SlideShare ist ein Scribd-Unternehmen logo
1 von 22
Downloaden Sie, um offline zu lesen
Capital Structure
-B.V.Raghunandan
Post-Graduate Department of Commerce,
Government First Grade College, Hebri
April 6, 2014
Capital Structure
• It is the mixture or combination of debt and
equity used by a corporate in financing its
long-term operations
• As debt and equity have different cost of
servicing, the composition has an effect on
the profitability and ultimately on the
valuation of a corporate
Leverage
• Leverage: Having debt in the
capital structure of a
company
• In 1950s and 60s, it was
considered to be a magical
act through comparison of
leveraged company and a
non-leveraged company
• Effect was considered for
profitable companies and
non-profitable companies
were ignored
Theories of Capital Structure
• Theories of capital structure dealt with the presence of
debt in the long-term capital structure of a firm and its
impact on cost of capital, profitability and valuation of
the firm wit the objective determining the optimum
capital structure
• Theories are:
1) Net Income Approach-David Duran
2) Net Operating Income Approach-David Duran
3) Traditional Approach-Ezra Solomon
4) Modigliani-Miller Theories
I Net Income Approach
• Propounded by David Durand in 1952
• The presence of debt and its increase reduces the
weighted average cost of capital of the firm as
cost of debt is less than cost of equity
• Thus, an increase in debt component of the
capital structure leads to better valuation of the
firm
• There is a direct relation between degree of
financial leverage and the valuation of the firm
II Net Operating Income Approach
• Also propounded by David Durand
• Directly opposite to Net Income Approach
• Increase in debt increases debt-equity ration forcing
the lenders to charge a higher rate of interest
• Thus, cost of debt will be equal to cost of debt
which is equal to weighted average cost of capital
• Thus, change in financial leverage does not change
the cost of capital or valuation of the firm
• Known as Irrelevance Theory
III Traditional Approach
• Asserted by Ezra Solomon
• Resolves the contradiction
between NI and NOI
• Upto a certain level, increase in
debt will increase the benefit of
financial leverage leading to
weighted average cost of capital
and higher valuation of the firm
• After that, a higher debt-equity
ratio will result in a higher rates of
interest neutralising the benefit of
leverage
Prof. Ezra Solomon
Franco Modigliani
• Italian Economist
• Naturalised American
• Professor at Graduate
School of Industrial
Administration of
Carnegie Mellon
University in 1958
• Joined Merton Miller in
advocating Modigliani-
Miller Theorem on
Corporate Finance
Merton Miller
• Graduate from
Harvard School
• Joined as
Asst.Professor at
London School of
Economics
• A ground-breaking
work called,”Merton
Miller on Derivatives”
• Nobel Laureate
IV Modigliani-Miller Theory
• they compiled a paper on ‘The Cost of Capital,
Corporate Finance and the Theory of
Investment’,
• They based their theory on NOI Approach
• They objected to the traditional view of
finding an optimal capital structure
• The weighted cost of capital does not change
with increase in debt
• Hence, no change in leverage or valuation of
firm
Rationale for Acceptance
• High corporate taxes caused reduced tax incidence as interest
on debt was a business expense
• Promoters’ Control was not diluted as debt did not carry
voting rights
• Equity form of finance like venture capital emerged later
• The concept of risk management also emerged later
Reality Check
• During a long gestation period of heavy industries and
infrastructure projects, it becomes toxic
• For the industry having a huge capital cost and huge running
expenses like civil aviation, it is devastating
• When unexpected risks exist, the tables will turn very quickly
• Prolonged trade cycles like mining and metal industries
Warning
• Sharia held debt to be a sin
• Shakespeare maintained, "never a lender nor a borrower be”
and also depicted the cruelest aspect through the character
of Shylock in Merchant of Venice
• Financial Management considered both equity and debt to be
the components of capital structure
• Never considered the repayment programme, cautions,
warning signals etc as an important exercise
A Carefree World
• Corporates did not learn the lesson
leading to the development of art
and science of bankruptcy
• Individuals and families were
encouraged to overborrow like
housing finance, consumer finance,
finance for hospital bills, student
loans
• Questionable methods employed for
recovery including foreclosure
• Credit card booms
• Empty houses and homeless
population
Revival of Equity Culture
• A more mature and developed primary market and stock market
• Reduced corporate tax rates
• Emergence of venture capital and private equity fund
• Contribution of HNI and Angel Investors
• A Systematic Risk Management and Popularity of debt-free capital structure
• Basel Norms for Banks
Rationale for Equity Shares
• No need to pay dividend in the absence
of profit
• Even in the presence of profit, a growth
oriented company does not declare
dividend
• No need to pay dividend during
gestation period
• Large body of investors to share the
losses
• Equity shares are the cheapest source
of finance
• Shareholder Loyalty for other projects
and group companies
• Huge funds can be raised through IPOs
and FPOs
• Share Premium as another cheap
source of finance
• Listed companies having access to
cheaper foreign funds
The Fallen Empire-DLF Limited
• 1946-Chaudhry Ragvendra
Singh promoted
• Developer of residential
and other complexes in
Delhi until 1957
• 1957-Delhi Development
Authority banned private
developers
• It went out to Gurgaon in
Haryana to develop a city
IPO Details of DLF Ltd.
• 2007-IPO made
• 17.5 crore shares of Rs.2 through book-building
• Cut-off Price Rs.525
• Face Value of Shares: Rs.35 crore
• Share Premium: Rs.9,152.5 crore
• Share Price went upto Rs.1000 in 2008
Falling Down from Grace
• Forays into Capital
Intensive expansion
• Hospitality Industry
• Wind and other power
business
• Extensive Borrowings
• Debt: Rs.19000 crores
• Questionable Trade
Practices
Correlation between Interest and Profit of DLF Ltd.(Figures in
Rs.Crore)
Year Sales Interest Profit
2007-08 14433 310 7,847
2008-09 10,035 555 4,497
2009-10 7,423 1,110 1,709
2010-11 9,560 1,706 1,638
2011-12 9,629 2,246 1,169
2012-13 7,773 2,314 663
2013-14 8,298 2,463 582
Alternative
• FPO at the cut-off price of IPO could have
brought in a huge amount of cost-free funds
• It would have saved the interest
• More meaningful diversification
• Taking care of quality of building in Gurgaon
and maintaining the customer relation
THANK YOU

Weitere ähnliche Inhalte

Was ist angesagt?

