Capital Structure

Presented by Devendra ojha

BBA v sem

Mail-id ojhad25@gmail.com

Outline

Meaning of Capital StructureSource of capitalCapital structure of multinational firmsFour main capital structure theories

Meaning of Capital Structure

Capital Structure refers to the combination or mix of debt and equity which a company uses to finance its long term operations.

Source of Capital

CAPITAL STRUCTURE OF MULTINATIONAL FIRMS

Capital structure for the multinational firm involves a choice between debt and equity financing across all its subsidiaries. A MNC can have more debt in its capital structure if its cash flows are more stable and it has a low credit risk.

Four main capital structure theories

Net income approach Net operating income approach Traditional approach Modigliani and miller approach

Net income approach

This approach being propounded by durand The cost of debt is lower than the cost of equityThe risk perception of investors is not changed

by the use of debt.There are no tax.

Net operating income approach

This approach also propounded by durand The cost of debt is lower than the cost of equityCost of debt are constant If we increase proportion of debt capital than

overall cost of capital decrease but same time interest burden on company increase

These are no corporate tax .

Traditional approach

increase in leverage does not affect the overall cost of capital and the value of the firm

Higher demanding of returnPoint of Optimum capital structure

Modigliani- miller approach

Feature

1. Capital markets are perfect

2. Homogeneous risk classes of firm

3. Expectations about the net operating income

4. Dividend payout ratio 100%

5. No corporate taxes