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AFM Capsule Cards PRO Capital Structure and Cos…
The Traditional Position offers a middle ground between the NI and NOI approaches. How does WACC behave according to this traditional view of leverage?
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Traditional Approach to Capital Structure
Capital Structure and Cost of Capital 31
WA 31
AFM Capsule Cards PRO Capital Structure and Cos…
Every firm needs money to buy assets and fund operations. In corporate finance, what exactly does the term 'Capital Structure' refer to?
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Capital Structure Definition
Capital Structure and Cost of Capital 29
WA 29
AFM Capsule Cards PRO Capital Structure and Cos…
Estimating the cost of equity is complex because there's no fixed obligation. What is the formula for the Capital Asset Pricing Model (CAPM) approach?
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Cost of Equity: CAPM
Capital Structure and Cost of Capital 29
WA 29
AFM Capsule Cards PRO Capital Structure and Cos…
When deciding between issuing equity or taking a bank loan, finance managers look at tax implications. Why is the 'Cost of Debt' effectively lower than the interest rate paid?
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Tax Shield on Debt
Capital Structure and Cost of Capital 28
WA 28
AFM Capsule Cards PRO Capital Structure and Cos…
Preference shares share traits with both debt and equity. How does the calculation of the Cost of Preference Capital differ crucially from the Cost of Debt?
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Cost of Preference Capital
Capital Structure and Cost of Capital 28
WA 28
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AFM Capsule Cards PRO Capital Structure and Cos…
If a firm pays regular dividends that increase steadily, you can value its equity cost using the Dividend Growth Model. What is the mathematical formula for this approach?
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Cost of Equity: Dividend Growth Model
Capital Structure and Cost of Capital 28
WA 28
AFM Capsule Cards PRO Capital Structure and Cos…
David Durand proposed various capital structure theories. According to his 'Net Income Approach', how does increasing the debt proportion affect the overall WACC and firm value?
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Net Income (NI) Approach
Capital Structure and Cost of Capital 27
WA 27
AFM Capsule Cards PRO Capital Structure and Cos…
Contrasting his earlier theory, David Durand's Net Operating Income (NOI) Approach takes a different view on leverage. What does the NOI approach state about WACC and firm value?
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Net Operating Income (NOI) Approach
Capital Structure and Cost of Capital 27
WA 27
AFM Capsule Cards PRO Capital Structure and Cos…
The Cost of Capital is crucial for investment decisions. In evaluating a new project, what fundamental role does the Cost of Capital play?
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Cost of Capital Benchmark
Capital Structure and Cost of Capital 27
WA 27
AFM Capsule Cards PRO Capital Structure and Cos…
A firm rarely uses just one source of funds. How is the Weighted Average Cost of Capital (WACC) mathematically calculated?
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Calculating WACC
Capital Structure and Cost of Capital 27
WA 27
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AFM Capsule Cards PRO Capital Structure and Cos…
Firms utilize different proportions of debt and equity. What do the terms 'Leverage' or 'Gearing' indicate about a firm's capital structure?
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Leverage / Gearing
Capital Structure and Cost of Capital 26
WA 26
AFM Capsule Cards PRO Capital Structure and Cos…
Promoters often prefer to borrow money rather than issue more shares. What is the financial principle of 'Trading on Equity' designed to achieve for the owners?
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Trading on Equity
Capital Structure and Cost of Capital 25
WA 25
AFM Capsule Cards PRO Capital Structure and Cos…
Issuing new shares or bonds involves underwriting fees, legal costs, and commissions. How do these 'Floatation Costs' mathematically impact the WACC of a new project?
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Impact of Floatation Costs
Capital Structure and Cost of Capital 23
WA 23
AFM Capsule Cards PRO Capital Structure and Cos…
As a firm raises more and more capital, the WACC doesn't stay flat forever. What does the 'Weighted Marginal Cost of Capital' represent?
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Weighted Marginal Cost of Capital
Capital Structure and Cost of Capital 22
WA 22
AFM Capsule Cards PRO Capital Structure and Cos…
A common fallacy among managers is treating internal funds as 'free'. Why is it a misconception that retained earnings have no cost of capital?
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Cost of Retained Earnings
Capital Structure and Cost of Capital 21
WA 21
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AFM Capsule Cards PRO Capital Structure and Cos…
A firm has many projects but limited cheap capital. How is the 'Optimal Capital Budget' theoretically determined on a graph?
