller Irrelevance Theory, Financial Indifference Point, Financial Leverage, Operating Leverage, Combined Leverage, Financial Break Even Point,
Working Capital ManagementChapter 15Working Ca.docxdunnramage
Working Capital Management
Chapter 15
Working Capital Terminology
Working capital: current assets.
Net working capital:
current assets - current liabilities.
Net operating working capital:
current assets - (current liabilities - notes payable).
Working capital management:
controlling cash, inventories, and A/R, plus short-term liability management.
2
Working Capital Financing Policies
Aggressive: Use short-term financing to finance permanent assets.
Moderate: Match the maturity of the assets with the maturity of the financing.
Maturity Matching, or “Self-Liquidating”, approach
Conservative: Use permanent capital for permanent assets and temporary assets.
3
Cash Conversion Cycle
The cash conversion cycle focuses on the length of time between when a company makes payments to its creditors and when a company receives payments from its customers.
4
Cash Conversion Cycle
15-5
5
Cash Budget
Forecasts cash inflows, outflows, and ending cash balances.
Used to plan loans needed or funds available to invest.
Can be daily, weekly, or monthly, forecasts.
Monthly for annual planning and daily for actual cash management.
6
Cash and Marketable Securities
Currency
Demand Deposit
Marketable Securities
Inventories
Supplies
Raw materials
Work in process
Finished goods
Accounts Receivable: Credit Policy
Credit Period: How long to pay? Shorter period reduces days sales outstanding (DSO) and average A/R, but it may discourage sales.
Cash Discounts: Lowers price. Attracts new customers and reduces DSO.
Credit Standards: Restrictive standards tend to reduce sales, but reduce bad debt expense. Fewer bad debts reduce DSO.
Collection Policy: How tough? Restrictive policy will reduce DSO but may damage customer relationships.
9
Accounts Payable: Trade Credit
Trade credit is credit furnished by a firm’s suppliers.
Trade credit is often the largest source of short-term credit, especially for small firms.
Spontaneous, easy to get, but cost can be high.
10
period
deferral
Payables
period
collection
Average
period
conversion
Inventory
CCC
-
+
=
Capital Structure Policy
Chapter 13
Learning Objectives
Understand the difference between business risk and financial risk.
Use the technique of break-even analysis.
Understand capital structure theories.
Business Risk
Business Risk is the variation in the firm’s expected earnings attributable to the industry in which the firm operates.
Determinants of business risk:
The stability of the domestic economy
The exposure to, and stability of, foreign economies
Sensitivity to the business cycle
Competitive pressures in the firm’s industry
Operating Risk
Operating risk is the variation in the firm’s operating earnings that results from firm’s cost structure (mix of fixed and variable operating costs).
Earnings of firms with higher proportion of fixed operating costs are more vulnerable to change in revenues.
5
Operating Lev.
NO1 Uk Black Magic Specialist Expert In Sahiwal, Okara, Hafizabad, Mandi Bah...Amil Baba Dawood bangali
Contact with Dawood Bhai Just call on +92322-6382012 and we'll help you. We'll solve all your problems within 12 to 24 hours and with 101% guarantee and with astrology systematic. If you want to take any personal or professional advice then also you can call us on +92322-6382012 , ONLINE LOVE PROBLEM & Other all types of Daily Life Problem's.Then CALL or WHATSAPP us on +92322-6382012 and Get all these problems solutions here by Amil Baba DAWOOD BANGALI
#vashikaranspecialist #astrologer #palmistry #amliyaat #taweez #manpasandshadi #horoscope #spiritual #lovelife #lovespell #marriagespell#aamilbabainpakistan #amilbabainkarachi #powerfullblackmagicspell #kalajadumantarspecialist #realamilbaba #AmilbabainPakistan #astrologerincanada #astrologerindubai #lovespellsmaster #kalajaduspecialist #lovespellsthatwork #aamilbabainlahore#blackmagicformarriage #aamilbaba #kalajadu #kalailam #taweez #wazifaexpert #jadumantar #vashikaranspecialist #astrologer #palmistry #amliyaat #taweez #manpasandshadi #horoscope #spiritual #lovelife #lovespell #marriagespell#aamilbabainpakistan #amilbabainkarachi #powerfullblackmagicspell #kalajadumantarspecialist #realamilbaba #AmilbabainPakistan #astrologerincanada #astrologerindubai #lovespellsmaster #kalajaduspecialist #lovespellsthatwork #aamilbabainlahore #blackmagicforlove #blackmagicformarriage #aamilbaba #kalajadu #kalailam #taweez #wazifaexpert #jadumantar #vashikaranspecialist #astrologer #palmistry #amliyaat #taweez #manpasandshadi #horoscope #spiritual #lovelife #lovespell #marriagespell#aamilbabainpakistan #amilbabainkarachi #powerfullblackmagicspell #kalajadumantarspecialist #realamilbaba #AmilbabainPakistan #astrologerincanada #astrologerindubai #lovespellsmaster #kalajaduspecialist #lovespellsthatwork #aamilbabainlahore #Amilbabainuk #amilbabainspain #amilbabaindubai #Amilbabainnorway #amilbabainkrachi #amilbabainlahore #amilbabaingujranwalan #amilbabainislamabad
what is the best method to sell pi coins in 2024DOT TECH
The best way to sell your pi coins safely is trading with an exchange..but since pi is not launched in any exchange, and second option is through a VERIFIED pi merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and pioneers and resell them to Investors looking forward to hold massive amounts before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade pi coins with.
