This document summarizes a presentation on capital structure. It discusses various types of capital including debt and equity sources like bank loans, bonds, preference shares, debentures, and equity shares. It also covers key concepts related to capital structure including debt-equity ratio, determinants of capital structure, capital gearing, and major capital structure theories like the net income approach, net operating income approach, traditional approach, and Modigliani-Miller approach. The presentation was made by various students covering different aspects of capital structure.

1. Capital structure
A PRESENTATION ON:-
B.Com. (Management) semester 4 section A
SUBMITTED TO:- MS. SINI M GEORGE
NAME R. NO.
AVNI AGRWAL 220012
INSHA KHAN 220021
JAY SINGH 220023
LUCKY CHOUHAN 220026
MAHIMA MISHRA 220027
YASH AHUJA 220052

2. CAPITAL STRUCTURE
Current speaker:- Jay singh

4. CAPITAL
The capital of a business is the money it uses to initiate the business
and to fund its future growth
CAPITAL
The capital of a business is the money it uses to initiate the business
and to fund its future growth

5. CAPITAL
The capital of a business is the money it uses to initiate the business
and to fund its future growth

6. CAPITAL
10,000 /MONTH
15,000 /MONTH

7. DEBT
EQUIT
Y
CAPITAL
BANK LOANS
EQUITY
SHARES
INVESTORS
PREFRENCE
SHARES DEBENTURES
BONDS

8. DEBT
EQUIT
Y
CAPITAL
BANK LOANS BONDS INVESTORS DEBENTURES PREFRENCE SHARES EQUITY SHARES

9. BANK LOANS BONDS INVESTORS DEBENTURES PREFRENCE SHARES EQUITY SHARES
DEBT EQUITY
DEBT
EQUIT
Y
CAPITAL

10. CAPITAL
STRUCTURE
Capital structure refers to the specific mix of debt and equity used to finance a
company's assets and operations.
DEBT EQUITY

11. CAPITAL STRUCTURE
Capital structure refers to the specific mix of debt and equity used to finance a
company's assets and operations.
DEBT EQUITY DEBT EQUITY
DEBT EQUITY

12. 1 2 3 4 5
FEATURES OF OPTIMUM CAPITAL
BANK LOANS BONDS INVESTORS
DEBENTURES PREFRENCE SHARES EQUITY SHARES
BANK LOANS EQUITY SHARES INVESTORS DEBENTURES
Profit
EQUITY 50% + DEBT 50% -> HIGHEST COST
EQUITY 35% + DEBT 75% -> LOWER COST
EQUITY 75% + DEBT 35% -> HIGHEST COST
EQUITY 75% + DEBT 35% -> LOWEST COST
STRUCTURE
EQUITY 25% + DEBT 75% -> LOWER COST
EQUITY 75% + DEBT 25% -> LOWEST COST

13. DETERMINANTS OF CAPITAL
STRUCTURE
Current speaker:- Insha Khan

14. DETERMINANTS OF CAPITAL STRUCTURE
C a p i t a l
s t r u c t u r e
1
Financial
leverage
2
EBIT-EPS
Analysis
5
Industry
standard
3
Cost of
Capital
4
Cash
Flow

15. CAPITAL GEARING
Capital gearing can be defined as a ratio between equity
share capital and fixed cost capital bearing securities i.e.
long term debts, debentures and preference share capital
formula
C.G.R =
equity share + reserves and surplus
preference shares+ long term debts

16. CAPITAL GEARING
C.G.R =
equity share + reserves and surplus
preference shares+ long term debts
EXAMPLE
PARTICULAR COMPANY A COMPANY B
equity share reserves and
surplus
70000 35000
preference shares and long
term debts
35000 70000
COMPANY A COMPANY B
C.G.R= equity share + reserves and surplus
preference shares+ long term debts
C.G.R=
70,000
35,000
C.G.R = 2:1
C.G.R= equity share + reserves and surplus
preference shares+ long term debts
C.G.R=
35,000
70,000
C.G.R = 1:2
LOW CAPITAL GEARING HIGH CAPITAL GEARING

17. CAPITAL STRUCTURE THEORIES
Current speaker:- Mahima Mishra

18. Modiglliani miller
approach
PROPUNDED BY
Franko MODIGLIANI
& MERTON HOWARD M.
. Traditional
. approach
.
. OLDEST
CAPITAL . .
STRUCTURE THEORY
Net operating income
FF approach
This approach
. was also
given . .
by Durand
NET INCOME APPROACH
PROPUNDED BY
DURAND
CAPITAL STRUCTURE THEORIES
In financial management, capital structure theory refers to
a systematic approach to financing business activities
through a combination of equities and liabilities.
M.M T.A
N.I N.O.I

19. NET INCOME APPROACH
Net Income Approach was
presented by Durand. The
theory suggests increasing
value of the firm by
decreasing the overall cost
of capital which is
measured in terms of
Weighted Average Cost of
Capital.
This can be done by
having a higher proportion
of debt, which is a
cheaper source of finance
compared to equity
finance.

20. ASSUMPTIONS IN NET INCOME APPROACH
ASSUMPTION 1
There are
no taxes
ASSUMPTION 2
Cost of debt
is less than
cost
ASSUMPTION 3
The increase in the
proportion of debt
in capital structure
does not change
the risk perception
of the equity
shareholders.