Capital structure and theories
Capital structure and theoriesCapital structure and theories
Capital structure and theoriesshivamchaturvedi45
 
Capital structure and its Determinants
     Capital structure and its Determinants     Capital structure and its Determinants
Capital structure and its DeterminantsMinhas Azeem
 
5 capital structure theories
5 capital structure theories5 capital structure theories
5 capital structure theoriesRAHUL DHAMIJA
 
Capital structure and term structure
Capital structure and term structure Capital structure and term structure
Capital structure and term structure mabruka mohamed
 
Chapter 14 Capital Structure and Leverage version1
Chapter 14 Capital Structure and Leverage version1Chapter 14 Capital Structure and Leverage version1
Chapter 14 Capital Structure and Leverage version1Mikee Bylss
 
MM APPROACH OF Capital structure
MM APPROACH OF Capital structureMM APPROACH OF Capital structure
MM APPROACH OF Capital structureManmathTripathy1
 
Financial management
Financial managementFinancial management
Financial managementAiswarya B
 
Capital Structure
Capital StructureCapital Structure
Capital Structurepurval
 
Factors affecting capital structure
Factors affecting capital structureFactors affecting capital structure
Factors affecting capital structureSandeep Suresh
 
Pecking Order Theory - components
Pecking Order Theory - components Pecking Order Theory - components
Pecking Order Theory - components Sundar B N
 
Capital structure e theory
Capital structure e theoryCapital structure e theory
Capital structure e theoryOnline
 
Capital Structure Theory
Capital Structure TheoryCapital Structure Theory
Capital Structure Theorypiyooshtripathi
 
Trade-off theory in capital structure
Trade-off theory in capital structureTrade-off theory in capital structure
Trade-off theory in capital structureKashif Khans
 
Capital structure defenition
Capital structure defenitionCapital structure defenition
Capital structure defenitionsaravanan
 
Assignment on pecking order theory
Assignment on pecking order theoryAssignment on pecking order theory
Assignment on pecking order theorySaid Yakubu Issahaku
 
Capital structure and Financial leverage
Capital structure and Financial leverageCapital structure and Financial leverage
Capital structure and Financial leverageAnkesh Gorkhali
 

Was ist angesagt? (20)

Capital structure ppt
Capital structure pptCapital structure ppt
Capital structure ppt
 
Capital structure and theories
Capital structure and theoriesCapital structure and theories
Capital structure and theories
 
Capital structure and its Determinants
     Capital structure and its Determinants     Capital structure and its Determinants
Capital structure and its Determinants
 
5 capital structure theories
5 capital structure theories5 capital structure theories
5 capital structure theories
 
Capital structure and term structure
Capital structure and term structure Capital structure and term structure
Capital structure and term structure
 
Ch 15
Ch 15Ch 15
Ch 15
 
Capital structure
Capital structureCapital structure
Capital structure
 
Chapter 14 Capital Structure and Leverage version1
Chapter 14 Capital Structure and Leverage version1Chapter 14 Capital Structure and Leverage version1
Chapter 14 Capital Structure and Leverage version1
 
Capital structure
Capital structureCapital structure
Capital structure
 
MM APPROACH OF Capital structure
MM APPROACH OF Capital structureMM APPROACH OF Capital structure
MM APPROACH OF Capital structure
 
Financial management
Financial managementFinancial management
Financial management
 
Capital Structure
Capital StructureCapital Structure
Capital Structure
 
Factors affecting capital structure
Factors affecting capital structureFactors affecting capital structure
Factors affecting capital structure
 
Pecking Order Theory - components
Pecking Order Theory - components Pecking Order Theory - components
Pecking Order Theory - components
 
Capital structure e theory
Capital structure e theoryCapital structure e theory
Capital structure e theory
 
Capital Structure Theory
Capital Structure TheoryCapital Structure Theory
Capital Structure Theory
 
Trade-off theory in capital structure
Trade-off theory in capital structureTrade-off theory in capital structure
Trade-off theory in capital structure
 
Capital structure defenition
Capital structure defenitionCapital structure defenition
Capital structure defenition
 
Assignment on pecking order theory
Assignment on pecking order theoryAssignment on pecking order theory
Assignment on pecking order theory
 
Capital structure and Financial leverage
Capital structure and Financial leverageCapital structure and Financial leverage
Capital structure and Financial leverage
 

Andere mochten auch

Rejuvenating indian manufacturing industries b.v.raghunandan
Rejuvenating indian manufacturing industries b.v.raghunandanRejuvenating indian manufacturing industries b.v.raghunandan
Rejuvenating indian manufacturing industries b.v.raghunandanSVS College
 
Redes Sociales (Características e Impacto)
Redes Sociales (Características e Impacto)Redes Sociales (Características e Impacto)
Redes Sociales (Características e Impacto)adavidbg
 
Working Capital Management-B.V.Raghunandan
Working Capital Management-B.V.RaghunandanWorking Capital Management-B.V.Raghunandan
Working Capital Management-B.V.RaghunandanSVS College
 
Ethical issues in accounting and corporate governance b.v.raghunandan
Ethical issues in accounting and corporate governance b.v.raghunandanEthical issues in accounting and corporate governance b.v.raghunandan
Ethical issues in accounting and corporate governance b.v.raghunandanSVS College
 
Microfinance-B.V.Raghunandan
Microfinance-B.V.RaghunandanMicrofinance-B.V.Raghunandan
Microfinance-B.V.RaghunandanSVS College
 
