Submit Search
Upload
Chapter20 capital structure_decision
β’
Download as PPT, PDF
β’
6 likes
β’
1,041 views
Amit Fogla
Follow
Economy & Finance
Business
Report
Share
Report
Share
1 of 20
Download now
Recommended
Financial management(1)
Financial management(1)
chowdhury auni
Β
197.capital structure lecture
197.capital structure lecture
kitturashmikittu
Β
Capital Structure Theory
Capital Structure Theory
piyooshtripathi
Β
Capital structure theories notes
Capital structure theories notes
Soumendra Roy
Β
Capital structure decision
Capital structure decision
dasjitendra89
Β
Capital structure and firm valuation by anil dora
Capital structure and firm valuation by anil dora
Anil Dora
Β
Capital Structure
Capital Structure
yashpal01
Β
Capital structure theories 1
Capital structure theories 1
vijay lahri
Β
Recommended
Financial management(1)
Financial management(1)
chowdhury auni
Β
197.capital structure lecture
197.capital structure lecture
kitturashmikittu
Β
Capital Structure Theory
Capital Structure Theory
piyooshtripathi
Β
Capital structure theories notes
Capital structure theories notes
Soumendra Roy
Β
Capital structure decision
Capital structure decision
dasjitendra89
Β
Capital structure and firm valuation by anil dora
Capital structure and firm valuation by anil dora
Anil Dora
Β
Capital Structure
Capital Structure
yashpal01
Β
Capital structure theories 1
Capital structure theories 1
vijay lahri
Β
Ch 6
Ch 6
Gaurav Muliya
Β
Chapter 19 capital_structure_and_firm_value
Chapter 19 capital_structure_and_firm_value
Amit Fogla
Β
Group8 (1)
Group8 (1)
Utkarsh Vashistha
Β
14857929 ebiteps-analysis-
14857929 ebiteps-analysis-
loteyhamin
Β
Capital Structure
Capital Structure
Dayasagar S
Β
Financial Leverage:complete concept
Financial Leverage:complete concept
Ashutosh Mishra
Β
Ebit ebs analysis
Ebit ebs analysis
RADHIKA GUPTA
Β
Capital structure ppt
Capital structure ppt
Lakshmipathi Bendapudi
Β
Capital Structure Theories
Capital Structure Theories
3631
Β
Capital structure defenition
Capital structure defenition
saravanan
Β
Capital Structure
Capital Structure
Dayasagar S
Β
Ch 15
Ch 15
kpserver
Β
Capital structure ppt
Capital structure ppt
Aarti Choudhary
Β
Optimal capital structure
Optimal capital structure
Kajal Yadav
Β
Capital structure theories
Capital structure theories
Ayush Jain
Β
Capital structure decisions
Capital structure decisions
Achla_Anoop
Β
Cost of capital
Cost of capital
Saurabh Verma
Β
Capital structure
Capital structure
AJITH MK
Β
Capital structure
Capital structure
Home
Β
Capital Structure
Capital Structure
Joel M Johnson
Β
Decision models
Decision models
nishikantwar
Β
Rational Expectations and The Firmβs Dividend Behavior
Rational Expectations and The Firmβs Dividend Behavior
Sudarshan Kadariya
Β
More Related Content
What's hot
Ch 6
Ch 6
Gaurav Muliya
Β
Chapter 19 capital_structure_and_firm_value
Chapter 19 capital_structure_and_firm_value
Amit Fogla
Β
Group8 (1)
Group8 (1)
Utkarsh Vashistha
Β
14857929 ebiteps-analysis-
14857929 ebiteps-analysis-
loteyhamin
Β
Capital Structure
Capital Structure
Dayasagar S
Β
Financial Leverage:complete concept
Financial Leverage:complete concept
Ashutosh Mishra
Β
Ebit ebs analysis
Ebit ebs analysis
RADHIKA GUPTA
Β
Capital structure ppt
Capital structure ppt
Lakshmipathi Bendapudi
Β
Capital Structure Theories
Capital Structure Theories
3631
Β
Capital structure defenition
Capital structure defenition
saravanan
Β
Capital Structure
Capital Structure
Dayasagar S
Β
Ch 15
Ch 15
kpserver
Β
Capital structure ppt
Capital structure ppt
Aarti Choudhary
Β
Optimal capital structure
