Financial Management
Subrata Halder Theory of Capital Structures
1
Value of Firm (V) = S + B
S = Value of Equity Share Capital
B = Value of Debt/Bond
Ke = Cost of Equity Share
= Equity Capitalization Rate
Kd = Cost of Debt
= Debt Capitalization Rate
= Interest Rate
Ko = Overall Cost of Capital
= Overall Capitalization Rate
= Weighted Average Cost of Capital
= WACC
-------------------------------------------------------------
EBIT = Earning Before Interest & Tax
NI = Net Income = EACS [No Tax]
EAT = Earning After Tax
= EACS
= Earning Available to Common Stockholders
EPS = Earning Per Share
DPS = Dividend Per Share
DFL = Degree of Financial Leverage
INT = Interest
Tr = Tax Rate (Corporate)
Tp = Personal Tax Rate
-------------------------------------------------------------
Vu = Value of Unlevered Firm
Vl = Value of Levered Firm
Keu = Equity Capitalization Rate of Unlevered Firm
Kel = Equity Capitalization Rate of Levered Firm
Kou = Keu = Overall Capitalization Rate of Ul firm
Kol =Overall Capitalization Rate of Levered Firm
Su = Market Value of Equity Shares of Ul Firm
Sl = Market Value of Equity Shares of Levered Firm
NI & NOI Approach:
>> V = S + B
=
MM, No Tax:
>> Vu = Vl =
MM, With Tax:
>> Vu =
(1)
>> Vl = Vu + TB
=
(1)
+ ( BTr)
NI & NOI Approach:
>> S =
= V- B
= No of Shares Unit Share Price
>> B =
()
()
= V S
MM, No Tax & With Tax:
>> Su = Vu
>> Sl = Vl - B
NI & NOI Approach :
>> Ke = Ko + (Ko Kd)
100
MM Approach:
>> Keu =
100 [No Tax & With Tax]
[ Note: When Tax isnt available, Keu = Kou. But,
when Tax is available, Keu Kou]
>> Kel = Keu + (Keu Kd)
[ No Tax]
= Kou + ( Kou Kd)
[ No Tax]
>> Kel = Keu + (Keu Kd)
(1-Tr) [Tax]
= Kou + (Kou Kd)
(1-Tr) [Tax]
Financial Management
Subrata Halder Theory of Capital Structures
2
When Personal Tax is Available :
Vu =
(1)(1)
Vl = Vu + [1 -
(1)(1)
(1)
]B
= Vu + [1 -
(1)(1)
(1)
]B Reduction in B
Added Value / Gain From Leverage / Tax Shield:
= Vl Vu = [1 -
(1)(1)
(1)
]D
For WACC method:
We =
= Equity Weight
Wd =
= Debt Weight
WACC = Ko =
Kd +
Ke
= (WdKd + WeKe)
NI & NOI Approach:
>> Ko =
100
=
Kd +
Ke
= Ke - (Ke Kd)
MM Approach:
>> Kou = Keu [No Tax]
>> Kou =
Kd +
Keu [ With Tax]
>> Kol =
Kel +
Keu [No Tax]
>> Kol =
Kd (1-Tr) +
Kel [Tax]
Others:
EPS = DPS =
DFL =
PFL =
100
Market Price Per Share =
Tabular Format (NI Approach)
Particulars Taka
EBIT ***
Less : Interest ***
NI ***
Ke ***
S = (
) = (
) ***
B ***
V= S + B
***
Ko = =
100 ***
Arbitrage Process ( From Levered To Unlevered)
Investors Position
In L Firm
Taka
Position In U Firm
After Arbitrage
Taka
Share Capital
Income From
Dividend
***
***
Sales of Share
Personal Leverage
Fund Available
Investment
>>Investment Savings
Income From Divided
Less: Interest
***
***
***
***
***
***
***
Net Income From
Arbitrage Process
***
Net Income From
Arbitrage Process
***
Arbitrage Process ( From Unlevered To Levered)
Investors
Position In U
Firm
Taka
Position In L Firm
After Arbitrage
Taka
Share Capital
Income From
Dividend
***
***
Sales of Share
Fund Available
Investment:
In Shares
In Debt
Total Investment
>>Investment Savings
Income From Divided
Income From Interest
***
***
***
***
***
***
***
***
Net Income
From Arbitrage
Process
***
Net Income From
Arbitrage Process
***
