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V It refers to the mix of long-terms sources of
funds, such as : Equity share capital, reserves
and surpluses, debentures, long-term debt
from outside sources and preference share
capital.
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It is a combination of debt, preference It is a combination of current
shares and ordinary shares of the liabilities, debt, preference
organization. shares and ordinary shares of the
organization.
V It is that level of debt-equity proportion
where the market value per share is
maximum and the cost of capital is minimum.
J ainimum WACC
J aaximizes the firm value
V irofitability/Return
V Solvency/Risk
V Flexibility
V Conservation/Capacity
V Control
V —ax benefit of debt
V Flexibility
V Control
V Seasonal Variations
V Degree of competition
V Industry life cycle
V Agency costs
V —iming of public issue
V ieriod of finance
V iurpose of finance
V Legal requirements
V Complete equity share capital
V Different proportions of equity and
preference share capital.
V Different proportions of equity and
debenture capital.
V Different proportion of equity, preference
and debenture capital.
V aost corporations have low debt-asset ratios
V Changes in Financial Leverage affect Firm
Value
V —here are differences in the Capital Structures
of Different Industries
V aost companies have a target debt ratio
V —arget debt ratio is dependent on taxes,
types of assets, uncertainty of operating
income, and pecking order and financial
slack.
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V EBI—-EiS Approach
V Valuation Approach
V Cash Flow Approach
V According to James Home : Dzthe employment
of an asset or sources of funds for which the
firm has to pay a fixed cost or fixed return.dz
V Here fixed cost (operating cost) or fixed
returns (financial cost) remains constant
irrespective of the level of output.
V ºperating leverage
V Financial leverage
V Combined leverage
V et income approach
V et operating income approach
V —raditional or WACC approach
V aodigliani ailler approach
V A firmǯs ÷
 ÷ is the proportion of a
firmǯs long-term funding provided by long-term
debt and equity.
V Capital structure influences a firmǯs cost of
capital through the  
  to debt
financing and the effect of capital structure on
 .
V Because of the   between the tax
advantage to debt financing and risk, each firm
has an 
 capital structure that minimizes
the WACC and maximises firm value.