Optimal capital structure
Kajal Yadav
Β
Capital structure theories
Capital structure theories
Ayush Jain
Β
Capital structure decisions
Capital structure decisions
Achla_Anoop
Β
Cost of capital
Cost of capital
Saurabh Verma
Β
Capital structure
Capital structure
AJITH MK
Β
Capital structure
Capital structure
Home
Β
Capital Structure
Capital Structure
Joel M Johnson
Β
What's hot
(20)
Ch 6
Ch 6
Β
Chapter 19 capital_structure_and_firm_value
Chapter 19 capital_structure_and_firm_value
Β
Group8 (1)
Group8 (1)
Β
14857929 ebiteps-analysis-
14857929 ebiteps-analysis-
Β
Capital Structure
Capital Structure
Β
Financial Leverage:complete concept
Financial Leverage:complete concept
Β
Ebit ebs analysis
Ebit ebs analysis
Β
Capital structure ppt
Capital structure ppt
Β
Capital Structure Theories
Capital Structure Theories
Β
Capital structure defenition
Capital structure defenition
Β
Capital Structure
Capital Structure
Β
Ch 15
Ch 15
Β
Capital structure ppt
Capital structure ppt
Β
Optimal capital structure
Optimal capital structure
Β
Capital structure theories
Capital structure theories
Β
Capital structure decisions
Capital structure decisions
Β
Cost of capital
Cost of capital
Β
Capital structure
Capital structure
Β
Capital structure
Capital structure
Β
Capital Structure
Capital Structure
Β
Viewers also liked
Decision models
Decision models
nishikantwar
Β
Rational Expectations and The Firmβs Dividend Behavior
Rational Expectations and The Firmβs Dividend Behavior
Sudarshan Kadariya
Β
C Programming: Control Structure
C Programming: Control Structure
Sokngim Sa
Β
Classical model of decision making
Classical model of decision making
Shashank Gupta
Β
Capital Structure, Business Risk & financial risk
Capital Structure, Business Risk & financial risk
Ramesh Pant
Β
Financial management
Financial management
Aiswarya B
Β
Managerial Decision Making
Managerial Decision Making
mandalina landy
Β
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
SVS College
Β
Dividend policy
Dividend policy
Pooja Narwani
Β
Decision Making In Management
Decision Making In Management
Vinesh Pathak
Β
Balanced Scorecard
Balanced Scorecard
Yodhia Antariksa
Β
Decision making
Decision making
Seta Wicaksana
Β
Viewers also liked
(12)
Decision models
Decision models
Β
Rational Expectations and The Firmβs Dividend Behavior
Rational Expectations and The Firmβs Dividend Behavior
Β
C Programming: Control Structure
C Programming: Control Structure
Β
Classical model of decision making
Classical model of decision making
Β
Capital Structure, Business Risk & financial risk
Capital Structure, Business Risk & financial risk
Β
Financial management
Financial management
Β
Managerial Decision Making
Managerial Decision Making
Β
Dividend Policy -B.V.Raghunandan
Dividend Policy -B.V.Raghunandan
Β
Dividend policy
Dividend policy
Β
Decision Making In Management
Decision Making In Management
Β
Balanced Scorecard
Balanced Scorecard
Β
Decision making
Decision making
Β
Similar to Chapter20 capital structure_decision
financial management unit-15
financial management unit-15
Ragila Maneesh
Β
Basic accounting unit7
Basic accounting unit7
UNBFS
Β
6 ratio analysis
6 ratio analysis
John McSherry
Β
Introduction to ratio analysis
Introduction to ratio analysis
Owusu Attakorah MIET
Β
Introduction to ratio analysis
Introduction to ratio analysis
Owusu Attakorah MIET
Β
Eva vs roi 14j
Eva vs roi 14j
Akash Gupta
Β
Dr. Sudhaviswa - MANAGEMENT ACCOUNTING.pptx
Dr. Sudhaviswa - MANAGEMENT ACCOUNTING.pptx
SudhaViswa
Β
Overview, Techniques, Ratios and LimitationsCarlos B. Stei.docx