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Optimal Capital Budget
Capital Structure and Cost of Capital 18
WA 18
AFM Capsule Cards PRO Capital Structure and Cos…
The WACC is influenced by both internal decisions and external market conditions. What is an example of an external factor affecting WACC that management cannot control?
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Factors Affecting WACC
Capital Structure and Cost of Capital 23
WA 23
AFM Capsule Cards PRO Capital Structure and Cos…
Firms accumulate funds due to depreciation accounting. Why is it incorrect to view depreciation funds as a completely free source of capital for new projects?
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Depreciation as a Funding Source
Capital Structure and Cost of Capital 22
WA 22
AFM Capsule Cards PRO Capital Structure and Cos…
To find the actual cost of a traded bond, you must calculate its Yield to Maturity (YTM). What is the approximation formula used to calculate YTM?
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Cost of Debt Formula (YTM)
Capital Structure and Cost of Capital 21
WA 21
AFM Capsule Cards PRO Capital Structure and Cos…
When growth is flat or dividends aren't reliable, analysts might look purely at earnings. How is the cost of equity calculated under the Earning Price Ratio approach?
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Cost of Equity: Earning Price Ratio
Capital Structure and Cost of Capital 20
WA 20
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Capital Structure and Cost of Capital — JAIIB AFM Capsules

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Traditional Approach to Capital Structure The Traditional Position offers a middle ground between the NI and NOI approaches. How does WACC behave… Capital Structure Definition Every firm needs money to buy assets and fund operations. In corporate finance, what exactly does the te… Cost of Equity: CAPM Estimating the cost of equity is complex because there's no fixed obligation. What is the formula for th… Tax Shield on Debt When deciding between issuing equity or taking a bank loan, finance managers look at tax implications. W… Cost of Preference Capital Preference shares share traits with both debt and equity. How does the calculation of the Cost of Prefer… Cost of Equity: Dividend Growth Model If a firm pays regular dividends that increase steadily, you can value its equity cost using the Dividen… Net Income (NI) Approach David Durand proposed various capital structure theories. According to his 'Net Income Approach', how do… Net Operating Income (NOI) Approach Contrasting his earlier theory, David Durand's Net Operating Income (NOI) Approach takes a different vie… Cost of Capital Benchmark The Cost of Capital is crucial for investment decisions. In evaluating a new project, what fundamental r… Calculating WACC A firm rarely uses just one source of funds. How is the Weighted Average Cost of Capital (WACC) mathemat… Leverage / Gearing Firms utilize different proportions of debt and equity. What do the terms 'Leverage' or 'Gearing' indica… Trading on Equity Promoters often prefer to borrow money rather than issue more shares. What is the financial principle of… Impact of Floatation Costs Issuing new shares or bonds involves underwriting fees, legal costs, and commissions. How do these 'Floa… Weighted Marginal Cost of Capital As a firm raises more and more capital, the WACC doesn't stay flat forever. What does the 'Weighted Marg… Cost of Retained Earnings A common fallacy among managers is treating internal funds as 'free'. Why is it a misconception that ret… Optimal Capital Budget A firm has many projects but limited cheap capital. How is the 'Optimal Capital Budget' theoretically de… Factors Affecting WACC The WACC is influenced by both internal decisions and external market conditions. What is an example of… Depreciation as a Funding Source Firms accumulate funds due to depreciation accounting. Why is it incorrect to view depreciation funds as… Cost of Debt Formula (YTM) To find the actual cost of a traded bond, you must calculate its Yield to Maturity (YTM). What is the ap… Cost of Equity: Earning Price Ratio When growth is flat or dividends aren't reliable, analysts might look purely at earnings. How is the cos…
Chapters in this paper
Definition, Scope & Accounting Standards including Ind AS Balance Sheet Equation Financial Management - An Overview Taxation: Income Tax/TDS/Deferred Tax Basic Accountancy Procedures Preparation of Final Accounts Ratio Analysis Goods & Services Tax Maintenance of Cash/Subsidiary Books and Ledger Company Accounts - I Financial Mathematics - Calculation of Interest and Annuities An Overview of Cost & Management Accounting Bank Reconciliation Statement Company Accounts - II Financial Mathematics - Calculation of YTM Costing Methods
Modules in AFM
MODULE A: Accounting Principles and Processes MODULE B: Financial Statements and Core Banking Systems MODULE C: Financial Management MODULE D: Taxation and Fundamentals of Costing
JAIIB papers
IE-IFS — Indian Economy & Indian Financial System PPB — Principles & Practices of Banking AFM — Accounting & Financial Management for Bankers RBWM — Retail Banking & Wealth Management
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