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A way a corporation fnances itsel throughsome combination o equity and debt.

 The capital structure should be designedwith the aim o maximizing the marketvaluation o the frm in the long run.

Capital Structure

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MARKET RISK  The possibility of loss to a bank/firm/company due to

change in market variables

Market Risk is also referred to as systematic risk or

non-diversifiable risk

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The possibility for an investor to experience losses

due to factors that affect the overall performance of

the financial markets

The risk that a major natural disaster will cause a

decline in the market as a whole is an example of

market risk. ther sources of market risk

include recessions! political turmoil! changes in

interest rates and terrorist attacks.

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The possibility that a company will have lower than

anticipated profits! or that it will experience a loss rather

than a profit.

"usiness risk is influenced by numerous factors! including

sales volume! per-unit price! input costs! competition!

overall economic climate and government regulations.

# company with a higher business risk should choose a

capital structure that has a lower debt ratio to ensure that

it can meet its financial obligations at all times.

BUSINESS RISK 

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"usiness risks can major by the influence by two major

risks$ internal risks %risks arising from the events

taking place within the organi&ation' and external

risks %risks arising from the events taking place outside

the organi&ation'.

(nternal risks arise from factors such as human factors

%talent management! strikes'! technological factors%emerging technologies'! physical factors %failure of

machines! fire or theft'! operational factors %access to

credit! cost cutting! advertisement'.

)xternal risks arise from factors such as economicfactors %market risks! pricing pressure'! natural factors

%floods! earth*uakes'! political factors %compliance and

regulations of government'

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The possibility that shareholders will lose money when

they invest in a company that has debt! if the

company+s cash flow proves inade*uate to meet its

financial obligations.

,inancial Risk as the term suggests is the risk that

involves financial loss to firms.

,inancial risk generally arises due to instability and

losses in the financial market caused by movements instock prices! currencies! interest rates and more.

FINANCIAL RISK 

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Business Risk  )xcluding debt! business risk is the basic risk of the company+s operations. The

greater the business risk! the lower the optimal debt ratio.

Companys Tax Exposure

ebt payments are tax deductible. #s such! if a company+s tax rate is high!

using debt as a means of financing a project is attractive because the taxdeductibility of the debt payments protects some income from taxes.

Financial Flexi!ility

This is essentially the firm+s ability to raise capital in bad times. (t should come

as no surprise that companies typically have no problem raising capital when

sales are growing and earnings are strong. owever! given a company+s strong

cash flow in the good times! raising capital is not as hard. ompanies should

make an effort to be prudent when raising capital in the good times! not

stretching its capabilities too far. The lower a company+s debt level! the more

financial flexibility a company has.

"eterminats o# Capital Structure

"ecisions

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 Mana$ement Style Management styles range from aggressive to conservative. The more conservative a

management+s approach is! the less inclined it is to use debt to increase profits. #n

aggressive management may try to grow the firm *uickly! using significant amounts of

debt to ramp up the growth of the company+s earnings per share %)01'.

%ro&t' Rate

,irms that are in the growth stage of their cycle typically finance that growth throughdebt! borrowing money to grow faster. The conflict that arises with this method is that the

revenues of growth firms are typically unstable and unproven. #s such! a high debt load

is usually not appropriate.

Market Con(itions

Market conditions can have a significant impact on a company+s capital-structure

condition. 1uppose a firm needs to borrow funds for a new plant. (f the market isstruggling! meaning investors are limiting companies+ access to capital because of market

concerns! the interest rate to borrow may be higher than a company would want to pay. (n

that situation! it may be prudent for a company to wait until market conditions return to a

more normal state before the company tries to access funds for the plant.

"eterminats o# Capital Structure

"ecisions

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)"(T-)01 #2#341(1

R)-R( #2#341(1

)*+ T* ESTIMATE TAR%ET CA,ITAL

STRUCTURE

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(t helps to understand what should be the optimum

capital structure which could generate highest )01. (t

would help in determining what should be the direct

ideal combination of debt-e*uity capital structure.

(t can be well explain with the help of break-even

 point %indifference point'.(t refers to the )"(T level

at which the )01 remains same for two differentfinancial plans.

EBIT-E,S ANAL.SIS

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#t break even point we can calculate the )"(T 5 )01 by

using the formula

%)"(T-('%6-t' 7 %)"(T-('%6-t'

 2 2

 

EBIT-E,S ANAL.SIS

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M#T)M#T(#334 #3>3#T) #1 ,33:

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THANK YOU