Finance Numericals

Capital Structure: It is a proportion of the capital raise through debt, equity or wholly debt or wholly equity to finance company's assets. Theories of Capital Structure: 1.        Net Income 2.        Net Operating Income 3.        Trade Off 4.        Pecking Order 5.        Modigliani and Miller 6.        Market Timing Net Income: According to this theory debt finance is cheaper than other sources of finance, more debt capital in a company lesser the total cost of capital because the interest is tax deductible and it reduces the burden of tax so, that’s why the weighted average cost of capital is less. Assumptions: ·          Cost of debt < cost of equity ·          No tax ·          Use of debt does not change the risk of investors. Net Operating Income: According to this theory increase or decrease in the debt of a company does not affect the value of a firm/company. Because it does not affect the operating income of a company or firm