Bottom of the pyramid strategy dewesternising marketing concepts-b.v.raghunandan
Bottom of the pyramid strategy dewesternising marketing concepts-b.v.raghunandanBottom of the pyramid strategy dewesternising marketing concepts-b.v.raghunandan
Bottom of the pyramid strategy dewesternising marketing concepts-b.v.raghunandanSVS College
 
Finance sector reforms development finance-b.v.raghunandan
Finance sector reforms development finance-b.v.raghunandanFinance sector reforms development finance-b.v.raghunandan
Finance sector reforms development finance-b.v.raghunandanSVS College
 
Stock Exchange-B.V.Raghunandan
Stock Exchange-B.V.Raghunandan Stock Exchange-B.V.Raghunandan
Stock Exchange-B.V.Raghunandan SVS College
 
Covert business practices & governance b.v.raghunandan
Covert business practices & governance b.v.raghunandanCovert business practices & governance b.v.raghunandan
Covert business practices & governance b.v.raghunandanSVS College
 
Venture Capital and Private Equity-B.V.Raghunandan
Venture Capital and Private Equity-B.V.RaghunandanVenture Capital and Private Equity-B.V.Raghunandan
Venture Capital and Private Equity-B.V.RaghunandanSVS College
 
Marketing management for dummies b.v.raghunandan
Marketing management for dummies b.v.raghunandanMarketing management for dummies b.v.raghunandan
Marketing management for dummies b.v.raghunandanSVS College
 
Ratio analysis b.v.raghunandan
Ratio analysis b.v.raghunandanRatio analysis b.v.raghunandan
Ratio analysis b.v.raghunandanSVS College
 
Training hr for rural marketing copy
Training hr for rural marketing   copyTraining hr for rural marketing   copy
Training hr for rural marketing copySVS College
 
Dynamics of indian finacial markets b.v.raghunandan
Dynamics of indian finacial markets b.v.raghunandanDynamics of indian finacial markets b.v.raghunandan
Dynamics of indian finacial markets b.v.raghunandanSVS College
 
Banker's final accounts b.v.raghunandan
Banker's final accounts b.v.raghunandanBanker's final accounts b.v.raghunandan
Banker's final accounts b.v.raghunandanSVS College
 
Pompei college campus agenda for m.com-b.v.raghunandan
Pompei college campus agenda for m.com-b.v.raghunandanPompei college campus agenda for m.com-b.v.raghunandan
Pompei college campus agenda for m.com-b.v.raghunandanSVS College
 
Retail investor protection b.v.raghunandan
Retail investor protection b.v.raghunandanRetail investor protection b.v.raghunandan
Retail investor protection b.v.raghunandanSVS College
 
Careers In Financial Management-B.V.Raghunandan
Careers In Financial Management-B.V.RaghunandanCareers In Financial Management-B.V.Raghunandan
Careers In Financial Management-B.V.RaghunandanSVS College
 
Career planning for a commerce graduate in india b.v.raghunandan
Career planning for a commerce graduate in india b.v.raghunandanCareer planning for a commerce graduate in india b.v.raghunandan
Career planning for a commerce graduate in india b.v.raghunandanSVS College
 

Andere mochten auch (20)

Rejuvenating indian manufacturing industries b.v.raghunandan
Rejuvenating indian manufacturing industries b.v.raghunandanRejuvenating indian manufacturing industries b.v.raghunandan
Rejuvenating indian manufacturing industries b.v.raghunandan
 
Redes Sociales (Características e Impacto)
Redes Sociales (Características e Impacto)Redes Sociales (Características e Impacto)
Redes Sociales (Características e Impacto)
 
Working Capital Management-B.V.Raghunandan
Working Capital Management-B.V.RaghunandanWorking Capital Management-B.V.Raghunandan
Working Capital Management-B.V.Raghunandan
 
Ethical issues in accounting and corporate governance b.v.raghunandan
Ethical issues in accounting and corporate governance b.v.raghunandanEthical issues in accounting and corporate governance b.v.raghunandan
Ethical issues in accounting and corporate governance b.v.raghunandan
 
Microfinance-B.V.Raghunandan
Microfinance-B.V.RaghunandanMicrofinance-B.V.Raghunandan
Microfinance-B.V.Raghunandan
 
Bottom of the pyramid strategy dewesternising marketing concepts-b.v.raghunandan
Bottom of the pyramid strategy dewesternising marketing concepts-b.v.raghunandanBottom of the pyramid strategy dewesternising marketing concepts-b.v.raghunandan
Bottom of the pyramid strategy dewesternising marketing concepts-b.v.raghunandan
 
Finance sector reforms development finance-b.v.raghunandan
Finance sector reforms development finance-b.v.raghunandanFinance sector reforms development finance-b.v.raghunandan
Finance sector reforms development finance-b.v.raghunandan
 
Stock Exchange-B.V.Raghunandan
Stock Exchange-B.V.Raghunandan Stock Exchange-B.V.Raghunandan
Stock Exchange-B.V.Raghunandan
 
Covert business practices & governance b.v.raghunandan
Covert business practices & governance b.v.raghunandanCovert business practices & governance b.v.raghunandan
Covert business practices & governance b.v.raghunandan
 
Venture Capital and Private Equity-B.V.Raghunandan
Venture Capital and Private Equity-B.V.RaghunandanVenture Capital and Private Equity-B.V.Raghunandan
Venture Capital and Private Equity-B.V.Raghunandan
 
Marketing management for dummies b.v.raghunandan
Marketing management for dummies b.v.raghunandanMarketing management for dummies b.v.raghunandan
Marketing management for dummies b.v.raghunandan
 
Ratio analysis b.v.raghunandan
Ratio analysis b.v.raghunandanRatio analysis b.v.raghunandan
Ratio analysis b.v.raghunandan
 
Training hr for rural marketing copy
Training hr for rural marketing   copyTraining hr for rural marketing   copy
Training hr for rural marketing copy
 
