Definitions and Symbols

In addition to the above assumptions, we shall make use of some symbols in our analysis capital structure theories:

S= total market value of equity
B = total market value of debt
I = total interest payments
V= total market value of the firm (V = S+ B)
N = net income available to equity-holders.
We shall also make use of some basic definitions:


(iii) overall cost of capital or weighted average cost of capital.


While exploring the relationship between capital structure and value of the firm, our concern is with the cost of equity capital (k). cost of debt (k) and overall cost of capital (k) when the capital structure/leverage changes. as measured by the change in the relationship between total value of debt and debt to total of ordinary shares (B/S).

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