222

$show=home

Welcome to Accounting Education

The Accounting University with 3400+ Accounting contents as study material which can watch, read and learn anyone, anywhere.

Start your studies

$show=home

Journal Entries $type=three$count=6$author=hide$comment=hide$label=hide$date=hide$show=home$s=0

Balance Sheet $type=three$count=6$author=hide$comment=hide$label=hide$date=hide$show=home$s=0

Capital Structure and Valuation

There is big relationship between current capital structure and valuation of company. At the different capital structure, Value of company will be different because new company will buy after checking its mixture of share capital and debt liabilities. Value of company will be decided after analysis of controlling power, risk and dividend and interest cost. These factors are also related with capital structure.

So, today, we will discuss the relationship between capital structure and valuation of a company.

1. Risk and Return 

Both capital structure and valuation of company is decided on the basis of risk and return theory. Optimal capital structure will be there where risk will be minimum but return of shareholder will be highest.

When a buyer company wants to buy any other company, it will see its risk and return level. Now, for checking risk and return level, we will use optimal capital structure. If buyer thinks that capital structure of company is not optimal and there is high risk and low return. Value of company will be low. If buyer thinks that capital structure of company is optimal, there is low risk and high return, buyer will buy company at higher value.

2. WACC

Both capital structure and valuation of company is decided on the basis of cost of Capital. But in normal cost of capital, both cost of debt and cost of share capital will include. So, for getting best answer, we will calculate weighted average cost of capital. We will decide capital structure (Debt/Equity Ratio ) where is WACC will be lowest.

When buyer will buy any comapny, he will also try to best WACC. If he will see in the Graph, company's capital structure is on highest level of WACC, buyer will buy company at low value. When buyer will see WACC is at its lowest level, he will buy company at highest value. See following graph.



3. Net Present Value 

When we buy anything, we remember the time value of money. NPV is one of important measurment, if there is higher NPV, we will interested to buy that asset. For buyer company or buying any other asset is same thing. For valuation, he check the capital structure, total value of capital and debt, he has to buy because with this, all the assets of company will become the asset of buyer. He will check market value of shares and market value of debt. He will also study the current earning. Both cash outflow (investment for buyig) and cash inflow (income from buying of company) will be counted  at present value. Then we will compare it and calculate the value of NPV. We will compare it with other company's NPV. If this company's NPV is higher, then we will buy this company at higher price. If NPV is low, we will buy this company at low price.

 Related : Valuation of a Firm 

Comments

 