Dynamics of indian finacial markets b.v.raghunandan
Dynamics of indian finacial markets b.v.raghunandanDynamics of indian finacial markets b.v.raghunandan
Dynamics of indian finacial markets b.v.raghunandan
 
Banker's final accounts b.v.raghunandan
Banker's final accounts b.v.raghunandanBanker's final accounts b.v.raghunandan
Banker's final accounts b.v.raghunandan
 
Time line 60's
Time line 60'sTime line 60's
Time line 60's
 
Pompei college campus agenda for m.com-b.v.raghunandan
Pompei college campus agenda for m.com-b.v.raghunandanPompei college campus agenda for m.com-b.v.raghunandan
Pompei college campus agenda for m.com-b.v.raghunandan
 
Retail investor protection b.v.raghunandan
Retail investor protection b.v.raghunandanRetail investor protection b.v.raghunandan
Retail investor protection b.v.raghunandan
 
Careers In Financial Management-B.V.Raghunandan
Careers In Financial Management-B.V.RaghunandanCareers In Financial Management-B.V.Raghunandan
Careers In Financial Management-B.V.Raghunandan
 
Career planning for a commerce graduate in india b.v.raghunandan
Career planning for a commerce graduate in india b.v.raghunandanCareer planning for a commerce graduate in india b.v.raghunandan
Career planning for a commerce graduate in india b.v.raghunandan
 

Ähnlich wie Capital structure b.v.raghunandan

Financial leverage as the balance sheet polluter b.v.raghunandan
Financial leverage as the balance sheet polluter b.v.raghunandanFinancial leverage as the balance sheet polluter b.v.raghunandan
Financial leverage as the balance sheet polluter b.v.raghunandanSVS College
 
Leverage as a financial perversion b.v.raghunandan
Leverage as a financial perversion b.v.raghunandanLeverage as a financial perversion b.v.raghunandan
Leverage as a financial perversion b.v.raghunandanSVS College
 
Traditional and MM approach in capital structure
Traditional and MM approach in capital structureTraditional and MM approach in capital structure
Traditional and MM approach in capital structureMERIN C
 
Bcu msc cg week 7 csr 220712
Bcu msc cg week 7 csr 220712Bcu msc cg week 7 csr 220712
Bcu msc cg week 7 csr 220712Stephen Ong
 
Chapter 1 understanding financial system
Chapter 1 understanding  financial systemChapter 1 understanding  financial system
Chapter 1 understanding financial systemSaid935282
 
Chapter18 financingofprojects
Chapter18 financingofprojectsChapter18 financingofprojects
Chapter18 financingofprojectsAKSHAYA0000
 
Mba1034 cg law ethics week 6 sri esg 2013
Mba1034 cg law ethics week 6 sri esg 2013Mba1034 cg law ethics week 6 sri esg 2013
Mba1034 cg law ethics week 6 sri esg 2013Stephen Ong
 
Stakeholder organization stout 5 6 from carly
Stakeholder organization stout 5 6 from carlyStakeholder organization stout 5 6 from carly
Stakeholder organization stout 5 6 from carlyJordi Comas
 
1 Financial System
1 Financial System1 Financial System
1 Financial Systemukabuka
 
Gwinner IFC AUHF Oct 2012
Gwinner IFC AUHF Oct 2012Gwinner IFC AUHF Oct 2012
Gwinner IFC AUHF Oct 2012Gwinner
 
MERCHANT BANKING SERVICES
MERCHANT BANKING SERVICESMERCHANT BANKING SERVICES
MERCHANT BANKING SERVICESAMAR ID
 
Introduction to corporate finance
Introduction to corporate financeIntroduction to corporate finance
Introduction to corporate financePriyanka Goswami
 
Business Financing - Sources of Finance
Business Financing - Sources of Finance Business Financing - Sources of Finance
Business Financing - Sources of Finance Mohammed Jasir PV
 
Leverage and Capital Structure .pptx
Leverage and Capital Structure .pptxLeverage and Capital Structure .pptx
Leverage and Capital Structure .pptxPaavaniDey
 
Meeting 1- Introduction (Financial Management)
Meeting 1- Introduction (Financial Management) Meeting 1- Introduction (Financial Management)
Meeting 1- Introduction (Financial Management) Albina Gaisina
 

Ähnlich wie Capital structure b.v.raghunandan (20)

Financial leverage as the balance sheet polluter b.v.raghunandan
Financial leverage as the balance sheet polluter b.v.raghunandanFinancial leverage as the balance sheet polluter b.v.raghunandan
Financial leverage as the balance sheet polluter b.v.raghunandan
 
Leverage as a financial perversion b.v.raghunandan
Leverage as a financial perversion b.v.raghunandanLeverage as a financial perversion b.v.raghunandan
Leverage as a financial perversion b.v.raghunandan
 
Traditional and MM approach in capital structure
Traditional and MM approach in capital structureTraditional and MM approach in capital structure
Traditional and MM approach in capital structure
 
Financial services- Basics
Financial services- BasicsFinancial services- Basics
Financial services- Basics
 
Bcu msc cg week 7 csr 220712
Bcu msc cg week 7 csr 220712Bcu msc cg week 7 csr 220712
Bcu msc cg week 7 csr 220712
 
Chapter 1 understanding financial system
Chapter 1 understanding  financial systemChapter 1 understanding  financial system
Chapter 1 understanding financial system
 
Chapter18 financingofprojects
Chapter18 financingofprojectsChapter18 financingofprojects
Chapter18 financingofprojects
 
Mba1034 cg law ethics week 6 sri esg 2013
Mba1034 cg law ethics week 6 sri esg 2013Mba1034 cg law ethics week 6 sri esg 2013
Mba1034 cg law ethics week 6 sri esg 2013
 
Stakeholder organization stout 5 6 from carly
Stakeholder organization stout 5 6 from carlyStakeholder organization stout 5 6 from carly
Stakeholder organization stout 5 6 from carly
 
