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= Equity Shares.
= Preference share capital
From Debentures.
Theories of capital
structure
Two firms X and Y one with zero leverage and the other with 50%
leverage. Means half of the total assets have been financed by debt
Balance sheet
x y x y
_______________________________________________________
Equity 2,000 1,000 Assets 2,000 2,000
Debt 10% -- 1,000
______________ ______________
2,000 2,000 2,000 2,000
Operating profit for both firms 300.Rs. Tax at 50% the
earnings to share holders in each firm is.
x y
___________________________________________________
EBIT 300 300
- Interest 10% --- 100
EAIBT 300 200
- Tax 50% 150 100
EAIT 150 100
D 30000
S 46000
Market value = 76000
D 60,000
S 22,000
Market value = 82,000
Ko =7,000/82,000=8.54%
Assumptions of NI theory:
The Kd is Cheaper than the Ke.
Income tax has been ognored.
The Kd and Ke remain constant.
Presented by
Raavi. Radhika .
M.B.A., M.com, M.Phil,
(P.hd)