Capital structure1
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This document discusses capital structure and the ideal proportion of debt and equity for a business. It explains that capital structure refers to the mix of owners' funds and borrowed funds. An optimal capital structure increases a company's value and profitability by considering whether the cost of debt is lower than the return on investment. The document recommends increasing debt if the cost is lower and reducing debt if the cost is higher to maximize earnings per share and shareholder wealth.
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2. The net income approach states that a firm's cost of capital and value are impacted by its capital structure, while the net operating income approach argues they are independent.
3. The Modigliani-Miller approach also argues a firm's value is independent of capital structure under certain assumptions, but value increases with tax benefits of debt under more realistic assumptions.
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* Firm X is leveraged as it has Rs. 500000 debentures while Firm Y is unleveraged
* EBIT of both firms is Rs. 100000
* Equity capitalisation rate of Firm X is 17% while that of Firm Y is 13%
* Investor A holds 10% shares of Firm X
* As per MM theory, this difference in capitalisation rate cannot exist for long due to arbitrage process
* Investor A will sell shares of Firm X whose capitalisation rate is higher and buy shares of similar value of Firm Y whose capitalisation rate is lower
* This will increase demand and price of shares of Firm Y and reduce price of shares of Firm X
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This document discusses capital structure and the optimal mix of debt and equity financing for companies. It defines capital structure as the composition of a firm's long-term financing which includes equity, preferred stock, and debt. The capital structure should be planned carefully to minimize costs and maximize shareholder value. Companies can raise funds through equity financing such as issuing shares, or through debt financing such as issuing bonds. While equity allows shareholders to trade shares freely, debt requires periodic interest payments and principal repayments which increase costs but also allow tax deductions for companies. The optimal capital structure balances these costs and risks.
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Capital structure refers to how a corporation finances its assets through a combination of equity, debt, or securities. A firm's capital structure composition includes liabilities like debt and equity shares. Equity shares make shareholders owners but do not burden the company, while debt provides tax advantages but requires regular payments. An optimal capital structure considers advantages and disadvantages of different sources to maximize utilization of resources.
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The document discusses capital structure, which is the mix of debt and equity used to finance a firm. The value of a firm is equal to the value of its debt plus the value of its equity. The optimal capital structure maximizes firm value by balancing the debt-equity ratio. Factors that influence the capital structure decision include business risk, taxes, financial flexibility, growth opportunities, and market conditions. Leverage increases risk for shareholders but also increases potential returns, as interest payments are tax deductible. Higher debt leads to greater financial risk.
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Capital structure refers to the combination of debt and equity that a company uses to finance its operations. It involves determining the appropriate mix of different types of securities like equity shares, preference shares, debentures, and long-term loans. An optimal capital structure maximizes the firm's value by minimizing its overall cost of capital. It provides the ideal balance between debt and equity financing.
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Firms must balance risk and return when determining their optimal capital structure. Using low amounts of debt results in lower risk but also lower returns, while high debt reduces shareholder value due to high costs. The target capital structure finds the balance between debt and equity that maximizes stock price. Every firm aims to maintain its target debt-equity ratio over time by raising capital through debt if below the target or equity if above the target, weighing the tradeoff between risk and return associated with different levels of debt.
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This document discusses capital structure and leverage. It defines capital structure as the composition of a company's long-term capital sources including loans, reserves, shares and bonds. The optimal capital structure maximizes firm value by balancing the use of debt and equity. Leverage refers to a company's use of fixed-cost funds, like debt, to increase returns to shareholders. Both financial leverage and operating leverage can magnify the impact of changes in revenues and earnings but also increase business risk.