Introduction to corporate finance
Introduction to corporate financeIntroduction to corporate finance
Introduction to corporate finance
 
1 Financial System
1 Financial System1 Financial System
1 Financial System
 
Gwinner IFC AUHF Oct 2012
Gwinner IFC AUHF Oct 2012Gwinner IFC AUHF Oct 2012
Gwinner IFC AUHF Oct 2012
 
MERCHANT BANKING SERVICES
MERCHANT BANKING SERVICESMERCHANT BANKING SERVICES
MERCHANT BANKING SERVICES
 
Introduction to corporate finance
Introduction to corporate financeIntroduction to corporate finance
Introduction to corporate finance
 
Umma hania
Umma haniaUmma hania
Umma hania
 
Business Financing - Sources of Finance
Business Financing - Sources of Finance Business Financing - Sources of Finance
Business Financing - Sources of Finance
 
Leverage and Capital Structure .pptx
Leverage and Capital Structure .pptxLeverage and Capital Structure .pptx
Leverage and Capital Structure .pptx
 
Financial Engineering
Financial EngineeringFinancial Engineering
Financial Engineering
 
LECTURE TWO.pptx
LECTURE TWO.pptxLECTURE TWO.pptx
LECTURE TWO.pptx
 
Meeting 1- Introduction (Financial Management)
Meeting 1- Introduction (Financial Management) Meeting 1- Introduction (Financial Management)
Meeting 1- Introduction (Financial Management)
 

Mehr von SVS College

Entrepreneurship b.v.raghunandan
Entrepreneurship b.v.raghunandanEntrepreneurship b.v.raghunandan
Entrepreneurship b.v.raghunandanSVS College
 
Case study for Class Room Teaching- B.V.Raghunandan
Case study for Class Room Teaching- B.V.Raghunandan Case study for Class Room Teaching- B.V.Raghunandan
Case study for Class Room Teaching- B.V.Raghunandan SVS College
 
Indian banking and financial inclusion b.v.raghunandan
Indian banking and financial inclusion b.v.raghunandanIndian banking and financial inclusion b.v.raghunandan
Indian banking and financial inclusion b.v.raghunandanSVS College
 
Professional ethics b.v.raghunandan
Professional ethics b.v.raghunandanProfessional ethics b.v.raghunandan
Professional ethics b.v.raghunandanSVS College
 
Ugc choice based common curriculum b.v.raghunandan-ugc
Ugc choice based common curriculum b.v.raghunandan-ugcUgc choice based common curriculum b.v.raghunandan-ugc
Ugc choice based common curriculum b.v.raghunandan-ugcSVS College
 
Budget 2015 16 and fundamentals of union budget-b.v.raghunandan
Budget 2015 16 and fundamentals of union budget-b.v.raghunandanBudget 2015 16 and fundamentals of union budget-b.v.raghunandan
Budget 2015 16 and fundamentals of union budget-b.v.raghunandanSVS College
 
Entrepreneurship in the it era b.v.raghunandan
Entrepreneurship in the it era b.v.raghunandanEntrepreneurship in the it era b.v.raghunandan
Entrepreneurship in the it era b.v.raghunandanSVS College
 
Analysis of society vis a vis advertising-b.v.raghunandan
Analysis of society vis a vis advertising-b.v.raghunandanAnalysis of society vis a vis advertising-b.v.raghunandan
Analysis of society vis a vis advertising-b.v.raghunandanSVS College
 
Cyer crimes and cyber laws b.v.raghunandan
Cyer crimes and cyber laws b.v.raghunandanCyer crimes and cyber laws b.v.raghunandan
Cyer crimes and cyber laws b.v.raghunandanSVS College
 
Campus agenda for career plannning mba- b.v.raghunandan
Campus agenda for career plannning  mba- b.v.raghunandanCampus agenda for career plannning  mba- b.v.raghunandan
Campus agenda for career plannning mba- b.v.raghunandanSVS College
 
Mentoring b.v.raghunandan
Mentoring b.v.raghunandanMentoring b.v.raghunandan
Mentoring b.v.raghunandanSVS College
 
Student empowerment through mentoring and reverese mentoring b.v.raghunandan
Student empowerment through mentoring and reverese mentoring b.v.raghunandanStudent empowerment through mentoring and reverese mentoring b.v.raghunandan
Student empowerment through mentoring and reverese mentoring b.v.raghunandanSVS College
 
Fdi in retail business b.v.raghunandan
Fdi in  retail business  b.v.raghunandanFdi in  retail business  b.v.raghunandan
Fdi in retail business b.v.raghunandanSVS College
 
Book building-b.v.raghunandan
Book building-b.v.raghunandanBook building-b.v.raghunandan
Book building-b.v.raghunandanSVS College
 
Ipo and retail investors b.v.raghunandan
Ipo and retail investors b.v.raghunandanIpo and retail investors b.v.raghunandan
Ipo and retail investors b.v.raghunandanSVS College
 
Emerging trends in indian marketing b.v.raghunandan
Emerging trends in indian marketing b.v.raghunandanEmerging trends in indian marketing b.v.raghunandan
Emerging trends in indian marketing b.v.raghunandanSVS College
 
Gfc, hiriyadka career options for commerce and management graduates-b.v.raghu...
Gfc, hiriyadka career options for commerce and management graduates-b.v.raghu...Gfc, hiriyadka career options for commerce and management graduates-b.v.raghu...
Gfc, hiriyadka career options for commerce and management graduates-b.v.raghu...SVS College
 
E'banking and e'commerce b.v.raghunandan
E'banking and e'commerce b.v.raghunandanE'banking and e'commerce b.v.raghunandan
E'banking and e'commerce b.v.raghunandanSVS College
 
Rbi & indian economy b.v.raghunandan
Rbi & indian economy b.v.raghunandanRbi & indian economy b.v.raghunandan
Rbi & indian economy b.v.raghunandanSVS College
 
