Debt Capital

Download as pptx, pdf, or txt
Download as pptx, pdf, or txt
You are on page 1of 12

1

RELEVANCE OF
DEBT CAPITAL IN
CAPITAL
STRUCTURE
Quantitative Techniques for Financial Analysis
What Is Capital Structure ?

Capital structure is the particular combination of


Debt and Equity used by a company to finance its
overall operations and growth.
What is debt capital ?

Debt capital refers to funds raised by a company through


borrowing, typically in the form of loans, bonds, or other debt
instruments. When a company seeks debt capital, it agrees
to repay the borrowed amount over a specified period of
time, along with interest payments.
Debt Equity
Loans Common stock
Bonds Preferred stock
Overdraft
Debenture
other Debt Instruments
1 Leverage

Tax Shield
2
Here are some reasons
3 Lower Cost of Capital why debt capital is
4 Flexibility relevant:
5 Market Perception

6 Stability of Returns

7 Access to Capital Markets

8 Cost Efficiency
Debt allows companies to amplify
returns on equity by investing
Leverage:
borrowed funds in projects that
yield higher returns than the cost
of borrowing. This leverage can
magnify shareholder returns when
utilized effectively.
: Interest payments on debt are tax-
deductible expenses for Tax Shield
corporations in many jurisdictions.
This tax shield can lower the overall
cost of capital for a company,
making debt financing more
attractive compared to equity
financing.
• Debt often comes with lower Cost Efficiency
financing costs compared to
equity, as interest payments are
tax-deductible. This can result in a
lower weighted average cost of
capital (WACC), enhancing overall
cost efficiency for the company.
Market Perception
An optimal mix of debt and
equity signals financial
prudence and can enhance
the company's reputation in
the market. It demonstrates a
balanced approach to
financing and may attract
investors who seek stable
returns and disciplined
financial management.
• Debt financing provides an Capital Access
additional avenue for raising
capital, complementing equity
financing. It allows companies to
access funds from various
sources, including banks, financial
institutions, and capital markets,
thereby broadening their
financing options.
Example of Cost of Capital
Comparison between Debt Cost & Equity cost
Question :- X Ltd. issues 12% Debentures of face value Rs. 100 each and realizes Rs. 95 per Debenture.
The Debentures are redeemable after 10 years at a premium of 10%.
Thank You

You might also like