Scribd
Upload
1K views

Capital Structures Formula

The document discusses theories related to capital structures including value of firm, costs of equity and debt, earnings before interest and taxes, net income, and approaches like net income, net operating income, and Modigliani-Miller. It also covers topics like degree of financial leverage, tax rates, value of levered and unlevered firms, and weighted average cost of capital.

Uploaded by

Subrata Halder
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
1K views

Capital Structures Formula

The document discusses theories related to capital structures including value of firm, costs of equity and debt, earnings before interest and taxes, net income, and approaches like net income, net operating income, and Modigliani-Miller. It also covers topics like degree of financial leverage, tax rates, value of levered and unlevered firms, and weighted average cost of capital.

Uploaded by

Subrata Halder
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

Financial Management

Subrata Halder Theory of Capital Structures


1


Value of Firm (V) = S + B
S = Value of Equity Share Capital
B = Value of Debt/Bond
Ke = Cost of Equity Share
= Equity Capitalization Rate
Kd = Cost of Debt
= Debt Capitalization Rate
= Interest Rate
Ko = Overall Cost of Capital
= Overall Capitalization Rate
= Weighted Average Cost of Capital
= WACC
-------------------------------------------------------------
EBIT = Earning Before Interest & Tax
NI = Net Income = EACS [No Tax]
EAT = Earning After Tax
= EACS
= Earning Available to Common Stockholders
EPS = Earning Per Share
DPS = Dividend Per Share
DFL = Degree of Financial Leverage
INT = Interest
Tr = Tax Rate (Corporate)
Tp = Personal Tax Rate
-------------------------------------------------------------
Vu = Value of Unlevered Firm
Vl = Value of Levered Firm
Keu = Equity Capitalization Rate of Unlevered Firm
Kel = Equity Capitalization Rate of Levered Firm
Kou = Keu = Overall Capitalization Rate of Ul firm
Kol =Overall Capitalization Rate of Levered Firm
Su = Market Value of Equity Shares of Ul Firm
Sl = Market Value of Equity Shares of Levered Firm
NI & NOI Approach:
>> V = S + B
=


MM, No Tax:
>> Vu = Vl =


MM, With Tax:
>> Vu =
(1)


>> Vl = Vu + TB
=
(1)

+ ( BTr)


NI & NOI Approach:
>> S =

= V- B
= No of Shares Unit Share Price
>> B =
()
()

= V S
MM, No Tax & With Tax:
>> Su = Vu
>> Sl = Vl - B

NI & NOI Approach :
>> Ke = Ko + (Ko Kd)

100
MM Approach:
>> Keu =

100 [No Tax & With Tax]


[ Note: When Tax isnt available, Keu = Kou. But,
when Tax is available, Keu Kou]
>> Kel = Keu + (Keu Kd)

[ No Tax]
= Kou + ( Kou Kd)

[ No Tax]
>> Kel = Keu + (Keu Kd)

(1-Tr) [Tax]
= Kou + (Kou Kd)

(1-Tr) [Tax]

Financial Management

Subrata Halder Theory of Capital Structures
2


When Personal Tax is Available :
Vu =
(1)(1)


Vl = Vu + [1 -
(1)(1)
(1)
]B
= Vu + [1 -
(1)(1)
(1)
]B Reduction in B
Added Value / Gain From Leverage / Tax Shield:
= Vl Vu = [1 -
(1)(1)
(1)
]D

For WACC method:
We =

= Equity Weight
Wd =

= Debt Weight
WACC = Ko =

Kd +

Ke
= (WdKd + WeKe)

NI & NOI Approach:
>> Ko =

100
=

Kd +

Ke
= Ke - (Ke Kd)


MM Approach:
>> Kou = Keu [No Tax]
>> Kou =

Kd +

Keu [ With Tax]



>> Kol =

Kel +

Keu [No Tax]


>> Kol =

Kd (1-Tr) +

Kel [Tax]
Others:
EPS = DPS =



DFL =

PFL =

100
Market Price Per Share =




Tabular Format (NI Approach)
Particulars Taka
EBIT ***
Less : Interest ***
NI ***
Ke ***
S = (

) = (

) ***
B ***
V= S + B
***

Ko = =

100 ***

Arbitrage Process ( From Levered To Unlevered)
Investors Position
In L Firm
Taka
Position In U Firm
After Arbitrage
Taka
Share Capital







Income From
Dividend
***







***
Sales of Share
Personal Leverage
Fund Available

Investment
>>Investment Savings

Income From Divided
Less: Interest
***
***
***

***
***

***
***
Net Income From
Arbitrage Process
***
Net Income From
Arbitrage Process
***
Arbitrage Process ( From Unlevered To Levered)
Investors
Position In U
Firm
Taka
Position In L Firm
After Arbitrage
Taka
Share Capital







Income From
Dividend
***







***
Sales of Share
Fund Available

Investment:
In Shares
In Debt
Total Investment

>>Investment Savings

Income From Divided
Income From Interest
***
***


***
***
***

***

***
***
Net Income
From Arbitrage
Process
***
Net Income From
Arbitrage Process
***

You might also like