imp.

COST OF CAPITAL:
low coc is beneficial for the company
what a person will going to bear in context of the capital is known as coc.

LEVERAGE-
A] operating- operating fixed cost
B] capital leverage- fixed returns fund
HOW MUCH LEVERAGE?
relation b/w coc and leverage
If leverage is high / high debt= hingh coc.
Every ruppee of capital must be raised from equity shareholder.

initial investment

constant

option D gives more freedom as leverage is increased.

leverage is high the return with intrest is high but the return is increasing
profit is decreasing in absolute terms but the number of people sharingh the profit
overall cost= equity capital * cost of equity/EBIT+ debt * debt %
1*.3+0=.3/30%
.8*.28+2*.1= 24.4%
0.6*0.26+0.4*0.1=19.6%
0.4*0.24+0.6*0.1= 15.6%

illustration-
 a b
operating income 10000 10000
net operating income 9000 7000
Ke 0.158823 0.190907
cost of equity 0.13498 0.104995
0.045
0.104995 0.15000

NET INCOME APPROACH

100 capital
15% cost of equity
10% cost of debt

when the capital is only equity and 0 debt= 15% total cost of capital
when the capital is 70 equity and 30 debt= 15% for equity and 10% for debt
when debt=30% .10*.3+.15*.7 0.135 13.5

when debt is 50% .10*.5+.15*.5 0.125 12.5

 initial investment

e return is increasing
r of people sharingh the profit has gone down hence, each one will have more share.
10% for debt