Campus agenda for career plannning for commerce and management graduates in I...
Campus agenda for career plannning for commerce and management graduates in I...Campus agenda for career plannning for commerce and management graduates in I...
Campus agenda for career plannning for commerce and management graduates in I...SVS College
 

Mehr von SVS College (20)

Entrepreneurship b.v.raghunandan
Entrepreneurship b.v.raghunandanEntrepreneurship b.v.raghunandan
Entrepreneurship b.v.raghunandan
 
Case study for Class Room Teaching- B.V.Raghunandan
Case study for Class Room Teaching- B.V.Raghunandan Case study for Class Room Teaching- B.V.Raghunandan
Case study for Class Room Teaching- B.V.Raghunandan
 
Indian banking and financial inclusion b.v.raghunandan
Indian banking and financial inclusion b.v.raghunandanIndian banking and financial inclusion b.v.raghunandan
Indian banking and financial inclusion b.v.raghunandan
 
Professional ethics b.v.raghunandan
Professional ethics b.v.raghunandanProfessional ethics b.v.raghunandan
Professional ethics b.v.raghunandan
 
Ugc choice based common curriculum b.v.raghunandan-ugc
Ugc choice based common curriculum b.v.raghunandan-ugcUgc choice based common curriculum b.v.raghunandan-ugc
Ugc choice based common curriculum b.v.raghunandan-ugc
 
Budget 2015 16 and fundamentals of union budget-b.v.raghunandan
Budget 2015 16 and fundamentals of union budget-b.v.raghunandanBudget 2015 16 and fundamentals of union budget-b.v.raghunandan
Budget 2015 16 and fundamentals of union budget-b.v.raghunandan
 
Entrepreneurship in the it era b.v.raghunandan
Entrepreneurship in the it era b.v.raghunandanEntrepreneurship in the it era b.v.raghunandan
Entrepreneurship in the it era b.v.raghunandan
 
Analysis of society vis a vis advertising-b.v.raghunandan
Analysis of society vis a vis advertising-b.v.raghunandanAnalysis of society vis a vis advertising-b.v.raghunandan
Analysis of society vis a vis advertising-b.v.raghunandan
 
Cyer crimes and cyber laws b.v.raghunandan
Cyer crimes and cyber laws b.v.raghunandanCyer crimes and cyber laws b.v.raghunandan
Cyer crimes and cyber laws b.v.raghunandan
 
Campus agenda for career plannning mba- b.v.raghunandan
Campus agenda for career plannning  mba- b.v.raghunandanCampus agenda for career plannning  mba- b.v.raghunandan
Campus agenda for career plannning mba- b.v.raghunandan
 
Mentoring b.v.raghunandan
Mentoring b.v.raghunandanMentoring b.v.raghunandan
Mentoring b.v.raghunandan
 
Student empowerment through mentoring and reverese mentoring b.v.raghunandan
Student empowerment through mentoring and reverese mentoring b.v.raghunandanStudent empowerment through mentoring and reverese mentoring b.v.raghunandan
Student empowerment through mentoring and reverese mentoring b.v.raghunandan
 
Fdi in retail business b.v.raghunandan
Fdi in  retail business  b.v.raghunandanFdi in  retail business  b.v.raghunandan
Fdi in retail business b.v.raghunandan
 
Book building-b.v.raghunandan
Book building-b.v.raghunandanBook building-b.v.raghunandan
Book building-b.v.raghunandan
 
Ipo and retail investors b.v.raghunandan
Ipo and retail investors b.v.raghunandanIpo and retail investors b.v.raghunandan
Ipo and retail investors b.v.raghunandan
 
Emerging trends in indian marketing b.v.raghunandan
Emerging trends in indian marketing b.v.raghunandanEmerging trends in indian marketing b.v.raghunandan
Emerging trends in indian marketing b.v.raghunandan
 
Gfc, hiriyadka career options for commerce and management graduates-b.v.raghu...
Gfc, hiriyadka career options for commerce and management graduates-b.v.raghu...Gfc, hiriyadka career options for commerce and management graduates-b.v.raghu...
Gfc, hiriyadka career options for commerce and management graduates-b.v.raghu...
 
E'banking and e'commerce b.v.raghunandan
E'banking and e'commerce b.v.raghunandanE'banking and e'commerce b.v.raghunandan
E'banking and e'commerce b.v.raghunandan
 
Rbi & indian economy b.v.raghunandan
Rbi & indian economy b.v.raghunandanRbi & indian economy b.v.raghunandan
Rbi & indian economy b.v.raghunandan
 
Campus agenda for career plannning for commerce and management graduates in I...
Campus agenda for career plannning for commerce and management graduates in I...Campus agenda for career plannning for commerce and management graduates in I...
Campus agenda for career plannning for commerce and management graduates in I...
 

Kürzlich hochgeladen

India Economic Survey Complete for the year of 2022 to 2023
India Economic Survey Complete for the year of 2022 to 2023India Economic Survey Complete for the year of 2022 to 2023
India Economic Survey Complete for the year of 2022 to 2023SkillCircle
 
LIC PRIVATISATION its a bane or boon.pptx
LIC PRIVATISATION its a bane or boon.pptxLIC PRIVATISATION its a bane or boon.pptx
LIC PRIVATISATION its a bane or boon.pptxsonamyadav7097
 
Monthly Market Risk Update: March 2024 [SlideShare]
Monthly Market Risk Update: March 2024 [SlideShare]Monthly Market Risk Update: March 2024 [SlideShare]
Monthly Market Risk Update: March 2024 [SlideShare]Commonwealth
 
Introduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an EntrepreneurIntroduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an Entrepreneurabcisahunter
 
Stock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdfStock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdfMichael Silva
 
Contracts with Interdependent Preferences
Contracts with Interdependent PreferencesContracts with Interdependent Preferences
Contracts with Interdependent PreferencesGRAPE
 
Taipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for TourismTaipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for TourismBrian Lin
 
