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Net Income Approach & Net Operating Income Approach (in Hindi)
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Heena
Believe in Conceptual Learning.

U
Unacademy user
sir is the enough to read the daily news analysis and editorial analysis made by you for cse instead of reading the newpaper
Karan Sejwar
2 years ago
go along with him..go article by article....read the article and for more explanation watch the video if you need...hope this helps
mam NI Approach nd wacc how its relate ??
mam in net income approach ke and kd are constant then how to increase debt?
thanki very much ...mam appreciate your teaching ... really nice ...its have so helpful for me...🍔🍔🥯🥯🎓🎓🎓
Nm
mam suggest us good book for paper 2 ......mai b arihant se padh rai usmein mcq mein mistakes hai nd syllabs wise matter kam hai mcq jada to achi kaun si book rahegi kyuk adha tym to matter collect karne mein chala jata hai.....aisi koi book jismein matter approx. mik jaye
Lokesh saini
8 months ago
financial management (i am pandey) all most syllsbus is covered in this book of fm
thanks a lot for your support mam can you please provide notes in soft copy like word file for the same financial management or ppt because it really very time taking to write down all the topics it's too hard to write down. my exam is to be held soon . thanks a lot please share at upscdilip@gmail.com
  1. Capital Structure Decision By Heena Malhotra


  2. Net Income (NI) Approach o According to this approach, capital structure decision is relevant to the value of the firm. o An increase in financial leverage will lead to decline in the weighted average cost of capital (WACC), while the value of the firm as well as market price of ordinary share will increase. o Conversely, a decrease in the leverage will cause an increase in the overall cost of capital and a consequent decline in the value as well as market price of equity shares. By Heena Malhotra


  3. Net Income (NI) Approach o Ke and Kd are assumed not to change with leverage. As debt increases, it causes weighted average cost of capital (WACC) to decrease. By Heena Malhotra


  4. The value of the firm on the basis of Net Income Approach can be ascertained as follows: Value of Firm (V) SD Where, V Value of the firm S Market value of equity D Market value of debt NI Market value of equity (S) Ke Where, NI Earnings available for equity shareholders K. Equity Capitalisation rate By Heena Malhotra


  5. EBIT veall ost apal-ale othem Thus according to this approach, the firm can increase its total value by decreasing its overall cost of capital through increasing the degree of leverage. The significant conclusion of this approach is that it pleads for the fim to employ as much debt as possible to maximise its value. By Heena Malhotra


  6. EBIT Overa cost of capitalWeighted average costof capital t eight fCcot fepity weightof eputy alue of the firm By Heena Malhotra


  7. Rupa Ltd's EBIT is 5,00,000. The company has 10%, 20 lakh debentures. The equity capitalization rate i.e. K, is 16%. You are required to calculate: (i) Market value of equity and value of firm (ii) Overall cost of capital. SOLUTION (i) Statement showing value of firm EBIT Less: Interest on debentures (10% of 20,00,000) Earnings available for equity holders i.e. Net Income (NI) Equity capitalization rate (Ke) 5,00,000 (2,00,000 3,00,000 16% NI 3,00,000 x 100 Market value of equity (S) Market value of debt (D) Total value of firm (V) S D 18,75,000 20,00,000 38,75,000 16.00 5,00,000 (i) Overall cost of capital Value of firm 38,75,000 EBIT 12.90% ra


  8. Net Income (NI) Approach Traditional Approach Net Operating Income Capital Structure Relevance Theory Capital Structure Theories Capital Structure Irrelevance (NOI) Approach Theory Modigliani-Miller (MM) Approach By Heena Malhotra


  9. Net Operating Income Approach (NOi) NOI means earnings before interest and tax (EBIT). According to this approach, capital structure decisions of the firm are irrelevant. Any change in the leverage will not lead to any change in the total value of the firm and the market price of shares, as the overall cost of capital is independent of the degree of leverage. As a result, the division between debt and equity is irrelevant. As per this approach, an increase in the use of debt which is apparently cheaper is offset by an increase in the equity capitalisation rate. This happens because equity investors seek higher compensation as they are opposed to greater risk due to the existence of fixed return securities in the capital structure. By Heena Malhotra


  10. K. K, K, Cost of Capital Leverage (Degree) 0 The above diagram shows that K, (Overall capitalisation rate) and (debt- capitalisation rate) are constant and K, (Cost of equity) increases with leverage. By Heena Malhotra