RTI,Chennai Learning Objective Given the concepts of financial leverage and cost of capital, the trainees will be able to analyse the management of capital of an organisation, as evaluated by the instructor

RTI,Chennai Factors that influence the source of capital Debt Vs Equity Economic conditions Market conditions Operating conditions Financial conditions

RTI,Chennai Kinds of leverages Financial Leverage FL = EBIT/EBIT-I-(P/(1-TR)) Operating Leverage OL = CM/CM-FC Combined Leverage CL = FL x OL

RTI,Chennai Cost of Capital Cost of Debt (Cd) = I- (1-TR) Cost of Equity Method I Ce = (dividend/market value of share) + rate of growth Method II Ce = rf + b (rm-rf) where b beta coefficient, rm is market rate of return, rf is risk free rate Method III Ce = Cd + risk premium

RTI,Chennai Financing decision Flexibility Risk Income Control Timing Refinancing risks Inflation Floatation cost

RTI,Chennai Capital Structure Measure the returns under different plans Return = EBIT/EPS Assessing the risk of each plan by comparing desired growth with actual growth rate G = P x R x A x T where P is profit margin, R is retention ratio, A is asset turnover and T is financial leverage