Financial Management - Session 2
Financial Management - Session 2
Financial Management - Session 2
Cost of debt has two parts: Explicit – rate of interest paid on debt ; implicit or hidden – increased cost of equity due to increase in
debt
Optimum capital structure under NOI Approach:
As per NOI approach the cost of debt, market value of the firm and the market value of the equity shares remain constant
irrespective of change in the financial leverage and the benefit of low cost of debt is offset by the increased rate of return on equity
with the increase in debt in the capital structure Therefore, the overall all cost of capital remains the same at any level of debt;
hence, the capital structure is optimum at any level of debt-equity mix. There is nothing as an “optimum capital structure”
Residual value of equity
Q1. The XYZ Ltd. has earned a profit before interest and tax Rs. 7 lakhs. The
company’s capital structure includes 30,000 14% Debenture of Rs. 100 each. The
overall capitalization rate of the firm is 16%. – Calculate the Total value of firm
and the equity capitalization rate?