Formulation of time variant leverage ratio and its relation with WACC and firm valuation in Indian service sector firms

Abstract

The problem of determining the correct form of financing is a difficult one to solve. The Indian Service sector is growing rapidly, and many large firms in this sector were found to be entirely equity financed. This went against conventional finance theory, that moderate amounts of debt were actually beneficial to firm value. Within this premise, a study was conducted in order to determine the nature of time-variant leverage ratios as well as associated Weighted Average Cost of Capitals (WACCs) in the National Stock Exchange (NSE) listed Indian Service sector firms, for the time period 2009 2018, both included. Almost all finance literature valued firms without modifying leverage ratio (defined as debt to total capital in this thesis) with time, or WACC with time. This thesisproposed formulations to compute a time-variant leverage ratio, and associated time-variant WACCs, using previously un-attempted, theoretical and empirical approaches.