Net Operating Income Approach of Capital Structure

Definition The net operating income approach claims that valuation of a firm is irrelevant to capital structure. In other words, the market value of a firm will be the same regardless of the proportion of… Read more

Modigliani-Miller Theories of Capital Structure

Definition The Modigliani-Miller theory of capital structure proposes that the market value of a firm is irrelevant to its capital structure, i.e., the market value of a levered firm equals the market value of an… Read more

Traditional Approach to Capital Structure

Definition The traditional approach to capital structure assumes that an increase in the proportion of debt to some extent does not result in an increase in the cost of equity, i.e., it remains fixed or… Read more

EBIT-EPS Analysis

Definition EBIT-EPS analysis is a technique used to determine the optimal capital structure in which the value of earnings per share (EPS) has the highest amount for a given amount of earnings before interest and… Read more

Degree of Combined Leverage

Introduction The degree of combined leverage (DCL) is a ratio that summarizes the effect of both operating and financial leverage. This ratio shows the percentage change in earnings per share (EPS) caused by a 1%… Read more

Degree of Financial Leverage, DFL

Definition The degree of financial leverage (DFL) is a ratio used in corporate finance to measure the sensitivity of earnings per share (EPS) to the fluctuation in the operating income (also called earnings before interest… Read more