@Pi_vendor_247
Currently pi network is not tradable on binance or any other exchange because we are still in the enclosed mainnet.
Right now the only way to sell pi coins is by trading with a verified merchant.
What is a pi merchant?
A pi merchant is someone verified by pi network team and allowed to barter pi coins for goods and services.
Since pi network is not doing any pre-sale The only way exchanges like binance/huobi or crypto whales can get pi is by buying from miners. And a merchant stands in between the exchanges and the miners.
I will leave the telegram contact of my personal pi merchant. I and my friends has traded more than 6000pi coins successfully
Tele-gram
@Pi_vendor_247
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
how to sell pi coins at high rate quickly.DOT TECH
Where can I sell my pi coins at a high rate.
Pi is not launched yet on any exchange. But one can easily sell his or her pi coins to investors who want to hold pi till mainnet launch.
This means crypto whales want to hold pi. And you can get a good rate for selling pi to them. I will leave the telegram contact of my personal pi vendor below.
A vendor is someone who buys from a miner and resell it to a holder or crypto whale.
Here is the telegram contact of my vendor:
@Pi_vendor_247
how can I sell pi coins after successfully completing KYCDOT TECH
Pi coins is not launched yet in any exchange 💱 this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
RIGHT NOW THE ONLY WAY you can sell pi coins is through verified pi merchants. A pi merchant is someone who buys pi coins and resell them to exchanges and crypto whales. Looking forward to hold massive quantities of pi coins before the mainnet launch.
This is because pi network is not doing any pre-sale or ico offerings, the only way to get my coins is from buying from miners. So a merchant facilitates the transactions between the miners and these exchanges holding pi.
I and my friends has sold more than 6000 pi coins successfully with this method. I will be happy to share the contact of my personal pi merchant. The one i trade with, if you have your own merchant you can trade with them. For those who are new.
Message: @Pi_vendor_247 on telegram.
I wouldn't advise you selling all percentage of the pi coins. Leave at least a before so its a win win during open mainnet. Have a nice day pioneers ♥️
#kyc #mainnet #picoins #pi #sellpi #piwallet
#pinetwork
how to sell pi coins on Bitmart crypto exchangeDOT TECH
Yes. Pi network coins can be exchanged but not on bitmart exchange. Because pi network is still in the enclosed mainnet. The only way pioneers are able to trade pi coins is by reselling the pi coins to pi verified merchants.
A verified merchant is someone who buys pi network coins and resell it to exchanges looking forward to hold till mainnet launch.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
2.
Capital structure is the proportion of debt and
preference and equity shares on a firm’s balance
sheet.
Optimum capital structure is the capital structure at
which the weighted average cost of capital is
minimum and thereby maximum value of the firm.
Capital Structure
3.
Capital structure theories explain the theoretical
relationship between capital structure, overall cost of
capital (k0) and valuation (V ). The four important
theories are:
1. Net income (NI) approach,
2. Net operating income (NOI) approach,
3. Modigliani and Miller (MM) approach and
4. Traditional Approach
Capital structure theories
4.
There are only two sources of funds used by a firm:
perpetual riskless debt and ordinary shares.
There are no corporate taxes. This assumption is
removed later.
The dividend-payout ratio is 100. That is, the total
earnings are paid out as dividend to the shareholders
and there are no retained earnings.
The total assets are given and do not change. The
investment decisions are, in other words, assumed to
be constant.
