POINTS TO REMEMBER

  1. What is financial leverage?

    • Mixing fixed-cost capital with equity is known as financial leverage.
    • A firm may have either all-equity/unleveraged capital structure or a leveraged capital structure meaning a combination of debt and equity.

  2. What is irrelevance approach to capital structure?

    • Irrelevance approach, propounded by Modigliani and Miller, suggests that in a perfect capital market with no taxes, introduction of debt in the capital structure does not change either value of the firm or the cost of capital.

     

  3. Does the irrelevance approach exist in presence of taxes?

    • Modigliani and Miller feel that in presence of taxes, financial leverage lowers the cost of capital.

     

  4. Does financial leverage influence EPS and cost ...

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