Buy and Sell Urban Tots unlisted shares.pptx
Buy and Sell Urban Tots unlisted shares.pptxBuy and Sell Urban Tots unlisted shares.pptx
Buy and Sell Urban Tots unlisted shares.pptxPrecize Formely Leadoff
 
Work and Pensions report into UK corporate DB funding
Work and Pensions report into UK corporate DB fundingWork and Pensions report into UK corporate DB funding
Work and Pensions report into UK corporate DB fundingHenry Tapper
 
2024.03 Strategic Resources Presentation
2024.03 Strategic Resources Presentation2024.03 Strategic Resources Presentation
2024.03 Strategic Resources PresentationAdnet Communications
 
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTESACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTESKumarJayaraman3
 
Mphasis - Schwab Newsletter PDF - Sample 8707
Mphasis - Schwab Newsletter PDF - Sample 8707Mphasis - Schwab Newsletter PDF - Sample 8707
Mphasis - Schwab Newsletter PDF - Sample 8707harshan90
 
MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.Arifa Saeed
 
Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024Guillaume Ⓥ Sarlat
 
20240315 _E-Invoicing Digiteal. .pptx
20240315 _E-Invoicing Digiteal.    .pptx20240315 _E-Invoicing Digiteal.    .pptx
20240315 _E-Invoicing Digiteal. .pptxFinTech Belgium
 
Slideshare - ONS Economic Forum Slidepack - 18 March 2024.pptx
Slideshare - ONS Economic Forum Slidepack - 18 March 2024.pptxSlideshare - ONS Economic Forum Slidepack - 18 March 2024.pptx
Slideshare - ONS Economic Forum Slidepack - 18 March 2024.pptxOffice for National Statistics
 
Solution manual for Intermediate Accounting, 11th Edition by David Spiceland...
Solution manual for  Intermediate Accounting, 11th Edition by David Spiceland...Solution manual for  Intermediate Accounting, 11th Edition by David Spiceland...
Solution manual for Intermediate Accounting, 11th Edition by David Spiceland...mwangimwangi222
 
Hungarys economy made by Robert Miklos
Hungarys economy   made by Robert MiklosHungarys economy   made by Robert Miklos
Hungarys economy made by Robert Miklosbeduinpower135
 

Kürzlich hochgeladen (20)

India Economic Survey Complete for the year of 2022 to 2023
India Economic Survey Complete for the year of 2022 to 2023India Economic Survey Complete for the year of 2022 to 2023
India Economic Survey Complete for the year of 2022 to 2023
 
LIC PRIVATISATION its a bane or boon.pptx
LIC PRIVATISATION its a bane or boon.pptxLIC PRIVATISATION its a bane or boon.pptx
LIC PRIVATISATION its a bane or boon.pptx
 
Monthly Market Risk Update: March 2024 [SlideShare]
Monthly Market Risk Update: March 2024 [SlideShare]Monthly Market Risk Update: March 2024 [SlideShare]
Monthly Market Risk Update: March 2024 [SlideShare]
 
Introduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an EntrepreneurIntroduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an Entrepreneur
 
Stock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdfStock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdf
 
Contracts with Interdependent Preferences
Contracts with Interdependent PreferencesContracts with Interdependent Preferences
Contracts with Interdependent Preferences
 
Monthly Economic Monitoring of Ukraine No.230, March 2024
Monthly Economic Monitoring of Ukraine No.230, March 2024Monthly Economic Monitoring of Ukraine No.230, March 2024
Monthly Economic Monitoring of Ukraine No.230, March 2024
 
Taipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for TourismTaipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
 
Buy and Sell Urban Tots unlisted shares.pptx
Buy and Sell Urban Tots unlisted shares.pptxBuy and Sell Urban Tots unlisted shares.pptx
Buy and Sell Urban Tots unlisted shares.pptx
 
Work and Pensions report into UK corporate DB funding
Work and Pensions report into UK corporate DB fundingWork and Pensions report into UK corporate DB funding
Work and Pensions report into UK corporate DB funding
 
2024.03 Strategic Resources Presentation
2024.03 Strategic Resources Presentation2024.03 Strategic Resources Presentation
2024.03 Strategic Resources Presentation
 
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTESACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
 
Mphasis - Schwab Newsletter PDF - Sample 8707
Mphasis - Schwab Newsletter PDF - Sample 8707Mphasis - Schwab Newsletter PDF - Sample 8707
Mphasis - Schwab Newsletter PDF - Sample 8707
 
MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.
 
Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024
 
20240315 _E-Invoicing Digiteal. .pptx
20240315 _E-Invoicing Digiteal.    .pptx20240315 _E-Invoicing Digiteal.    .pptx
20240315 _E-Invoicing Digiteal. .pptx
 
Slideshare - ONS Economic Forum Slidepack - 18 March 2024.pptx
Slideshare - ONS Economic Forum Slidepack - 18 March 2024.pptxSlideshare - ONS Economic Forum Slidepack - 18 March 2024.pptx
Slideshare - ONS Economic Forum Slidepack - 18 March 2024.pptx
 
New Monthly Enterprises Survey. Issue 21. (01.2024) Ukrainian Business in War...
New Monthly Enterprises Survey. Issue 21. (01.2024) Ukrainian Business in War...New Monthly Enterprises Survey. Issue 21. (01.2024) Ukrainian Business in War...
New Monthly Enterprises Survey. Issue 21. (01.2024) Ukrainian Business in War...
 
Solution manual for Intermediate Accounting, 11th Edition by David Spiceland...
Solution manual for  Intermediate Accounting, 11th Edition by David Spiceland...Solution manual for  Intermediate Accounting, 11th Edition by David Spiceland...
Solution manual for Intermediate Accounting, 11th Edition by David Spiceland...
 
