Formulas

Unit – II - Capital Structure

Calculation of Capitalization
 Capitalization = Equity Share Capital + Preference Share Capital +
Long-term Loans and Debentures + Retained Earnings
Calculation of Capital Structure
 Capital Structure = Equity Share Capital + Preference Share Capital +
Long-term Loans and Debentures + Retained Earnings + Capital
Surplus
Calculation of Financial Structure
 Financial Structure = Equity Share Capital + Preference Share Capital
+ Long-term Loans and Debentures + Retained Earnings + Capital
Surplus + Current Liabilities

EBIT - EPS Analysis

New Debt
Existing (or)
New New
Equity Debentures
Particulars Equity Preference
Share (0r) Loans
Shares Shares
Capital (or)
Borrowings

Earnings Before Interest and Tax ×××× ×××× ×××× ××××

(EBIT)

LESS: Interest on Debt (or)

Debentures (0r) Loans (or) ×××× ×××× ×××× ××××
Borrowings

Earning Before Tax (EBT) ×××× ×××× ×××× ××××

LESS: Taxation ×××× ×××× ×××× ××××

Earning After Tax (EAT) ×××× ×××× ×××× ××××

LESS: Dividend on preference ×××× ×××× ×××× ××××

Shares

Net Earnings (NE) ×××× ×××× ×××× ××××

Number of Equity Shares ×××× ×××× ×××× ××××
EARNING PER SHARE (EPS) =

Net Earnings ×××× ×××× ×××× ××××

____________
Number of Equity Shares
 NET INCOME APPROACH (NI Approach)

Calculation of Total Value of Firm and Overall Capitalization Rate

Existing New Debt (or)
New New
Equity Debentures (0r)
Particulars Equity Preference
Share Loans (or)
Shares Shares
Capital Borrowings
Earnings Before Interest and
Tax (EBIT)
×××× ×××× ×××× ××××

LESS: Interest on Debt (or)

Debentures (0r) Loans (or) ×××× ×××× ×××× ××××
Borrowings

Earning Before Tax (EBT) ×××× ×××× ×××× ××××

LESS: Taxation (% on EBT) ×××× ×××× ×××× ××××
NET EARNING TO EQUITY
SHARE HOLDERS ×××× ×××× ×××× ××××
Cost of Equity (Ke) ×××× ×××× ×××× ××××
Market Vale of Equity =
Net Earning to Equity
Shareholders
___________________________ ×××× ×××× ×××× ××××
Cost of Equity

ADD: Market Value of

Debentures (or) Debt ×××× ×××× ×××× ××××
Total Value of Firm ×××× ×××× ×××× ××××
Overall Capitalization Rate (Ko)

Average Cost of Capital =

EBIT ×××× ×××× ×××× ××××
______ × 100
Total Value of Firm
 NET OPERAING INCOME APPROACH (NOI Approach)

PARTICULARS AMOUNT
EBIT ××××
LESS: Interest on Debt ××××
Net Earning to Equity Shareholders ××××
Cost of Equity (Ke) ××××
Market Value of Equity ××××
Add: Market Value of Debt ××××
Total Value of Firm ××××
Overall Capitalization Rate (Ko) = EBIT / Total Value of Firm ×100 ××××

EBIT
Overall Capitalization Rate (Ko) =
Total Value of Firm

Market
Total Value of
Market Value of Equity = - Value of
Firm
Debt

Net Earnings to Equity

Equity Capitalization Rate
= Shareholders × 100
(Ko)
Market Value of Equity