Presentation On Capital Structure: By: Arun Mohan Yadav

Presentation on Capital Structure By: Arun Mohan Yadav

Contents • Meaning • Assumptions • Reasons

NET Income Approach This approach has been suggested by Durand. According to this approach, a firm can minimize the overall cost of capital and increase the value of the firm as well as market price of equity shares by using debts financing to the maximum possible extent.

Assumptions 1. The cost of debts is less than the cost of equity. In other words , debts is always cheaper to equity. 2. There are no corporate tax. 3. The risk perception of investors is not changed by the use of debts.

Reasons 1.Interest rates are usually lower than dividend rates. 2. Interest is a deductible expense for computing taxable income while dividend is not.