Leverage Analysis
Leverage Analysis
Submitted to:-
Prof. Vipin Agarwal
Submitted by:-
Biplab banerjee(PG-022)
Manish Chaurasia(PG-037)
Moumita Ghosh(PG-042)
Prashant Kumar(PG-054)
Leverage Analysis
Capital structure decisions aims at determining the types of funds a company should seek to finance its investment opportunity and the preparation in which these funds should be raised. The term capital structure is used to represent the proportionate relationship between the various long-term forms of financing such as debentures, long term debts, preference share capital and equity share capital. ‘Leverage’ is the action of a lever or the mechanical advantage gained by it; it also means ‘effectiveness’ or ‘power’. The common interpretation of leverage is derived from the use or manipulation of a tool or device termed as lever, which provides a substantive clue to the meaning and nature of financial leverage.
When an organization is planning to raise its capital requirements (funds), these may be raised either by issuing debentures and securing long term loan or by issuing share-capital. Normally, a company is raising fund from both sources. When funds are raised from debts, the Company will pay interest, which is a definite liability of the company. Whether the company is earning profits or not, it has to pay interest on debts. But one benefit of raising funds from debt is that interest paid on debts is allowed as deduction for income tax. ‘When funds are raised by issue of shares (equity) , the investor are paid dividend on their investment. Dividends are paid only when the Company is having sufficient amount of profit. In case of loss, dividends are not paid. But dividend is not allowed as deduction while computing tax on the income of the Company. In this way both way of raising funds are having some advantages and disadvantages. A Company has to decide that what will be its mix of Debt and Equity, considering the liability, cost of funds and expected rate of return
Submitted to:-
Prof. Vipin Agarwal
Submitted by:-
Biplab banerjee(PG-022)
Manish Chaurasia(PG-037)
Moumita Ghosh(PG-042)
Prashant Kumar(PG-054)
Leverage Analysis
Capital structure decisions aims at determining the types of funds a company should seek to finance its investment opportunity and the preparation in which these funds should be raised. The term capital structure is used to represent the proportionate relationship between the various long-term forms of financing such as debentures, long term debts, preference share capital and equity share capital. ‘Leverage’ is the action of a lever or the mechanical advantage gained by it; it also means ‘effectiveness’ or ‘power’. The common interpretation of leverage is derived from the use or manipulation of a tool or device termed as lever, which provides a substantive clue to the meaning and nature of financial leverage.
When an organization is planning to raise its capital requirements (funds), these may be raised either by issuing debentures and securing long term loan or by issuing share-capital. Normally, a company is raising fund from both sources. When funds are raised from debts, the Company will pay interest, which is a definite liability of the company. Whether the company is earning profits or not, it has to pay interest on debts. But one benefit of raising funds from debt is that interest paid on debts is allowed as deduction for income tax. ‘When funds are raised by issue of shares (equity) , the investor are paid dividend on their investment. Dividends are paid only when the Company is having sufficient amount of profit. In case of loss, dividends are not paid. But dividend is not allowed as deduction while computing tax on the income of the Company. In this way both way of raising funds are having some advantages and disadvantages. A Company has to decide that what will be its mix of Debt and Equity, considering the liability, cost of funds and expected rate of return