Assumptions
5.
The total financing remains constant. The firm can change
its degree of leverage (capital structure) either by selling
shares and use the proceeds to retire debentures or by
raising more debt and reduce the equity capital.
The operating profits (EBIT) are not expected to grow.
Business risk is constant over time and is assumed to be
independent of its capital structure and financial risk.
Perpetual life of the firm.
Cont’d
6.
The essence of this approach is that capital structure
decision of a corporate does not affect its cost of
capital and valuation, and, hence, irrelevant.
Net Operating Income (NOI)
Approach
7.
The NOI Approach is based on the following
propositions.
Overall cost of capital/ capitalization Ratio(K◦) is
constant
Residual Value of Equity
Changes in cost of equity capital
Optimum Capital Structure
Propositions
8.
Market Price of Share
Cost of Debt
Explicit Cost
Implicit Cost
Cont’d
5
10
15
0 0.5 1.0
Degree of Leverage (B/V)
Leverage and Cost of Capital (NOI Approach)
X
Y
Ke,kiandk0(%)
k0
ki
ke
20
25
k0 and ki remain unchanged as the degree of leverage changes, but as the
degree of leverage increases, the ke increases continuously.
9.
Modigliani-Miller (MM)
Approach
P resented by Modigliani and Miller in 1958
Modigliani and Miller (MM) concur with NOI and
provide a operational justification for the irrelevance
of capital structure.
10.
They maintain that the cost of capital and the value
of the firm do not change with a change in leverage.
x
(in Rs)
v
k0(%)
Degree of Leverage (B/V)
Leverage and Cost of Capital (MM Approach)
V0
k0
11.
The overall cost of capital (k0) and the value of the
firm (V) are independent of its capital structure
The cost of equity of a levered firm is equal to the
cost of equity of an unlevered firm plus a financial
risk premium, which depends on the degree of
financial leverage
The discount rate for investment purposes is
completely independent of the way in which an
investment is financed.
Propositions
12.
Perfect capital markets: The implication of a perfect
capital market is that
investors are free to buy/sell securities
investors can borrow without restrictions on the
same terms and conditions as firms can
there are no transaction costs
information is perfect, that is, each investor has the
same information which is readily available to him
without cost and
investors are rational and behave accordingly.
Assumptions
13.
Given the assumption of perfect information and
rationality, all investors have the same expectation of
firm’s net operating income (EBIT) with which to
evaluate the value of a firm.
Business risk is equal among all firms within similar
operating environment.
The dividend payout ratio is 100 per cent.
There are no taxes. (This assumption is removed later)
Assumptions
14. MM’s Proposition 1
The market value of any firm is independent of its
capital structure.
If a company has a given set of assets, changing debt
to equity will change the way net operating income
is divided between lenders and shareholders but will
not change the value of the company.
Value of a company is given by:
0
annual net operating income
V
k
15.
According to the MM hypothesis, this situation cannot
continue for long time, as the arbitrage process, based
on the substitutability of personal leverage for
corporate leverage, will operate and the values of the
two firms will be brought to an identical level.
Proof of Proposition 1
16.
17.
Example:
Suppose two firms one Levered “L” and the other
unlevered “U” identical by nature i.e. capital, and profits
falling in the same risk class but having different capital
structure and Market value.
L U
Equity 100,000 150,000
8% Debentures 50,000 -
Market price per share Rs. 13 Rs. 10
EBIT Rs. 20,000 Rs. 20,000
Same amount
Of capital
Same Profit
18.
Suppose there is an investor “Mr. X”, holding 10%
shares of Levered firm “L”
Since the market value of L is greater than U, where
as profit is the same
So, Mr. X will sell his 10% shares in firm L
=Rs. 13,000
And will raise a personal loan in the same
proportion i.e. 10%
=Rs. 50,000×10%
=Rs. 5000
Total cash in hand is: Rs. 13,000+5000= Rs.18,000
He will invest that amount in shares of firm U. which
amounts to 12% of total shares in firm U
19.
L U
EBIT Rs. 20,000 Rs. 20,000
Less: Interest (4000) -
EBT/NI 16,000 20,000
Dividend 10% i.e. 1600 12% i.e. 2400
Profit earned by Mr. X from Unlevered firm = Rs. 2400
Less: Interest to be paid on loan(50,000×8%) = (400)
Total profit earned = Rs. 2000
Arbitrage process will continue till the share prices of Firm L fall and Firm U’s rises.
So as to make the market prices of both firms identical