Hungarys economy made by Robert Miklos
Hungarys economy   made by Robert MiklosHungarys economy   made by Robert Miklos
Hungarys economy made by Robert Miklos
 

Capital structure b.v.raghunandan

  • 1. Capital Structure -B.V.Raghunandan Post-Graduate Department of Commerce, Government First Grade College, Hebri April 6, 2014
  • 2. Capital Structure • It is the mixture or combination of debt and equity used by a corporate in financing its long-term operations • As debt and equity have different cost of servicing, the composition has an effect on the profitability and ultimately on the valuation of a corporate
  • 3. Leverage • Leverage: Having debt in the capital structure of a company • In 1950s and 60s, it was considered to be a magical act through comparison of leveraged company and a non-leveraged company • Effect was considered for profitable companies and non-profitable companies were ignored
  • 4. Theories of Capital Structure • Theories of capital structure dealt with the presence of debt in the long-term capital structure of a firm and its impact on cost of capital, profitability and valuation of the firm wit the objective determining the optimum capital structure • Theories are: 1) Net Income Approach-David Duran 2) Net Operating Income Approach-David Duran 3) Traditional Approach-Ezra Solomon 4) Modigliani-Miller Theories
  • 5. I Net Income Approach • Propounded by David Durand in 1952 • The presence of debt and its increase reduces the weighted average cost of capital of the firm as cost of debt is less than cost of equity • Thus, an increase in debt component of the capital structure leads to better valuation of the firm • There is a direct relation between degree of financial leverage and the valuation of the firm
  • 6. II Net Operating Income Approach • Also propounded by David Durand • Directly opposite to Net Income Approach • Increase in debt increases debt-equity ration forcing the lenders to charge a higher rate of interest • Thus, cost of debt will be equal to cost of debt which is equal to weighted average cost of capital • Thus, change in financial leverage does not change the cost of capital or valuation of the firm • Known as Irrelevance Theory
  • 7. III Traditional Approach • Asserted by Ezra Solomon • Resolves the contradiction between NI and NOI • Upto a certain level, increase in debt will increase the benefit of financial leverage leading to weighted average cost of capital and higher valuation of the firm • After that, a higher debt-equity ratio will result in a higher rates of interest neutralising the benefit of leverage Prof. Ezra Solomon
  • 8. Franco Modigliani • Italian Economist • Naturalised American • Professor at Graduate School of Industrial Administration of Carnegie Mellon University in 1958 • Joined Merton Miller in advocating Modigliani- Miller Theorem on Corporate Finance
  • 9. Merton Miller • Graduate from Harvard School • Joined as Asst.Professor at London School of Economics • A ground-breaking work called,”Merton Miller on Derivatives” • Nobel Laureate
  • 10. IV Modigliani-Miller Theory • they compiled a paper on ‘The Cost of Capital, Corporate Finance and the Theory of Investment’, • They based their theory on NOI Approach • They objected to the traditional view of finding an optimal capital structure • The weighted cost of capital does not change with increase in debt • Hence, no change in leverage or valuation of firm
  • 11. Rationale for Acceptance • High corporate taxes caused reduced tax incidence as interest on debt was a business expense • Promoters’ Control was not diluted as debt did not carry voting rights • Equity form of finance like venture capital emerged later • The concept of risk management also emerged later
  • 12. Reality Check • During a long gestation period of heavy industries and infrastructure projects, it becomes toxic • For the industry having a huge capital cost and huge running expenses like civil aviation, it is devastating • When unexpected risks exist, the tables will turn very quickly • Prolonged trade cycles like mining and metal industries
  • 13. Warning • Sharia held debt to be a sin • Shakespeare maintained, "never a lender nor a borrower be” and also depicted the cruelest aspect through the character of Shylock in Merchant of Venice • Financial Management considered both equity and debt to be the components of capital structure • Never considered the repayment programme, cautions, warning signals etc as an important exercise
  • 14. A Carefree World • Corporates did not learn the lesson leading to the development of art and science of bankruptcy • Individuals and families were encouraged to overborrow like housing finance, consumer finance, finance for hospital bills, student loans • Questionable methods employed for recovery including foreclosure • Credit card booms • Empty houses and homeless population
  • 15. Revival of Equity Culture • A more mature and developed primary market and stock market • Reduced corporate tax rates • Emergence of venture capital and private equity fund • Contribution of HNI and Angel Investors • A Systematic Risk Management and Popularity of debt-free capital structure • Basel Norms for Banks
  • 16. Rationale for Equity Shares • No need to pay dividend in the absence of profit • Even in the presence of profit, a growth oriented company does not declare dividend • No need to pay dividend during gestation period • Large body of investors to share the losses • Equity shares are the cheapest source of finance • Shareholder Loyalty for other projects and group companies • Huge funds can be raised through IPOs and FPOs • Share Premium as another cheap source of finance • Listed companies having access to cheaper foreign funds
  • 17. The Fallen Empire-DLF Limited • 1946-Chaudhry Ragvendra Singh promoted • Developer of residential and other complexes in Delhi until 1957 • 1957-Delhi Development Authority banned private developers • It went out to Gurgaon in Haryana to develop a city
  • 18. IPO Details of DLF Ltd. • 2007-IPO made • 17.5 crore shares of Rs.2 through book-building • Cut-off Price Rs.525 • Face Value of Shares: Rs.35 crore • Share Premium: Rs.9,152.5 crore • Share Price went upto Rs.1000 in 2008
  • 19. Falling Down from Grace • Forays into Capital Intensive expansion • Hospitality Industry • Wind and other power business • Extensive Borrowings • Debt: Rs.19000 crores • Questionable Trade Practices
  • 20. Correlation between Interest and Profit of DLF Ltd.(Figures in Rs.Crore) Year Sales Interest Profit 2007-08 14433 310 7,847 2008-09 10,035 555 4,497 2009-10 7,423 1,110 1,709 2010-11 9,560 1,706 1,638 2011-12 9,629 2,246 1,169 2012-13 7,773 2,314 663 2013-14 8,298 2,463 582
  • 21. Alternative • FPO at the cut-off price of IPO could have brought in a huge amount of cost-free funds • It would have saved the interest • More meaningful diversification • Taking care of quality of building in Gurgaon and maintaining the customer relation