21. NET INCOME APPROACH
KEY TAKEAWAY
DEBT Cost Value

22. NET INCOME APPROACH
example
Company A Company B Company C
DEBT EQUITY
PROPORTION
VALUE OF THE
COMPANY
VALUE PER
SHARE
50:50 80:20 20:80
Nuteral Positive Negative
Unchanged Increased Decreased

23. NET OPERATING INCOME
APPROACH
Current speaker:- Lucky Chouhan

24. NET OPERATING INCOME APPROACH
This approach was propounded by David
Durand in 1952

25. EXPLANATION
1
2
3
4
Entirely opposite to Net Income Approach
No relationship between capital structure and
value of company
Increase in debt composition results in increased
risk perception by investors
Higher risk leads to higher return from company and
rise in equity capital

26. ASSUMPTIONS IN NET OPERATING
INCOME APPROACH
Cost of debt is constant
There are no corporate taxes
Value of equity is determined by deducting total
value of debt from total value of company
Investors capitalize total earnings of company to find
value of company as whole
Change in proportion of debt capital leads to change in risk
. perception by shareholders
Overall cost of capital ( Ko) remains constant for all degrees
of debt – equity mix
1
2
3
4
5
6

27. NET OPERATING INCOME APPROACH
Practical question
A company is having EBIT Rs
1,00,000, Debt borrowed @ 10%. Rs
5,00,000 and overall capitalisation
rate ( Ko ) @12.5 % .
What would be the value of this
company and equity capitalisation
rate ?

28. THE TRADITIONAL APPROACH
Current speaker:- Yash Ahuja

29. EXPLANATION
1
2
3
4
It is also known as Intermediate approach as it includes
both Net Income Approach and Net Operating Income
Approach.
According to this theory, the value of the firm can be
increased initially or the cost of capital can be decreased
by using more debt as the debt is a cheaper source of
funds than equity .
Beyond a particular point, the cost of equity increases
because increased debt increases the financial risk of
the equity shareholders.
The advantage of cheaper debt at this point of capital
structure is offset by increased cost of equity.

30. ASSUMPTIONS IN TRADITIONAL APPROACH
ASSUMPTION 1
The rate of interest
on debt remains
constant for a
certain period and
thereafter with an
increase in
leverage, it
increases.
ASSUMPTION 2
The expected rate by
equity shareholders
remains constant or
increase gradually.
After that, the equity
shareholders starts
perceiving a financial
risk and then from the
optimal point and the
expected rate increases
speedily
ASSUMPTION 3
As a result of the
activity of rate of
interest and
expected rate of
return, the WACC
first decreases and
then increases. The
lowest point on the
curve is optimal
capital structure.

31. GRAPHICAL PRESENTATION OF
TRADITIONAL APPROACH
Cost of
capital
Level of debt
Optimum point
A
Net Income Approach stating
Debt is increased which
results in
reduced Cost of Capital
Net Operating Income Approach stating
Debt is increased
which results in
Increased implicit cost (cost of Equity)

32. TRADITIONAL APPROACH
Formulas
Cost of Capital = Cost of Debt + Cost of Equity
B -> Market Value Of Debt S -> Market Value of Equity
ko -> Cost of Capital(Total/Overall)
ke -> Cost of Equity ki -> Cost of Debt

33. OBJECTIVE TRADITIONAL APPROACH
The Main Objective of Traditional Approach is to create a proper
Balanced Capital Structure by using Capital Mix of Debt & Equity which
depends upon the level of Business Uncertainty and Situation of
Capital Markets
Business
Certainty
Stability
of
Business
Capital
Market’s
Situations
Key Determinants
Optimum Range occurs at a
Higher level of Leverage/ Debt for
Stable Industries
SUITABLE UNSUITABLE

34. MODIGLIANI-MILLER
APPROACH
MILLER
MODIGLIANI
Current speaker:- Avni Agrawal

35. MILLER
MODIGLIANI
FRANKO MERTON HOWARD

36. EXPLANATION
1
2
3
4
MM APPROACH advocates that value of firm is not
affected by average cost of capital.
It is also known as the capital irrelevance principle.
This approach is similar to NOI approach
relating to independence of cost of capital and
degree of leverage.
Also, value of levered firm = value of unlevered firm

37. ARBITRAGE METHOD
Arbitrage is the process of simultaneous buying and selling of an asset
from different platforms, exchanges or locations. MM approach uses
this method to justify its crux of argument.
Price of gold in Maharashtra - 27000
Price of gold in Chhattisgarh - 27500
BUYING PRICE:- 27000
SELLING PRICE:- 27500
PROFIT:- 500

38. 01
ASSUMPTIONS
• Perfect capital market
• No corporate taxes
• Equivalent risk classes
• Expected value of
distributions of all investors
are same
02
PROPOSITIONS
• Ko and V will remain constant
irrespective of degree of leverage.
• Ke = capitalisation rate [pure
equity + premium for financial
risk]
• The cut off rate for investment is
completely independent of way in
which investment is financed.
ASSUMPTIONS AND PROPOSITIONS

39. LIMITATIONS OF MM APPROCH
LIMITATION
1
The
arbitrage
process is
not realistic
LIMITATION
2
Presence of
transaction
cost
3
LIMITATION
Corporate
taxes do
not exist
4
LIMITATION
Imposition of
transaction
cost.

40. Agency cost
Bankruptcy costs
DIFFERENT COST OF BORROWING
The mm propositions with corporate taxes
INSTITUTIONAL RESTRICTIONS -margin transactions, short sales,
limitations imposed by regulatory authorities on bonds or stocks.
SUBSTITUTION OF PERSONAL AND CORPORATE LEVERAGE
ARGUMENTS AGAINST MM HYPOTHESIS
1
2
3
4
5
6

41. MODIGLIANI-MILLER APPROACH
Practical question
There are two firms N and M having EBIT of
Rs 20,000. Firm M is levered company
having a debt of Rs 1,00,000 @7% rate of
equity. The cost of equity of N company is
10% and forb M is 11.50 %