Overview, Techniques, Ratios and LimitationsCarlos B. Stei.docx
LacieKlineeb
Β
Ye 2014-square two-investor-call-presentation-final-03-02-15
Ye 2014-square two-investor-call-presentation-final-03-02-15
SquareTwoFinancial
Β
Fourth Quarter and Year End 2014 Financial Results Investor Call
Fourth Quarter and Year End 2014 Financial Results Investor Call
SquareTwoFinancial
Β
Leverage (Operating, financial & combined leverage)
Leverage (Operating, financial & combined leverage)
Yamini Kahaliya
Β
Capital Budgeting and Leverages
Capital Budgeting and Leverages
Bhooshan Kanani
Β
Bic Group - Overview of the value creation and implied expectations
Bic Group - Overview of the value creation and implied expectations
Guillaume Danis
Β
CHAPTER 8 : PERFORMANCE MANAGEMENT & CONTROL
CHAPTER 8 : PERFORMANCE MANAGEMENT & CONTROL
Sazzad Hossain, ITP, MBA, CSCAβ’
Β
Ratio Analysis F F M
Ratio Analysis F F M
Zoha Qureshi
Β
Block2 5dupontandotherratios
Block2 5dupontandotherratios
Γngel MartΓn Soto
Β
3 capital budgeting
3 capital budgeting
Dr.R. SELVAM
Β
Financial accounting
Financial accounting
Owusu Attakorah MIET
Β
First Quarter 2015 Financial Results Investor Call
First Quarter 2015 Financial Results Investor Call
SquareTwoFinancial
Β
PPT BSBA Final project Finance
PPT BSBA Final project Finance
Accounting and Finance
Β
Similar to Chapter20 capital structure_decision
(20)
financial management unit-15
financial management unit-15
Β
Basic accounting unit7
Basic accounting unit7
Β
6 ratio analysis
6 ratio analysis
Β
Introduction to ratio analysis
Introduction to ratio analysis
Β
Introduction to ratio analysis
Introduction to ratio analysis
Β
Eva vs roi 14j
Eva vs roi 14j
Β
Dr. Sudhaviswa - MANAGEMENT ACCOUNTING.pptx
Dr. Sudhaviswa - MANAGEMENT ACCOUNTING.pptx
Β
Overview, Techniques, Ratios and LimitationsCarlos B. Stei.docx
Overview, Techniques, Ratios and LimitationsCarlos B. Stei.docx
Β
Ye 2014-square two-investor-call-presentation-final-03-02-15
Ye 2014-square two-investor-call-presentation-final-03-02-15
Β
Fourth Quarter and Year End 2014 Financial Results Investor Call
Fourth Quarter and Year End 2014 Financial Results Investor Call
Β
Leverage (Operating, financial & combined leverage)
Leverage (Operating, financial & combined leverage)
Β
Capital Budgeting and Leverages
Capital Budgeting and Leverages
Β
Bic Group - Overview of the value creation and implied expectations
Bic Group - Overview of the value creation and implied expectations
Β
CHAPTER 8 : PERFORMANCE MANAGEMENT & CONTROL
CHAPTER 8 : PERFORMANCE MANAGEMENT & CONTROL
Β
Ratio Analysis F F M
Ratio Analysis F F M
Β
Block2 5dupontandotherratios
Block2 5dupontandotherratios
Β
3 capital budgeting
3 capital budgeting
Β
Financial accounting
Financial accounting
Β
First Quarter 2015 Financial Results Investor Call
First Quarter 2015 Financial Results Investor Call
Β
PPT BSBA Final project Finance
PPT BSBA Final project Finance
Β
More from Amit Fogla
Section 3 chapter 21 - financial management - teaching aid
Section 3 chapter 21 - financial management - teaching aid
Amit Fogla
Β
Ppt01
Ppt01
Amit Fogla
Β
Erp overview
Erp overview
Amit Fogla
Β
Chapter 20 hr new
Chapter 20 hr new
Amit Fogla
Β
Competitive strategies in different types of industries
Competitive strategies in different types of industries
Amit Fogla
Β
The new venture exploration plan
The new venture exploration plan
Amit Fogla
Β
Csr13 5(imple)
Csr13 5(imple)
Amit Fogla
Β
Session rural marketing final
Session rural marketing final
Amit Fogla
Β
Student presentation
Student presentation
Amit Fogla
Β
Mis jaiswal-chapter-13
