2. FINANCIAL MANAGEMENT
Financial management is concerned with
raising financial resources and their
effective utilisation towards achieving the
organisation goals. In simple words
Financial Management is concerned with
the planning effective use of an important
economic resources, namely capital fund.
3. CAPITAL
STRUCTURE
Capital Structure refers to
composition of large term sources
of fund, such as debentures, long
term debts, preference share capital
and ordinary share capital including
reserves and surplus retained.
4. TOTAL CAPITAL STRUCTURE OF
FIRMS..
EQUITY CAPITAL
1. EQUITY SHARE
2. CAPITAL PREFERENCE
3. SHARE CAPITAL
4. RETAINED EARNINGS
DEBT CAPITAL
1. TERM LOANS
2. DEBENTURES
3. LONG TERM DEBTS
4. LIABILITY OTHER
5. DEFERRED PAY
TOTAL CAPITALS
6. 2. Safety and solvency :- Capital
structure must built regarding
future safety and solvency.
Excess presence of debt capital
make difficult for firm not only pay
annual interest but also to redeem
it's debt on maturity.
7. 3. Flexible :- Capital
structure must change time
to time according to
situations in capital market.
8. 4. Control :- Helps the
management in retain Control over
decision making. It suggests debt
should preferd over equity
whenever additional funds need.
9. 5. Cost of issue and Flotation cost
Structure in such way that it reduce
the issue cost and Flotation cost as
much as possible.
Normal'- Cost of debt should lower
as compared to cost of equity.
10. FACTORS AFFECTING
CAPITAL STRUCTURE
1. Nature of business :- Business
donot have stable income prefer
equity capital while business
engaged in public utility prefer
more debenture and preference
share.
11. 2. Purpose of Finance :- If need
for productive purpose -
debentures unproductive =
Equity.
12. 3. Technology :- Firm use
Capital intensive techniques =
Debentures
Firm use labour party intensive
= Equity.
13. 4. Requirements of investors :-
Investors who want high risk =
Equity
Firm need less risk =prefer
debentures or prefer Share.
14. 5. Nature and size firm :- Size
large then issue debentures or
raise borrowed money easily while
size small then companyp prefer
owned company as source of
income.
15. 6. Risk :- More risk = Equity
Less risk = Debentures or pref
Shares.
16. THEORIES OF CAPITAL
STRUCTURE..
1. NET INCOME APPROACH
11. NET OPERATING INCOME
APPROACH
111. TRADITIONAL APPROACH
1V. MODIGLIANI MILLER APPROACH
(MM APPROACH)
17. NET INCOME APPROACH
• The theory propound that' is company can
increase its value and reduce my he overall cost
of capital by increasing the proportion of debts in
its capital structure. In simple words according
to this approach change in the capital structure
of a company can effect the market value of the
firm.
• ⬆️Debts. ⬆️Market Value.⬇️Reduce overall cost of
capital.
19. NET OPERATING INCOME
APPROACH..
• This theory is suggested by the DURAND.
• According to this approach change in the
capital structure of a company does not effect
the market value of the firm and the overall
cost of capital is remain consistent is implies
that the overall cost of capital remain the same
whether the debt equity mix in 50:50 and 20:80
or 0:100, thus there is nothing as an optimal
capital structure.
21. MODIGLIANI AND MILLER
APPROACH
• M&M approach is indentical with the net operating income
approach of taxes are ignored. However when the corporate
taxes are assumed to exist, their hipothesis is similar to the Net
Income approach.
• 1.. In the absence of taxes :- the theory prove that cost of capital
is not affected by changes in the capital structure.
• 2.. When the corporate taxes are exist :- Modigliani and Miller, in
their article of 1963 has recognised that the value of firm will
increase and cost of capital will decreased with the use of debts.
23. THE TRADITIONAL APPROACH
• The traditional approach is also known as
intermediate approach, it is the compromise
between the two extremes of net income approach
and net operating income approach.. According to
this theory, the value of firm can can be increased
initially or the cost of capital can be decreased by
using more debts as the debts is cheaper source
of fund than equity. Thus the optimum capital
structure, can be reached by proper debts-equity
mix.