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The document discusses capital structure, which refers to the composition of a company's long-term financing, including loans, reserves, shares, and bonds. It outlines factors that influence a company's capital structure, both internal factors like financial leverage and risk, and external factors like industry trends and availability of funds. The document also discusses the concept of an optimal capital structure that maximizes firm value and minimizes cost of capital, and explains the point of indifference where earnings per share remains the same regardless of the debt-equity mix. Leverage is defined as a company's ability to use fixed-cost assets or funds to increase returns to owners, and different types of leverage including financial, operating, combined, and working capital leverage are described
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The document defines capital structure as the composition of a company's long-term financing, including loans, reserves, shares, and bonds. It discusses factors that influence a company's capital structure such as financial leverage, risk, growth, and cost of capital. It also discusses the concept of an optimal capital structure that maximizes firm value. The document then covers related topics like the point of indifference, types of leverage including financial and operating leverage, and how they impact a company's earnings.
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1. The document discusses various capital structure theories including the net income approach, net operating income approach, Modigliani-Miller approach, and traditional approach.
2. The net income approach states that a firm's cost of capital and value are impacted by its capital structure, while the net operating income approach argues they are independent.
3. The Modigliani-Miller approach also argues a firm's value is independent of capital structure under certain assumptions, but value increases with tax benefits of debt under more realistic assumptions.
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The document defines capital structure as the permanent long-term financing of a company, including long-term debt, common stock, preferred stock, and retained earnings. It discusses the concept of optimal capital structure, which minimizes a firm's cost of capital. The document also outlines various approaches to establishing capital structure, including EBIT-EPS analysis and cash flow analysis. It evaluates capital structure based on factors like flexibility, risk, return, and control.
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* Firm X is leveraged as it has Rs. 500000 debentures while Firm Y is unleveraged
* EBIT of both firms is Rs. 100000
* Equity capitalisation rate of Firm X is 17% while that of Firm Y is 13%
* Investor A holds 10% shares of Firm X
* As per MM theory, this difference in capitalisation rate cannot exist for long due to arbitrage process
* Investor A will sell shares of Firm X whose capitalisation rate is higher and buy shares of similar value of Firm Y whose capitalisation rate is lower
* This will increase demand and price of shares of Firm Y and reduce price of shares of Firm X
* The process will continue till
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The document discusses capital structure and the advantages and disadvantages of debt versus equity financing. It summarizes Modigliani and Miller's seminal work which established that in a perfect capital market without taxes, a firm's value is independent of its capital structure. When taxes are considered, debt provides a tax shield that increases firm value up to a point, after which additional debt increases financial distress costs. The optimal capital structure balances the tax benefits of debt against the costs of financial distress.
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The capital structure of a company refers to the mix of long-term debt, short-term debt, common equity, and preferred equity used to finance the company's overall operations and growth. There are various principles and considerations that go into planning an optimal capital structure, including cost, risk, control, flexibility, and timing. Determining the right mixture of internal and external sources of financing is important for a company's long-term survival and depends on factors like trading on equity, degree of control, flexibility, choice of investors, capital market conditions, financing period, cost, sales stability, and company size.
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The document discusses factors that affect a company's capital structure and the types of securities it issues. It identifies 12 key considerations: 1) the nature of the business, 2) money market conditions, 3) stability of earnings, 4) capital requirements, 5) retaining control, 6) long-term interests of the company, 7) legal restrictions, 8) nature of assets, 9) general interest rates, 10) attitudes of investors, 11) taxation policy, and 12) cost of financing. The types of securities issued should take all these factors into account to determine the optimal capital structure for the company.
Capital structure
The document discusses capital structure, asset structure, financial structure, and optimal capital structure. It defines capital structure as the permanent financing of a firm through long-term debt, preferred stock, and net worth. Financial structure includes current liabilities in addition to capital structure. Optimal capital structure is the combination of debt and equity that achieves goals like maximizing returns in the most effective way. Determinants of capital structure include the nature of business, stability of earnings, growth rate, and costs of capital.
Introduction to capital structure
This document discusses capital structure and the optimal mix of debt and equity financing for companies. It defines capital structure as the composition of a firm's long-term financing which includes equity, preferred stock, and debt. The capital structure should be planned carefully to minimize costs and maximize shareholder value. Companies can raise funds through equity financing such as issuing shares, or through debt financing such as issuing bonds. While equity allows shareholders to trade shares freely, debt requires periodic interest payments and principal repayments which increase costs but also allow tax deductions for companies. The optimal capital structure balances these costs and risks.
