capital structure

Financial Management
Unit – 4

Capital Structure

Capital Structure
• It refers to the kinds of securities and the proportionate amounts that make up capitalization. • A decision about the proportion among the three types of securities viz., Equity shares,
Pref. Shares and Debentures refers to the
Capital Structure of an enterprise.

What is “Capital Structure”?
• Definition
The capital structure of a firm is the mix of different securities issued by the firm to finance its operations.
Securities
• Debt Sources - Bonds, bank loans
• Ordinary shares (common stock),
• Preference shares (preferred stock)

What is “Financial Structure”?
Balance Sheet
Current

Current

Assets

Liabilities

Fixed
Assets

Debt
Preference
shares

Ordinary shares Financial
Structure

What is “Capital Structure”?
Balance Sheet
Current

Current

Assets

Liabilities

Fixed
Assets

Debt
Preference
shares

Ordinary shares Capital
Structure

Forms or Patterns of Capital Structure
•
•
•
•

Equity shares only
Equity shares and Preference Shares
Equity shares and Debentures
Equity shares, Preference shares and
Debentures

Importance's:
• View point that strongly supports the close relationship between leverage and value of a firm. • It help to determine various investment decisions • Capital Structure decision can influence the value of the firm through earnings available to the share holders.

Features of Appropriate Capital
Structure
A). Profitability/Return
B). Solvency/Risk
C). Flexibility
D). Conservation/Capacity
E). Control

Factors Determining the Capital
Structure
1.
2.
3.
4.
5.
6.
7.
8.

Financial Leverage or
Trading on Equity
Growth and Stability of sales Cost of Control
Cash flow ability to service debt
Nature and Size of the
Firm
Requirement of
Investors.
Capital Market Structure
Assets Structure

9. Purpose of Financing
10.Period of Financing