Working Capital Management LET US SUM UP - Accounts and Finance for Managers

The capital structure theories are facilitating the business fleeces to identify the optimum capital structure. The optimum capital structure of the organization differs from one approach to another. The cost of capital is having greater influence on the EBIT level of the firm; which directs affects the amount of earnings available to the investors, that finally reflects on the value of the firm. Net income approach, the cost of debt is identified as cheaper source of financing than equity share capital. Net Operating income approach developed by Durand, which has underlying principle that the application of leverage do not have any influence on the value of the firm through the overall cost of capital. The more application of leverage leads to bring down the explicit cost of capital on one side and on the other side implicit cost of debt is expected to go up. Under this approach, no capital structure is found to be a optimum capital structure. Arbitrage process is the process facilitates the individual investors to buy the investments at lower price at one market and sells them off at higher price in another market. The traditional approach is known as intermediate approach in between the Net income approach and NOI approach.

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