CAPITAL STRUCTURE

 CAPITAL STRUCTURE

This mix of debts and equities make up the finances used for a business's operations and growth.

 For example, the capital structure of a company might be 30% long-term debt (bonds), 20% preferred stock, and 50% common stock. The capital structure of a business firm is essentially the right side of its balance sheet.

In other words A mix of various long term sources of funds employed by a firm is called capital structure.

Definition Of Capital Structure

According to  gerestenbeg Capital structure of a company refers to the composition of its capitalisation and it includes all long term capital sources i.e., loans, reserves, shares and bonds".

According to  Schwarty" the Capital structure of business can be measured by the ratio of various kinds of permanent loan and equity capital to total capital". 

YOU CAN ALSO READ:-PYQ FINANCIAL MANAGEMENT

Importance of Capital Structure

1) Capital structure is vital for a firm as it determines the overall stability of a firm. Here are some of the other factors that highlight the importance of capital structure

2) A firm having a sound capital structure has a higher chance of increasing the market price of the shares and securities that it possesses. It will lead to a higher valuation in the market.

3) A good capital structure ensures that the available funds are used effectively. It prevents over or under capitalisation.

4) It helps the company in increasing its profits in the form of higher returns to stakeholders.

5) A proper capital structure helps in maximising shareholder’s capital while minimising the overall cost of the capital.

6) A good capital structure provides firms with the flexibility of increasing or decreasing the debt capital as per the situation.

YOU CAN ALSO READ:- TECHNIQUES OF CAPITAL BUDGETING 

Factors influencing to capital structure

*  Business Risk

* Company Tax exposure

* Financial Flexibility

* Growth Rate

*  Market Condition

* Cost of Fixed Assets

*  Size of Business Organization

Optimal Capital structure

Capital structure is the proportion of debt and preference and equity shares on a firm's balance sheet.

Meaning of Optimal Capital structure is the capital structure at which the weighted average cost of capital is minimum and thereby maximum value of the firm.

Features of  Optimal Capital structure

* Retaining control by company

* Fullfilling Legal Requirements of SEBI

* Minimum Risk and Minimum cost of capital

* Maximum Profitability

* Simple & Flexibility

Sources of finance

What is finance :- FINANCIAL MANAGEMENT 

Internal sources of finance

Internal finance refers to the funds generated from within the business itself 

for example: Selling off fixed assets, such as machinery or premises. Such assets can be leased back from the new owner if they are still needed by the business.

* Managing cash flow by reducing the length of time that customers have to pay invoices, while taking longer to pay suppliers.

* Retained profit: the difference between the revenue generated from sales and costs incurred in making them, which can be invested back into the business.

EXTERNAL SOURCES OF FINANCE

LONG TERM 

1) Equity Share:-  A key feature of equity share is the 'sharing of ownership rights. The return is in the form of a dividend or bonus shares.

2) Debentures:-  Debt is considered to be the cheaper mode of finance compared to equity. It does not share control with investors.

3) Term Loan:-  It is given by some bank or financial institutions. These loans are also secured by some assets.

4) Preferred Stock The characteristics of both common equity stocks and debt. they have got priority over common equity shares in terms of payment

5) Venture Capital They normally invest in a new company at an initial stage and do a ngorous analysis of a company before investing.

6) Leasing/ HP Can help businesses delay its cash payment which is equal to having its goods financed

SHORT TERM 

1) Bank Overdraft:-  Businesses need money for their day to day requirement which arises due to a time gap between their collections and payments.

2) Trade Credit:- The credit given to a business by their creditors/ suppliers. The credit given to a business by their creditors/ suppliers

3) Debt Factoring :- An arrangement whereby the business sells its account receivables/debtors at a discount