Explain the capital structure theories.

Financial Management
MODEL QUESTIONS
1. Define capital structure.
2. Differentiate the capital structure and financial structure.
3. What is optimum capital structure?
4. Discuss the various factors affecting the capital structure.
5. Explain the capital structure theories.
6. XYZ Ltd., expects a net income of Rs. 1,50,000. The company has 10% of
5,00,000 Debentures. The equity capitalization rate of the company is 10%.
(a) Calculate the value of the firm and overall capitalization rate according to
the net income approach (ignoring income tax).
(b) If the debenture debt is increased to Rs. 7,50,000 and interest of debt is change
to 9%. What is the value of the firm and overall capitalization rate?
(Ans. (a) Rs. 15,00,000, 10% (b) Rs. 15,75,000 and 9.52%)
7. A Company Ltd., projected net operating income of Rs. 75,000. It has Rs. 3,00,000,
8% debentures.
(a) Calculate the value of the firm according to 10 net opening income and overall
capitalization rate is 10%.
(b) If debenture debt is increased to Rs. 5,00,000. What is the value of the firm
and the equity capitalization rate? (Ans. (a) Rs. 7,50,000, (b) 11.33%, 14%)
8. According to Traditional approach, compute the market value of the firm, value
of shares and the average cost of capital from the following information:
Net Operating Income 1,00,000
Total Investment 7,00,000
Equity capitalization Rate:
(a) if the firms uses no debt 7%.
(b) if the firm uses Rs. 2,00,000 debentures 8%
(c) if the firm uses Rs. 4,00,000 debentures 9%
Assume that Rs 2,00,000 debentures at 6% rate of interest whereas Rs. 4,00,000
debentures at 6% rate of interest whereas Rs. 4,00,000 debentures at 7% rate of interest