Mis jaiswal-chapter-13
Amit Fogla
Β
Environmental analysis
Environmental analysis
Amit Fogla
Β
Chapter37 internationalfinancialmanagement
Chapter37 internationalfinancialmanagement
Amit Fogla
Β
Mis jaiswal-chapter-05
Mis jaiswal-chapter-05
Amit Fogla
Β
Mis jaiswal-chapter-10
Mis jaiswal-chapter-10
Amit Fogla
Β
Mis jaiswal-chapter-03
Mis jaiswal-chapter-03
Amit Fogla
Β
Mis jaiswal-chapter-04
Mis jaiswal-chapter-04
Amit Fogla
Β
Mis jaiswal-chapter-09
Mis jaiswal-chapter-09
Amit Fogla
Β
Mis jaiswal-chapter-12
Mis jaiswal-chapter-12
Amit Fogla
Β
Mis jaiswal-chapter-08
Mis jaiswal-chapter-08
Amit Fogla
Β
Ecf
Ecf
Amit Fogla
Β
More from Amit Fogla
(20)
Section 3 chapter 21 - financial management - teaching aid
Section 3 chapter 21 - financial management - teaching aid
Β
Ppt01
Ppt01
Β
Erp overview
Erp overview
Β
Chapter 20 hr new
Chapter 20 hr new
Β
Competitive strategies in different types of industries
Competitive strategies in different types of industries
Β
The new venture exploration plan
The new venture exploration plan
Β
Csr13 5(imple)
Csr13 5(imple)
Β
Session rural marketing final
Session rural marketing final
Β
Student presentation
Student presentation
Β
Mis jaiswal-chapter-13
Mis jaiswal-chapter-13
Β
Environmental analysis
Environmental analysis
Β
Chapter37 internationalfinancialmanagement
Chapter37 internationalfinancialmanagement
Β
Mis jaiswal-chapter-05
Mis jaiswal-chapter-05
Β
Mis jaiswal-chapter-10
Mis jaiswal-chapter-10
Β
Mis jaiswal-chapter-03
Mis jaiswal-chapter-03
Β
Mis jaiswal-chapter-04
Mis jaiswal-chapter-04
Β
Mis jaiswal-chapter-09
Mis jaiswal-chapter-09
Β
Mis jaiswal-chapter-12
Mis jaiswal-chapter-12
Β
Mis jaiswal-chapter-08
Mis jaiswal-chapter-08
Β
Ecf
Ecf
Β
Recently uploaded
Business Principles, Tools, and Techniques in Participating in Various Types...
Business Principles, Tools, and Techniques in Participating in Various Types...
jeffreytingson
Β
Indore Real Estate Market Trends Report.pdf
Indore Real Estate Market Trends Report.pdf
SaviRakhecha1
Β
From Luxury Escort Service Kamathipura : 9352852248 Make on-demand Arrangemen...
From Luxury Escort Service Kamathipura : 9352852248 Make on-demand Arrangemen...
From Luxury Escort : 9352852248 Make on-demand Arrangements Near yOU
Β
Diva-Thane European Call Girls Number-9833754194-Diva Busty Professional Call...
Diva-Thane European Call Girls Number-9833754194-Diva Busty Professional Call...
priyasharma62062
Β
Solution Manual for Financial Accounting, 11th Edition by Robert Libby, Patri...
Solution Manual for Financial Accounting, 11th Edition by Robert Libby, Patri...
ssifa0344
Β
VIP Independent Call Girls in Bandra West πΉ 9920725232 ( Call Me ) Mumbai Esc...
VIP Independent Call Girls in Bandra West πΉ 9920725232 ( Call Me ) Mumbai Esc...
dipikadinghjn ( Why You Choose Us? ) Escorts
Β
Booking open Available Pune Call Girls Talegaon Dabhade 6297143586 Call Hot ...
Booking open Available Pune Call Girls Talegaon Dabhade 6297143586 Call Hot ...
Call Girls in Nagpur High Profile
Β
Mira Road Awesome 100% Independent Call Girls NUmber-9833754194-Dahisar Inter...
Mira Road Awesome 100% Independent Call Girls NUmber-9833754194-Dahisar Inter...
priyasharma62062
Β
falcon-invoice-discounting-unlocking-prime-investment-opportunities
falcon-invoice-discounting-unlocking-prime-investment-opportunities
Falcon Invoice Discounting
Β
Vip Call US π 7738631006 β Call Girls In Sakinaka ( Mumbai )
Vip Call US π 7738631006 β Call Girls In Sakinaka ( Mumbai )
Pooja Nehwal
Β
VIP Independent Call Girls in Mumbai πΉ 9920725232 ( Call Me ) Mumbai Escorts ...
