Capital Structure

Meaning of Capital Structure

Capital Structure is named because of the quantitative relation of various forms of securities raised by a firm as semipermanent finance. The capital structure involves 2 decisions-

Types

of securities to be issued are equity shares, stock and long haul borrowings (Debentures).
Relative magnitude relation of securities could also be determined by the technique of capital gears. On this basis, the companies are divided into two-
Highly meshed firms - Those firms whose proportion of equity capitalization is little.
Low meshed firms - Those firms whose equity capital dominates total capitalization.

Factors determinant Capital Structure

Trading on Equity- 

The word “equity” denotes the possession of the company. transaction on equity suggests that taking advantage of equity share capital to borrowed funds on cheap basis. It refers to additional profits that equity shareholders earn due to the provision of debentures and stock. it's supported the thought that if the speed of dividend on preference capital and conjointly the speed of interest on borrowed capital isn't up to the ultimate rate of company’s earnings, equity shareholders ar at advantage that suggests a company got to opt for a thought of mixture of stock, equity shares still as debentures. transaction on equity becomes tons of necessary once expectations of shareholders ar high.

Degree of control-

 in every company, it's the administrators UN agency is thus known as nonappointive representatives of equity shareholders. These members have gotten most vote rights in a very concern as compared to the preference shareholders and debenture holders. Preference shareholders have fairly less vote rights whereas debenture holders haven't any vote rights. If the policies of the management of companies ar such as they need to retain their vote rights in their hands, the capital structure consists of debenture holders and loans rather than equity shares.

Flexibility of financial plan-

 In an associated enterprise, the capital structure needs to be such as there is every contraction still as relaxation in plans. Debentures and loans are also refunded back as a result of time desires. whereas equity capital cannot be refunded at any purpose that has rigidity to plans. Therefore, therefore on produce the capital structure potential, the company needs to select the issue of debentures and different loans.

Choice of investors-

 The company’s policy typically is to own totally different classes of investors for securities. Therefore, a capital structure ought to offer enough options to all reasonable investors to speculate. daring and swaggering investors typically choose equity shares and loans and debentures are typically raised keeping into mind aware investors.

Capital market condition- 

within the life of the corporate, the value of the shares possesses a vital influence. throughout amount|period of time|period} period, the company’s capital structure typically consists of debentures and loans. whereas in amount of boons and inflation, the company’s capital ought to encompass share capital typically equity shares.

Period of financing-

 once the company desires to boost finance for brief amount, it goes for loans from banks and alternative institutions; whereas for long amount it goes for issue of shares and debentures.

Cost of financing- 

in a very capital structure, the corporate has got to look to the issue of value once securities are raised. it's seen that debentures at the time of profit earning of company persuade be a less expensive supply of finance as compared to equity shares wherever equity shareholders demand an additional share in profits.

Stability of sales-

 a longtime business that includes a growing market and high sales turnover, the corporate is in position to satisfy mounted commitments. Interest on debentures has got to be paid no matter profit. Therefore, once sales are high, thereby the profits ar high and the company is in higher position to satisfy such mounted commitments like interest on debentures and dividends on the stock. If the company has unstable sales, then the corporate isn't in position to satisfy mounting obligations. then capitan of equity proves to be safe in such cases

company size-

 small size business corporations capital structure typically consists of loans from banks and maintained profits. whereas on the opposite hand, huge corporations having goodwill, stability and a longtime profit will simply choose a provision of shares and debentures still as loans and borrowings from money establishments. the larger the dimensions, the broader is total capitalization.