capital structure? Income, Net Operating Income

Theories of capital structure are to facilitate fleece business to identify the optimal capital structure. The optimal capital structure of the organization differs from one approach to another because of the assumption underlying referring to many influences . The success of the company is normally a function of the rate at which funds are raised, differs from one organization to another depending on the needs . The cost of capital is to have a greater impact on the EBIT level of the enterprise that runs affects the amount of compensation available to investors, which ultimately reflects on the value of the company .
The more disposable income at the end will lead to a better return on fund investors, enhance shareholder value due to greater demand . There are two approaches together in reference to the capital structure , which normally affects the value of the company by the overall cost of capital (K ) is an approach called relevance approach theories of capital structure and others have no influence on the value of the company is known as an approach to insignificance. The debt financing in the capital structure facilitates the company to increase the value of EPS on one side on the other hand, it is subject to the leverage in reference to trading on equity . The use of debt in the capital structure increases the value of the company by the cost of capital.

NET APPROACH

Mathematically, the relationship between the cost of capital, overall cost of capital and debt ratio is explained as follows :
Ke = Ko + ( Ko- Ki ) B / S
Net income approach was developed by Durand, in which he portrayed the influence of leverage on the value of the company , which means that the value of the company is subject to the application debt or leverage. In this approach, the cost of debt is identified as a source of cheaper than equity capital financing. The application of more debt in the capital structure lowers the overall capital , especially under 100% debt financing leads to resemble the over all cost of capital than the cost of debt. The weighted average cost of capital will result in an application more leverage in the capital structure , only by reference to cost to raise the cost of equity capital .
Ko Ke = (S / V) + Ki (B / V)
The enterprise value is more in the case of overall lower cost of capital through an application more leverage in the capital structure . The optimal capital structure is that when the value of the company is higher and the overall cost of capital is lower.
V = B + S
V = EBIT / Ko
This approach emphasizes that the application of lever affects the overall cost of capital and affects the value of the company .

NET OPERATING INCOME APPROACH

This alternative approach developed by Durand , who assumed that the application of lever have no influence on the value of the company by the overall cost of the underlying capital. Applying more leverage leads to lower explicit cost of capital on the one hand and on the other side of implied cost of debt is expected to rise . How the implicit cost of debt will increase ? The application of more debt leads to increased financial risk among investors , which justified the holders of the capital to bear an additional financial risk of the company. Due to the additional financial risk, shareholders require the company to pay additional dividends in relation to the existing. The rising expectations of shareholders dividends increased reference to the cost of equity . Under this approach , no capital structure is found to be an optimal capital structure . The main reason is that the debt ratio does not influence the overall cost of capital , which is still nothing but remains constant. He finally concluded that this approach shows that the application of lever never made ​​an attempt to increase the value of the company , in other words is known as affected by the application of leverage.

MODIGLIANI - MILLER APPROACH [M -M ]

This is the approach , attempts to explain the application of leverage does not affect the value of the business model through the behavior of investors. The model of investor behavior is taken into account to explain the value of the company is not affected by the application of the debt / leverage in the capital structure through the arbitration process . The MM approach has three different proposals :
( I) The overall capital structure of the company is not affected by the cost of capital leverage
( Ii ) The cost of capital increases and offset the increase in debt in the capital structure
( Iii ) The rate cut for investment purposes is completely independent .
For discussion , the proposal is considered to study the use of leverage in the capital structure , which had no impact on the value of the company.

The traditional approach

The traditional approach is known as an intermediate approach between the method of net income and NOI approach. The value of the company and the cost of capital is affected by the IRB , but the assumptions of the approach NOI are not relevant . The overall cost of capital will go down due to demand cheaper source of funding ie debt financing to some extent , after some use , the implementation of the debt will increase the financial risk of the company, which require shareholders to expect additional performance but nothing is risk premium. The risk premium is expected by investors will improve the overall cost of capital. The optimal capital structure " the real marginal cost of debt, to include both implicit and explicit will be equal to the actual cost of the shares . For a debt ratio before this level , the marginal cost of debt would be less than the equity , while beyond this level of debt , the real marginal cost of debt is higher than equity.

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