David durand the cost of capital

capital structure theories pdf

It also allows you to accept potential citations to this item that we are uncertain about. The business risk at each level of debt-equity mix remains constant. Net Income Approach to Capital Structure Theory This approach was first suggested by David Durand inand he was a proponent of financial leverage.

The market capitalizes the value of the firm as a whole.

capital structure theories with diagram

The equity share price in Company NL rises based on increased share demand. This approach assumes that companies prioritize their financing strategy based on the path of least resistance. Because debt is a cheap source of raising funds as compared to equity capital.

David durand the cost of capital

As long as ki is constant, ke is a linear function of the debt-to-equity ratio. Therefore, overall cost of capital also remains constant.

We have no references for this item. What are the relative costs of debt and equity? The value of two identical firms would remain the same and value would not be affected by the choice of finance adopted to finance the assets. The business risk at each level of debt-equity mix remains constant. The financing decision seeks to increase the value of the firm by selecting the best borrowing pattern for the firm. Sell the stock in Company L for Rs Therefore, overall cost of capital also remains constant.

It may appear a firm should use as much debt and as little equity as possible due to the cost difference, but this ignores the potential problems associated with debt. B What will be the effect on the value of the firm and overall cost of capital, if: i the firm decides to raise the amount of debentures to Rs.

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Theories of Capital Structure