Interest tax shield Net income approach Net operating income approach Operating leverage Optimum cash structure

Risk return trade off Weighted average cost of capital

Terminal questions 1. What do you understand by business risk and financial risk? What factors influence business risk? 2. A company should finance pro-actively and not reactively. Do you agree? 3. The more debt the firm issues, the higher the interest rate it must pay. That is one important reason why companies should operate at conservative debt levels. Critically evaluate this statement 4. It has been suggested that one disadvantage of common stock financing is that share prices tend to decline in recessions and bear market conditions, thereby increasing the cost of capital and deterring investment. Discuss this view. Is it an argument for greater use of debt financing? 5. Compute the value of interest tax shields generated by these three debt issues. Consider corporate taxes only. The marginal tax rate is 30% a. Rs.100,000 one year loan at 10 per cent per annum b. A five year loan of Rs.500,000 at 12 per cent per annum. It is assumed that the entire loan amount is repaid only at maturity 6. To study the relationship between capital structure and company value, what are the assumptions normally made 7. What is the relationship between leverage and cost of capital as per the net income approach? 8. Discuss the relationship between leverage and cost of capital as per the net operating income approach 9. What are the important propositions of the traditional approach? 10. Define and discuss Modigliani Miller proposition I and proposition 11. Comment on capital structure policies in practice 12. Elucidate the control implications of alternative financing plans

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