Impact of Financial Leverage on Cost of Capital
DEPARTMENT OF BUSINESS ADMINISTRATION
A TERM PAPER ON –
IMPACT OF FINANCIAL LEVERAGE ON COST OF CAPITAL AND VALUATION OF FIRM:
A STUDY OF CEMENT INDUSTRY
NAME- DIPANNITA GHOSH
DEPT- MBA
ROLL- 11
INTRODUCTION
In corporate finance, financing decisions has greater importance because the optimal capital structure can be created trough proper mix of finance. Corporate managers generally prefer borrowings over other means of financing. Management of a company has to be very careful while deciding the extent of financing leverage in its capital structure because the right use of financial leverage can increase the share holder’s wealth whereas its improper use would adversely affects the interest of share holders. This study examine the empirical effects of corporate capital structure (Financial leverage) on cost of capital and market value of selected firms of Indian Cement Industries for the period from 2001-01 to 2007-08.The research evidence of the study indicates that no impact of financing leverage on cost of capital was found in the cement industry in India, i.e. no significant linear relationship between the Financial leverage and total valuation within the cement industry. Many financial managers argue that the financial leverage is the most important among the leverage concepts. It is particularly applicable in capital structures management. A Firm’s capital structures are the relation between debt and equity capital that makes up the Firm’s financing of the assets. A firm using no debt capital is said to have an all equity capital structure. Since most firm has a capital structure comprising debt and equity, such a firms’ financial managers is highly concerned with right choice of debt and equity. It determines the relationship that should exist between dept and equity capital at a given point of time. A firms which makes no use of fixed-charge security have a purely equity capital structure and thus have no financial leverage at all. Thus it is
A TERM PAPER ON –
IMPACT OF FINANCIAL LEVERAGE ON COST OF CAPITAL AND VALUATION OF FIRM:
A STUDY OF CEMENT INDUSTRY
NAME- DIPANNITA GHOSH
DEPT- MBA
ROLL- 11
INTRODUCTION
In corporate finance, financing decisions has greater importance because the optimal capital structure can be created trough proper mix of finance. Corporate managers generally prefer borrowings over other means of financing. Management of a company has to be very careful while deciding the extent of financing leverage in its capital structure because the right use of financial leverage can increase the share holder’s wealth whereas its improper use would adversely affects the interest of share holders. This study examine the empirical effects of corporate capital structure (Financial leverage) on cost of capital and market value of selected firms of Indian Cement Industries for the period from 2001-01 to 2007-08.The research evidence of the study indicates that no impact of financing leverage on cost of capital was found in the cement industry in India, i.e. no significant linear relationship between the Financial leverage and total valuation within the cement industry. Many financial managers argue that the financial leverage is the most important among the leverage concepts. It is particularly applicable in capital structures management. A Firm’s capital structures are the relation between debt and equity capital that makes up the Firm’s financing of the assets. A firm using no debt capital is said to have an all equity capital structure. Since most firm has a capital structure comprising debt and equity, such a firms’ financial managers is highly concerned with right choice of debt and equity. It determines the relationship that should exist between dept and equity capital at a given point of time. A firms which makes no use of fixed-charge security have a purely equity capital structure and thus have no financial leverage at all. Thus it is
Bibliography: http.//on.wikipedia.com.org/wiki/leverage_(finance) www.cwu.edu/~youngm/FIN%20470/.../Chapter%2017.ppt www.thefreelibrary.com › Business › Paradigm › July 1, 2009 http://www.thefreelibrary.com/Impact+of+financial+leverage+on+cost+of+capital+and+valuation+of...-a0238426584