VIP Independent Call Girls in Mumbai πΉ 9920725232 ( Call Me ) Mumbai Escorts ...
dipikadinghjn ( Why You Choose Us? ) Escorts
Β
Webinar on E-Invoicing for Fintech Belgium
Webinar on E-Invoicing for Fintech Belgium
FinTech Belgium
Β
Stock Market Brief Deck (Under Pressure).pdf
Stock Market Brief Deck (Under Pressure).pdf
Michael Silva
Β
Navi Mumbai Cooperetive Housewife Call Girls-9833754194-Natural Panvel Enjoye...
Navi Mumbai Cooperetive Housewife Call Girls-9833754194-Natural Panvel Enjoye...
priyasharma62062
Β
VIP Call Girl in Mira Road π§ 9920725232 ( Call Me ) Get A New Crush Everyday ...
VIP Call Girl in Mira Road π§ 9920725232 ( Call Me ) Get A New Crush Everyday ...
dipikadinghjn ( Why You Choose Us? ) Escorts
Β
call girls in Sant Nagar (DELHI) π >ΰΌ9953056974 π genuine Escort Service πβοΈβοΈ
call girls in Sant Nagar (DELHI) π >ΰΌ9953056974 π genuine Escort Service πβοΈβοΈ
9953056974 Low Rate Call Girls In Saket, Delhi NCR
Β
Top Rated Pune Call Girls Aundh β 6297143586 β Call Me For Genuine Sex Servi...
Top Rated Pune Call Girls Aundh β 6297143586 β Call Me For Genuine Sex Servi...
Call Girls in Nagpur High Profile
Β
Top Rated Pune Call Girls Dighi β 6297143586 β Call Me For Genuine Sex Servi...
Top Rated Pune Call Girls Dighi β 6297143586 β Call Me For Genuine Sex Servi...
Call Girls in Nagpur High Profile
Β
VIP Independent Call Girls in Andheri πΉ 9920725232 ( Call Me ) Mumbai Escorts...
VIP Independent Call Girls in Andheri πΉ 9920725232 ( Call Me ) Mumbai Escorts...
dipikadinghjn ( Why You Choose Us? ) Escorts
Β
Top Rated Pune Call Girls Pashan β 6297143586 β Call Me For Genuine Sex Serv...
Top Rated Pune Call Girls Pashan β 6297143586 β Call Me For Genuine Sex Serv...
Call Girls in Nagpur High Profile
Β
Recently uploaded
(20)
Business Principles, Tools, and Techniques in Participating in Various Types...
Business Principles, Tools, and Techniques in Participating in Various Types...
Β
Indore Real Estate Market Trends Report.pdf
Indore Real Estate Market Trends Report.pdf
Β
From Luxury Escort Service Kamathipura : 9352852248 Make on-demand Arrangemen...
From Luxury Escort Service Kamathipura : 9352852248 Make on-demand Arrangemen...
Β
Diva-Thane European Call Girls Number-9833754194-Diva Busty Professional Call...
Diva-Thane European Call Girls Number-9833754194-Diva Busty Professional Call...
Β
Solution Manual for Financial Accounting, 11th Edition by Robert Libby, Patri...
Solution Manual for Financial Accounting, 11th Edition by Robert Libby, Patri...
Β
VIP Independent Call Girls in Bandra West πΉ 9920725232 ( Call Me ) Mumbai Esc...
VIP Independent Call Girls in Bandra West πΉ 9920725232 ( Call Me ) Mumbai Esc...
Β
Booking open Available Pune Call Girls Talegaon Dabhade 6297143586 Call Hot ...
Booking open Available Pune Call Girls Talegaon Dabhade 6297143586 Call Hot ...
Β
Mira Road Awesome 100% Independent Call Girls NUmber-9833754194-Dahisar Inter...
Mira Road Awesome 100% Independent Call Girls NUmber-9833754194-Dahisar Inter...
Β
falcon-invoice-discounting-unlocking-prime-investment-opportunities
falcon-invoice-discounting-unlocking-prime-investment-opportunities
Β
Vip Call US π 7738631006 β Call Girls In Sakinaka ( Mumbai )
Vip Call US π 7738631006 β Call Girls In Sakinaka ( Mumbai )
Β
VIP Independent Call Girls in Mumbai πΉ 9920725232 ( Call Me ) Mumbai Escorts ...
