Capital Structure and Cost of Capital
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Accounting and Financial Management for Bankers — JAIIB.
One-liners from this chapter
Free sample — 8 of 75 rapid-fire Q&A cards.
Define Capital Structure.
Combination of debt and equity used by a company to finance operations and growth.
What is Leverage or Gearing?
Proportion of debt capital in the total capital structure.
Why do bankers need to master Capital Structure and WACC?
Essential for credit appraisal, term-loan decisions, leverage assessment, and project finance.
Net Income Approach: What happens to WACC as debt proportion rises?
WACC falls and firm value increases; optimal structure theoretically 100% debt.
Net Operating Income Approach: Is capital structure relevant to firm value?
No; WACC and firm value unaffected by debt proportion; no optimal structure exists.
Traditional Position Approach: Describe WACC curve shape.
U-shaped: declines, flattens, then rises; bottom of U is optimal capital structure.
Modigliani-Miller with taxes: How does tax affect firm value?
Levered firm value exceeds unlevered by present value of tax shield on interest.
Why is interest tax-deductible but dividend is not?
Interest is a contractual cost; dividend is a distribution of profits after tax.
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