and it is assumed that it is independent of the capital structure. 6. The firm has a perpetual life. 7. The firm’s earnings before interest and taxes are not expected to grow. 8. The firm’s total financing remains constant. The firm’s degree of leverage can be altered either by selling shares and to retire the debt using the proceeds or by raising more debt and reduce the equity financing. 9. All the investors are assumed to have the same subjective
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make maximum use of leverage at a minimum cost. • Flexibility - An ideal capital structure should be flexible enough to adapt to changing conditions. • Control - The structure should have minimum dilution of control. • Solvency - Use of excessive debt threatens the very existence of the company. 4 PREVIOUS HOME C oEXT d e n t i a l N nfi MB0045-Financial Management Unit-7 Capital Structure Factors Affecting Capital Structures • Leverage - The use of fixed charges
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CAPITAL STRUCTURE DETERMINANTS THE CASE OF THE KENYAN BANKING INDUSTRY TABLE OF CONTENTS 1. INTRODUCTION Capital structure refers to the mix of debt and equity which a firm uses to finance its operations. Many theories have been formulated with regard to whether there exists an optimal capital structure mix and the role the various determinants of capital structure play in deciding the mix. The Modern theory of capital structure began with Modigliani and Miller in 1958 (Harris
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Rosengren* During the 1980s‚ the proportion of business assets financed by debt exceeded that of any other period since World War II. Although much of this leverage accommodated new investment‚ during the last half of the decade corporations also replaced more than one-sixth of their outstanding stock with debt securities. Because of this surge in leverage‚ many analysts and policymakers are wary that businesses may have become too vulnerable‚ perhaps imperiling prospects for capital formation and employment
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CORPORATE FINANCE END TERM PROJECT To study the Financials of ICICI bank‚ HDFC bank and Axis bank and to conduct Comparative Financial Analysis among them. UNDER THE GUIDANCE: Dr. ASHISH GARG PROGRAM COORDINATOR PGDM (FINANCE)
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companies achieving high profitability have less risk of financial distress and bankruptcy‚ so the cost of debt is lower. Second‚ higher profitability means that companies can achieve higher utilization of the interest tax shield by increasing the amount leverage and hence the promised interest payments each period. Similarly‚ increased debt will serve as a disciplinary factor for managers when free cash flow likely increase with increased profitability. However‚ as dynamic trade-off theory predicts adjustment
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Capital‚ Corporation Finance and the Theory of Investment”‚ the American EconomicReview. Vol. 48‚ No. 3. Fama‚ E.‚ 1980‚ “Agency Problems and Theory of the Company”‚ Journal ofPolitical Economy‚ Vol. 88‚ No. 2. Bhayani .S.J‚ 2009. Impact of Financial Leverage on Cost of Capital and Valuation of Company: A Study of Indian Cement Industry‚ Paradigm. vol XIII‚ No 2‚ July December‚ 2009. Myers‚ S.‚ and N Myers‚ S.C.‚ 1977‚ “Determinants of Corporate Borrowing”‚ Journal of Financial Economics‚ Vol. 5. Myers
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000 = 205‚000 250‚000 – 205‚000 = 45‚000 profit C. What is the degree of operating leverage at 20‚000 bags and 25‚000 bags? 20‚000 bags 20‚000($0.10 x 50 lbs)/20‚000($5.00) – 80‚000 100‚000/20‚000 DOL = 5 25‚000 bags 25‚000($0.10 x 50 lbs)/25‚000($5.00) – 80‚000 125‚000/45‚000 DOL =2.78 Why does the degree of operating leverage change as the quantity sold increase? The degree of operating leverage gives the company an idea of how much operating level they have at different points of
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Assessed Discussion Question 1. Define what we mean by the firm’s financing decision and the firm’s investment decision. What entities are on the “other side” of these decisions? Financing decision refers to those decisions related to the liabilities and the stockholders equality sides of the firm’s position statement especially concerning decision on to issue bond. Firms’ investment decision refers to those decisions concerned with the asset side of the firm’s balance sheet dealing with
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debt ratio. Part c. (Operation Leverage) A firm that makes few sales with sales providing a high gross margin is said to have high operation leverage. Operating leverage is dependent on a firm’s fixed and variable costs. If a firm has a high proportion of fixed costs it has high operation leverage as opposed to a firm with low fixed costs and high variable casts which are considered to have a low operation leverage. A high-end car dealership has high operating leverage while a grocery store has low
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