Bank Theory

Capital Structure and Cost of Capital | Bank Theory Capital Structure and Cost of Capital Descriptive Notes Capital Structure: Refers to the proportion of debt and equity used by a firm to finance its overall operations and growth. An optimal capital structure balances risk and return and maximizes firm value. Leverage or Gearing: Leverage indicates the extent to which a firm uses debt in its capital structure. Higher leverage increases financial risk but may also amplify returns. Factors Influencing Capital Structure Decisions: Cost of capital Business risk Control considerations Flexibility and timing Market conditions Theories on Capital Structuring: Net Income (NI) Approach: Assumes lower debt increases firm value due to cheaper cost. Net Operating Income (NOI) Approach: Firm value remains constant irrespective of capital structure. Traditional Approach: Suggests an optimal debt-equity mix exists. Key Assumption...