Capital structure
Capital structure refers to how a corporation finances its assets through a combination of equity, debt, or securities. A firm's capital structure composition includes liabilities like debt and equity shares. Equity shares make shareholders owners but do not burden the company, while debt provides tax advantages but requires regular payments. An optimal capital structure considers advantages and disadvantages of different sources to maximize utilization of resources.
Capital structure ppt
The document discusses capital structure, which is the mix of debt and equity used to finance a firm. The value of a firm is equal to the value of its debt plus the value of its equity. The optimal capital structure maximizes firm value by balancing the debt-equity ratio. Factors that influence the capital structure decision include business risk, taxes, financial flexibility, growth opportunities, and market conditions. Leverage increases risk for shareholders but also increases potential returns, as interest payments are tax deductible. Higher debt leads to greater financial risk.
Capital structure theory
Capital structure refers to the combination of debt and equity that a company uses to finance its operations. It involves determining the appropriate mix of different types of securities like equity shares, preference shares, debentures, and long-term loans. An optimal capital structure maximizes the firm's value by minimizing its overall cost of capital. It provides the ideal balance between debt and equity financing.
Factors affecting capital structure
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RBC Capital Markets initiated coverage of Apollo Global Management with a Sector Perform rating and $35 price target. While Apollo has one of the strongest private equity franchises, RBC is concerned that the current pace of realizations may not be sustainable and that deploying newly raised capital could be difficult. RBC prefers peers that are less deep into the realization cycle or have more diversified sources of income.
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Firms must balance risk and return when determining their optimal capital structure. Using low amounts of debt results in lower risk but also lower returns, while high debt reduces shareholder value due to high costs. The target capital structure finds the balance between debt and equity that maximizes stock price. Every firm aims to maintain its target debt-equity ratio over time by raising capital through debt if below the target or equity if above the target, weighing the tradeoff between risk and return associated with different levels of debt.
ARES Initiation
- RBC Capital Markets initiated coverage of Ares Management, L.P. with an Outperform rating and $23 price target.
- Ares Management is uniquely positioned between alternative and traditional asset managers, with higher management fees than alternatives but more attractive fee rates than traditionals.
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The document discusses capital structure, which refers to the composition of a company's long-term financing, including loans, reserves, shares, and bonds. It outlines factors that influence a company's capital structure such as financial leverage, risk, growth, and external conditions. The document also discusses the concept of an optimal capital structure that maximizes firm value and minimizes the cost of capital. It notes different types of leverage including financial, operating, combined, and working capital leverage and how they impact a company's earnings and risk.
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THE INVESTMENT DECISION THE INVESTMENT DECISION
Financial_management_S_3.pptfhjhdfhjkkggfykjf
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Capital structure spk
The document discusses capital structure, which refers to the mix of long-term financing sources like debt and equity. It notes that capital structure should maximize returns to shareholders without adding undue risk. It then covers various factors that affect capital structure decisions, including return, risk, flexibility, debt capacity, and control considerations. Specific factors discussed include trading on equity, retaining control, enterprise nature, legal regulations, financing purpose and period, investor requirements, company size, and government policy.
Capital structure 1
Explain different theories of capital structure - More useful to the
students of Universities in Kerala
Capital structure decisions
This document discusses capital structure decisions and optimal capital structure. It defines capital structure as the mix of long-term financing sources like debt and equity. An optimal capital structure minimizes costs while maximizing firm value. It balances financial risk from debt against non-employment of debt capital risk. The optimal structure achieves the lowest weighted average cost of capital.
197.capital structure lecture
This document summarizes key concepts regarding capital structure analysis:
1) EBIT/EPS analysis examines how different capital structures affect earnings available to shareholders and risk based on different levels of EBIT. Leverage increases EPS at high EBIT levels but decreases it at low levels.