Name

access,2,account,86,accountant,95,Accounting,683,accounting definitions,99,accounting ebook,3,Accounting education,85,Accounting Education Ads Help,1,accounting procedure,2,accounting process outsourcing,2,Accounting Software,52,advance,3,advertising,6,africa,7,Amalgamation,6,amendments,16,Amortization,1,announcements,62,Annuity,2,assets,53,audit,47,auditing,41,Australia,2,B.Com.,22,balance sheet,87,bank,111,Bank reconciliation,12,banking,33,basic accounting,110,BBA,1,benefits,13,best,50,bill,12,black money,3,blog,12,bloggers,7,book keeping,4,bookkeeping,3,Branch Accounting - full tutorial,8,budget,35,Budget variance,13,business,65,businessman,9,CA,30,calculator,4,canada,3,capital,72,capital budgeting,27,career,21,cash,40,cash book,8,cash flow statement,11,Chiense,1,children,13,china,6,class,3,coaching,2,coins,2,college,6,commerce,10,commerce students,7,company,36,computer,9,computer accounting,1,conference,4,Contact vinod kumar,1,Control Your Spending,27,corporate accounting,69,cost,160,cost accounting,195,cost center,8,cost centre,1,CPA,2,credit,18,credit card,11,cs,10,currency,35,data,11,Debit and credit,17,debit cards,1,debt,62,debtor,21,degree,6,depletion,2,depreciation,38,Diwali Messages,12,documents,4,dollar,5,domain,3,Downloads,3,Dubai,1,e-accounting,17,earning,17,education,246,Education Loans,6,email,15,employee,4,EPF,2,ERP,7,euromoney,1,examination,7,excel,17,excise duty,6,expenses,65,facebook,7,factor of loan,1,fans,2,feature,32,fifo,5,FII,4,fiji,1,finacle,1,finance,823,Finance Journal Entries,6,Financial,134,financial accounting,147,Financial Statements,4,fire insurance,3,flickr,2,flow,4,forensic,4,forex,21,formula,8,france,1,fraud,6,free,2,fun,34,function,1,fund,48,GAAP,36,GDP,1,gdr,5,germany,1,gold,7,goodwill,4,goodwill accounting,3,google,34,google apps,3,google apps,1,google base,1,google buzz,1,google calendar,1,Google docs,38,google finance,3,google fusion tables,1,google talk,5,govt.,5,GST,33,guide,85,health,6,Hindi,2,Hindi Language,3,history,3,holding company,3,How to treat FBT in Tally 9,1,HRA,3,ICAI,11,ICAWI,3,ICICI Bank,1,IFRS,11,income,17,income statement,19,Income Tax,7,India,57,indian railway,1,Indonesia,1,inflation,4,inflation accounting,3,infographics,8,information,7,inspiration,176,insurance,14,insurance accounting,2,Intangible,3,interest,26,international,7,Internet,40,Introduction of Tally 9,1,inventory,41,investment,135,investment in Shares,6,invoice,3,IT,1,Japan,1,Job costing,4,journal entries,143,Journal Entries eBook Help,4,Kalculate,1,keyboard,3,kuwait,2,laptop,2,law,4,LBT,1,learning,36,lease,5,lecture,11,ledger,17,leducation,1,Leverage Analysis,7,liabilities,16,lifo,3,linkedin,1,loan,74,logical point,1,loss,5,loss of profit,1,M.Com.,5,m.phil,2,malaysia,3,management accounting,129,manual accounting,4,manufacturing account,1,market,11,marketing,3,mastercard,2,material,13,MBA,14,MCA,1,media,4,migration,2,mobile,9,money,61,ms word,3,ms. excel,14,multi currency in tally 9,1,Multicurrency Accounting,3,mutual fund,30,national security,1,new and sacrifice ratio,1,new york times,1,new zealand,1,news,1,NGO,5,nonprofit-accounting,6,North Georgia Mountains,1,Notification,1,NPV,17,NSE,1,odbc,2,office,10,oman,1,online application,2,online accounting,11,Online Accounting Course,5,otcei,1,pakistan,3,parents,3,Partnership,1,pay pal,3,pdf,4,Personal Finance,6,pie chart,1,pie chart of income,2,pnb,5,podcast,1,ppf,1,presentation,10,price,7,privacy policy,2,prof. vinod kumar,13,profit,24,profit and loss account,12,project management,11,provision,14,purchase,9,puzzles,2,quickbooks,2,Quote,22,quotes,42,quotes of svtuition,1,rating agency,2,ratio analysis,34,RBI,7,readers,13,real estate,13,rectification of errors,11,remote control,2,reports,10,reserves,8,responsibility accounting,4,retirement,2,revenue,3,Revenue reserves,2,review,7,risk,11,rupees,9,salary,5,sale,12,SAP,3,saudi arabia,1,saving,19,sbi,9,scholarship,2,school,1,SEBI,13,security,30,service tax,23,share,20,share trading,15,Shares,16,shri lanka,3,singapore,2,sms,6,social accounting,7,society,5,solution,219,South Africa,1,stock,24,stock exchange,22,structure,6,student,39,students,70,study,21,subsidiary company,2,svtuition,14,swiss bank,2,tally,100,tally 9,8,Tally 7.2,8,Tally 9,42,Tally.ERP 9,59,TallyPrime,1,tanzania,2,tax,94,Tax Accounting,30,TDS,15,teacher,62,teaching,112,technology,33,test,40,testimonial,15,testimonials,15,thailand,1,tips,60,trading,5,trading on equity,2,transaction,7,trend,12,trial balance,14,truthfulness,1,tuition,3,twitter,10,UAE,5,UGC - NET Commerce,13,UK,11,United Arab Emirates,1,university,9,usa,25,valuation,9,VAT,22,Video,36,Voucher and vouching,4,Wealth,8,wikipedia,25,working capital,29,youtube,14,
ltr
item
Accounting Education: Capital Structure and Valuation
Capital Structure and Valuation
https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdpW5Ax93o5C3ulBPSpCOLn4Z9uiL2IbPE4d264LTbjsVA8Q_7DdpmLgE5s2nFArB9HbBMmgibxicQRCIQwMy1sZC5UT3cqQ3ZlHWVynUCJjJVlVEwCJQGn39gvzcolH-ifkFrltwM100/s640/valuation+of+company.bmp
https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdpW5Ax93o5C3ulBPSpCOLn4Z9uiL2IbPE4d264LTbjsVA8Q_7DdpmLgE5s2nFArB9HbBMmgibxicQRCIQwMy1sZC5UT3cqQ3ZlHWVynUCJjJVlVEwCJQGn39gvzcolH-ifkFrltwM100/s72-c/valuation+of+company.bmp
Accounting Education
https://www.svtuition.org/2013/06/capital-structure-and-valuation.html
https://www.svtuition.org/
https://www.svtuition.org/
https://www.svtuition.org/2013/06/capital-structure-and-valuation.html
true
2410664366776677676
UTF-8
Loaded All Posts Not found any posts VIEW ALL Reply Cancel reply Delete By Home PAGES Contents View All RELATED CONTENTS FOR YOUR LEARNING Topic ARCHIVE SEARCH ALL POSTS Not found any post match with your request Back Home Sunday Monday Tuesday Wednesday Thursday Friday Saturday Sun Mon Tue Wed Thu Fri Sat January February March April May June July August September October November December Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec just now 1 minute ago $$1$$ minutes ago 1 hour ago $$1$$ hours ago Yesterday $$1$$ days ago $$1$$ weeks ago more than 5 weeks ago Followers Follow THIS PREMIUM CONTENT IS LOCKED STEP 1: Share to a social network STEP 2: Click the link on your social network Copy All Code Select All Code All codes were copied to your clipboard Can not copy the codes / texts, please press [CTRL]+[C] (or CMD+C with Mac) to copy