VIP Independent Call Girls in Mumbai πΉ 9920725232 ( Call Me ) Mumbai Escorts ...
Β
Webinar on E-Invoicing for Fintech Belgium
Webinar on E-Invoicing for Fintech Belgium
Β
Stock Market Brief Deck (Under Pressure).pdf
Stock Market Brief Deck (Under Pressure).pdf
Β
Navi Mumbai Cooperetive Housewife Call Girls-9833754194-Natural Panvel Enjoye...
Navi Mumbai Cooperetive Housewife Call Girls-9833754194-Natural Panvel Enjoye...
Β
VIP Call Girl in Mira Road π§ 9920725232 ( Call Me ) Get A New Crush Everyday ...
VIP Call Girl in Mira Road π§ 9920725232 ( Call Me ) Get A New Crush Everyday ...
Β
call girls in Sant Nagar (DELHI) π >ΰΌ9953056974 π genuine Escort Service πβοΈβοΈ
call girls in Sant Nagar (DELHI) π >ΰΌ9953056974 π genuine Escort Service πβοΈβοΈ
Β
Top Rated Pune Call Girls Aundh β 6297143586 β Call Me For Genuine Sex Servi...
Top Rated Pune Call Girls Aundh β 6297143586 β Call Me For Genuine Sex Servi...
Β
Top Rated Pune Call Girls Dighi β 6297143586 β Call Me For Genuine Sex Servi...
Top Rated Pune Call Girls Dighi β 6297143586 β Call Me For Genuine Sex Servi...
Β
VIP Independent Call Girls in Andheri πΉ 9920725232 ( Call Me ) Mumbai Escorts...
VIP Independent Call Girls in Andheri πΉ 9920725232 ( Call Me ) Mumbai Escorts...
Β
Top Rated Pune Call Girls Pashan β 6297143586 β Call Me For Genuine Sex Serv...
Top Rated Pune Call Girls Pashan β 6297143586 β Call Me For Genuine Sex Serv...
Β
Chapter20 capital structure_decision
1.
CAPITAL STRUCTURE DECISION Β©
Centre for Financial Management , Bangalore
2.
OUTLINE β’ EBIT β
EPS Analysis β’ ROI β ROE Analysis β’ Ratio Analysis β’ Leverage Analysis β’ Cash Flow Analysis β’ Comparative Analysis β’ Guidelines for Capital Structure Planning β’ Capital Structure Policies in Practice Β© Centre for Financial Management , Bangalore
3.
EBIT β EPS
ANALYSIS The relationship between EBIT and EPS is as follows: (EBIT β I) (1 β t) EPS = n Β© Centre for Financial Management , Bangalore
4.
EARNINGS PER SHARE
UNDER ALTERNATIVE FINANCING PLANS Equity Financing Debt Financing EBIT : 2,000,000 EBIT : 4,000,000 EBIT : 2,000,000 Interest Profit before taxes Taxes Profit after tax Number of equity shares Earnings per share EBIT : 4,000,000 2,000,000 1,000,000 1,000,000 4,000,000 2,000,000 2,000,000 1,400,000 600,000 300,000 300,000 1,400,000 2,600,000 1,300,000 1,300,000 2,000,000 0.50 2,000,000 1.00 1,000,000 0.30 1,000,000 1.30 Β© Centre for Financial Management , Bangalore
5.
BREAK-EVEN EBIT LEVEL The
EBIT indifference point between two alternative financing plans can be obtained by solving the following equation for EBIT* (EBIT *β I1) (1 β t) (EBIT *β I2) (1 β t) = n1 n2 Β© Centre for Financial Management , Bangalore
6.
ROI β ROE
ANALYSIS ROE = [ROI + (ROI β r) D/E] (1 β t) where ROE = return on equity ROI = return on investment r = cost of debt D/E = debt-equity ratio t = tax rate Β© Centre for Financial Management , Bangalore
7.
LEVERAGE ANALYSIS β’ There
are two kinds of leverage, viz., operating leverage and financial leverage. β’ Operating leverage arises from the firmβs fixed operating costs. β’ Financial leverage arises from the firmβs fixed financing costs. Β© Centre for Financial Management , Bangalore
8.