2) Debt provides a tax shield benefit as interest payments reduce taxable income. This increases overall returns to investors compared to an unlevered firm.
3) There is a trade-off between the tax benefits of debt and the financial distress and agency costs of debt as leverage increases. Optimal capital structure balances these factors.
4) Practical considerations like industry standards, creditor requirements, maintaining borrowing capacity, and manager
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· Generate 2-3 recommendations for an organization needing to create a more "thriving" environment.
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Aswath Damodaran! 1!
Financial Statement Analysis!
“The raw data for investing”
Aswath Damodaran! 2!
Questions we would like answered…!
Assets Liabilities
Assets in Place Debt
Equity
What is the value of the debt?
How risky is the debt?
What is the value of the equity?
How risky is the equity?
Growth Assets
What are the assets in place?
How valuable are these assets?
How risky are these assets?
What are the growth assets?
How valuable are these assets?
Aswath Damodaran! 3!
Basic Financial Statements!
The balance sheet, which summarizes what a firm owns and owes at a
point in time.
The income statement, which reports on how much a firm earned in
the period of analysis
The statement of cash flows, which reports on cash inflows and
outflows to the firm during the period of analysis
Aswath Damodaran! 4!
The Accounting Balance Sheet!
Assets Liabilities
Fixed Assets
Debt
Equity
Short-term liabilities of the firm
Intangible Assets
Long Lived Real Assets
Assets which are not physical,
like patents & trademarks
Current Assets
Financial InvestmentsInvestments in securities &
assets of other firms
Short-lived Assets
Equity investment in firm
Debt obligations of firm
Current
Liabilties
Other
Liabilities Other long-term obligations
Figure 4.1: The Balance Sheet
Aswath Damodaran! 5!
Principles underlying accounting balance
sheets!
An Abiding Belief in Book Value as the Best Estimate of Value: Unless
a substantial reason is given to do otherwise, accountants view the
historical cost as the best estimate of the value of an asset.
A Distrust of Market or Estimated Value: The market price of an asset
is often viewed as both much too volatile and too easily manipulated
to be used as an estimate of value for an asset. This suspicion runs
even deeper when values are is estimated for an asset based upon
expected future cash flows.
A Preference for under estimating value rather than over estimating it:
When there is more than one approach to valuing an asset, accounting
convention takes the view that the more conservative (lower) estimate
of value should be used rather than the less conservative (higher)
estimate of value.
Aswath Damodaran! 6!
Measuring asset value!
.
Cost of capital
The document provides an introduction to cost of capital, which includes the cost of debt, cost of equity, and weighted average cost of capital (WACC). It discusses how to calculate the cost of debt, cost of equity using the capital asset pricing model, and WACC. It also explains different models to value equity such as the dividend discount model and two-stage growth model.
NSE IFSC – Debt to equity ratio (1).pdf
This document discusses the debt to equity ratio, which is a financial ratio that measures a company's financial leverage by comparing its total liabilities to its total shareholders' equity. It is calculated by dividing a company's total liabilities by its shareholders' equity. A high debt to equity ratio means the company has more debt than equity, making it riskier as it must pay off debt before equity shareholders if it goes bankrupt. The ideal ratio depends on the industry, so companies must be compared to their peers. The ratio helps investors assess credit risk but should be considered along with other financial metrics.
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Chapter-1-Capital Structure Policy and Leverage.pptx
Chapter-1-Capital Structure Policy and Leverage.pptx
Optimization Of Capital Structure Of Firm To Improve Profitability Complete Deck
Optimization Of Capital Structure Of Firm To Improve Profitability Complete Deck
FM-CH(4).ppt THE INVESTMENT DECISION THE INVESTMENT DECISION
FM-CH(4).ppt THE INVESTMENT DECISION THE INVESTMENT DECISION
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Capital structure1
- 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?
- 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.
- 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