Page 179 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances Rupesh Roshan Singh, Lovely Professional University

Notes Unit 8: Capital Structure Decision

CONTENTS
Objectives
Introduction

8.1 Meaning of Capital Structure
8.2 Optimum Capital Structure
8.3 Features of an Appropriate Capital Structure

8.4 Computation of Optimal Capital Structure
8.5 Determinants of Capital Structure
8.6 Assumption of Capital Structure Theories
8.7 Theory of Capital Structure
8.7.1 Net Income Approach (NI)

8.7.2 Net Operating Income Approach
8.7.3 Traditional or Intermediate Approach or WACC Approach
8.7.4 Modigliani-Miller Approach (MM)

8.7.5 Modigliani and Miller Theory
8.8 Working of the Arbitrage Process
8.9 The Trade-off Theory: Cost of Financial Distress and Agency Costs
8.9.1 Trade-off Model
8.9.2 Agency Costs

8.9.3 Consequences of Financial Distress
8.9.4 Optimum Capital Structure: Trade-off Theory
8.10 Pecking Order Theory – Overview

8.10.1 Capital Market Treatment of New Security Issues
8.10.2 How Pecking Order is Superior to the Trade-off Model
8.10.3 Limitations of Pecking Order Theory
8.11 Approaches to Determine Appropriate Capital Structure
8.11.1 EBIT-EPS (Approach) Analysis

8.11.2 Indifference Point
8.12 Summary
8.13 Keywords

8.14 Review Questions
8.15 Further Readings

174 LOVELY PROFESSIONAL UNIVERSITY