INCOME STATEMENT FORMAT Sales Operating leverage Financial leverage Less:
Variable costs Less: Fixed operating costs Contribution before interest and tax Less: Interest on debt Profit before tax Less: Tax Profit after tax Less: Preferred dividend Equity earnings Β© Centre for Financial Management , Bangalore Total leverage
9.
CERTAIN RELATIONSHIPS PBIT = Q
(P β V) β F PAT = (PBIT β I) ( 1 β T) EPS = (PBIT β I) (1 β T) β Dp N = [Q (P β V) β F β I] (1 β T) β Dp N Β© Centre for Financial Management , Bangalore
10.
OPERATING LEVERAGE The sensitivity
of profit before interest and taxes (PBIT) to changes in unit sales is referred to as the degree of operating leverage (DOL). Ξ PBIT/PBIT DOL = ΞQ/Q Q (P β V) = Q (P β V) β F Contribution = Profit before interest and tax Β© Centre for Financial Management , Bangalore
11.
FINANCIAL LEVERAGE The sensitivity
of profit before tax (or profit after tax or earnings per share) to changes in PBIT is referred to as the degree of financial leverage. Ξ PBT / PBT DFL = PBIT = Ξ PBIT / PBIT PBIT β I Profit before interest and tax = Profit before tax Β© Centre for Financial Management , Bangalore
12.
TOTAL LEVERAGE The sensitivity
of profit before tax (or profit after tax or earnings per share) to changes in unit sales is referred to as the degree of total (or combined) leverage (DTL). Ξ PBT / PBT DTL = Q (P β V) = ΞQ/Q = PBIT β T Contribution Profit before tax DTL = DOL x DFL Β© Centre for Financial Management , Bangalore
13.
RATIO ANALYSIS Interest Coverage
Ratio Earnings before interest and taxes Interest on debt Β Cash Flow Coverage Ratio EBIT + Depreciation + Other non-cash charges Interest on debt + Loan repayment instalment (1 β Tax rate) Β© Centre for Financial Management , Bangalore
14.
RATIO ANALYSIS n β PATi
+ DEPi + INTi + Li i=1 DSCR = n β INTi + LRIi + Li i=1 where DSCR = debt service coverage ratio PATi = profit after tax for year i DEPi = depreciation for year i INTi = interest on long-term loan for year i LRIi = loan repayment instalment for year i Li = lease rental for year i = period of the loan n Β© Centre for Financial Management , Bangalore
15.
CASH FLOW ANALYSIS The
key question in assessing the debt capacity of a firm is whether the probability of default associated with a certain level of debt is acceptable to the management. The cash flow analysis establishes the debt capacity by examining the probability of default. Β© Centre for Financial Management , Bangalore
16.
INVENTORY OF RESOURCES It
would be helpful to supplement cash flow analysis by estimating potential sources of liquidity available to the firm to meet possible cash drains. These sources, as suggested by Gordon Donaldson, may be divided into three categories: β’ Uncommitted reserves β’ Reduction of planned outlays β’ Liquidation of assets Β© Centre for Financial Management , Bangalore
17.
COMPARATIVE ANALYSIS β’ A
common approach to analysing the capital structure of a firm is to compare its debt-equity ratio to the average debt-equity ratio of the industry to which the firm belongs. β’ Since the firms in an industry may differ on factors like operating risk, profitability, and tax status it makes sense to control for differences in these variables. Β© Centre for Financial Management , Bangalore
18.
GUIDELINES FOR CAPITAL STRUCTURE
PLANNING β’ Avail of the tax advantage of debt β’ Preserve flexibility β’ Ensure that the total risk exposure is reasonable β’ Examine the control implications of alternative financing plans β’ Subordinate financial policy to corporate strategy β’ Mitigate potential agency costs Β© Centre for Financial Management , Bangalore
19.
GUIDELINES FOR CAPITAL STRUCTURE
PLANNING β’ Resort to timing judiciously β’ Finance proactively not reactively β’ Know the norms of lenders and credit rating agencies β’ Issue innovative securities β’ Widen the range of financing sources β’ Communicate intelligently with investors Β© Centre for Financial Management , Bangalore
20.
CAPITAL STRUCTURE POLICIES Five
common policies are: A. No debt should be used B. Debt should be employed to a very limited extent C. The debt-equity ratio should be maintained around 1:1 D. The debt-equity ratio should be kept within 2:1 E. Debt should be tapped to the extent available Β© Centre for Financial Management , Bangalore
Download now