13671883-Capital-Structure-Theory.pdf - 2 N D CAPITAL STRUCTURE THEORY Chapter CAPITAL STRUCTURE THEORY Copyright 2008 Dr Sudhindra Bhat 14 1 FINANCIAL

13671883-Capital-Structure-Theory.pdf - 2 N D CAPITAL...

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Excel Books Excel Books FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat Copyright © 2008, Dr Sudhindra Bhat 2 N D 14 – 1 CAPITAL STRUCTURE THEORY Chapter CAPITAL STRUCTURE THEORY
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Excel Books Excel Books FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat Copyright © 2008, Dr Sudhindra Bhat 2 N D 14 – 2 CAPITAL STRUCTURE THEORY Questions while Making the Financing Decision How should the investment project be financed?Does the way in which the investment projects are financed matter?How does financing affect the shareholders’ risk, return and value?Does there exist an optimum financing mix in terms of the maximum value to the firm’s shareholders?Can the optimum financing mix be determined in practice for a company?What factors in practice should a company consider in designing its financing policy?
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Excel Books Excel Books FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat Copyright © 2008, Dr Sudhindra Bhat 2 N D 14 – 3 CAPITAL STRUCTURE THEORY Features of An Appropriate Capital Structure capital structure is that capital structure at that level of debt – equity proportion where the market value per share is maximum and the cost of capital is minimum. Appropriate capital structure should have the following features Profitability / Return Solvency / Risk Flexibility Conservation / Capacity Control
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Excel Books Excel Books FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat Copyright © 2008, Dr Sudhindra Bhat 2 N D 14 – 4 CAPITAL STRUCTURE THEORY Determinants of Capital Structure Seasonal Variations Tax benefit of Debt Flexibility Control Industry Leverage Ratios Agency Costs Industry Life Cycle Degree of Competition Company Characteristics Requirements of Investors Timing of Public Issue Legal Requirements
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Excel Books Excel Books FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat Copyright © 2008, Dr Sudhindra Bhat 2 N D 14 – 5 CAPITAL STRUCTURE THEORY Patterns / Forms of Capital Structure Following are the forms of capital structure: Complete equity share capital; Different proportions of equity and preference share capital; Different proportions of equity and debenture (debt) capital and Different proportions of equity, preference and debenture (debt) capital.
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Excel Books Excel Books FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat Copyright © 2008, Dr Sudhindra Bhat 2 N D 14 – 6 CAPITAL STRUCTURE THEORY Problems on Capital structure
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