Capital Structure of a company refers to the composition or make-up of its capitalization and it includes all long term capital

resources via: loans, reserves, shares and bonds.

Capital Structure represents the relationship among different kinds of long term capital.

Owners capital. Equity Shares. Preference Shares. Retained Earnings. Borrowed Capital. Debentures. Term Loans.

Simple Capital Structure. Compound Capital Structure. Complex Capital Structure.

Financial Leverages or Trading on Equity. Operating Leverage. EBIT/EPS Analysis. Cost of Capital. Growth and Stability of Sales. Nature and Size of a firm. Flexibility. Cash Flow Analysis.

Control. Marketing. Floatation Costs. Legal Constraints. Capital Market Condition. Asset Structure. Purpose of Financing. Period of Finance.

Traditional Approach. Net Income Approach. Net Operating Income Approach. Modigliani and Miller Approach.

That there are only two sources of funds, i.e., the equity and the debt, which is having fixed interest. That the total assets of the firm are given and there would be no change in the investment decisions of the firm. That the firm has a policy of distributing the entire profits among the shareholders implying that there is no retained earning. The operating profits of the firm are given and are not expected to grow.

The business risk complexion of the firm is given and is constant and is not affected by the financing mix. That there is no corporate or personal taxes, and. The investors have the same subjective probability distribution of expected operating profits of the firm.

The traditional approach is suggested by Ezra Solomon, also know as Intermediate h, is a compromise between the two extremes of net income approach and net operating income approach. According to this theory, the value of the firm can be increased initially or the cost of capital can be decreased by using more debt as the debt is cheaper source of funds than equity.

This approach has been suggested by Durand. According to this approach, capital structure decision is relevant to the valuation of the firm. This approach states that the higher debt content in the capital structure will result in decline in the overall or weighted average cost of the capital.

There are no corporate taxes. The cost of debt is less than cost of equity or equity capitalization rate. The debt content does not change the risk perception of the investors.

This approach has also been suggested by Durand. This is just opposite of net income approach. According to this approach, the market value of the firm is not at all affected by the capital structure changes.

The overall cost of capital remains constant for all degrees of debt-equity mix or leverage. The market capitalizes the value of the firm as a whole and, therefore, the split between debt and equity is not relevant. The use of debt having low cost increases the risk of equity shareholders, this result in increase in equity capitalization rate. There are no corporate taxes.

Franco Modigliani and Meron H. Miller developed a hypothesis, which fundamentally affects the understanding of effects of gearing.

The term dividend refers to that part of profits of a company which is distributed by the company among its shareholders after execution of retaining earning.

The Relevance concept of dividend includes. Walters Approach. Gordons Approach. The Irrelevance concept of dividend includes. Residual Approach. Modigliani and Miller Approach.

The relationship between the internal rate of return earned by the firm and its cost of capital is very significant in determining the dividend policy to sub serve the ultimate goal of maximizing the wealth of the share holders. P = D + r(E-D)/ke / ke

Internal Financing. Constant Return and cost of capital. 100 Percent Payout or Retention. Constant EPS and DPS. Infinite Time.

Myrion Gordon contended that dividends are relevant . He proposed a model of stock valuation using the dividend capitalization approach.

P = E(1-b) / k br.

All-Equity Firm. No External Financing. Constant Return. Constant cost of capital. Perpetual Earning. No Taxes. Constant Retention. Cost of Capital Greater than Growth Rate.

According to this theory dividend policy has no effect on the market price of the shares and the value of the firm is determined by the earning capacity of the firm or its investment policy.

Perfect Capital Markets. No Taxes. Investment Policy given. No Risk .

A dividend is a distribution to share holders out of profit or reserves available for this purpose.

The term dividend policy refers to the policy concerning quantum of profit to be distributed as dividend.

The firm has to balance the growth of the company and the distribution to the shareholders. It plays an important role in determining the value of a firm. Stockholders visualize dividends as signals of the firms ability to generate income. The market price gets affected if dividends paid are less.

The decision to pay dividend is independent of investment decisions, dividends can indirectly influence the external financing plans of financial managers. It has to also to strike a balance between the long term financing decision and the wealth maximization. Retained earnings helps the firm to concentrate on the growth, expansion and modernization of the firm.

Information Signaling. Clientele Effect. Cost of Capital. Realization of Objectives. Shareholders Group. Release of Corporate Earning.

A stock/share split is a method to increase the number of shares outstanding, with proportional reduction in the par value of the shares. Reasons for Stock Split. To make shares attractive. Indication of higher future profits. Increased Dividend.

Buy-Back is reverse of issue of shares by a company where it offers to take back its share owned by the investors at a specified price.

Buy-Back of Shares means a corporations repurchase of stock or bonds it has issued .

Presented By
Vidhya. A