This PPT describes fundamental concepts of capital structure

1. CAPITAL STRUCTURE
Dr.S.BELLARMIN DIANA
Assistant Professor
Department of Management Studies
Bon Secours College for women, Thanjavur

2. MEANING
Capital structure refers to the make-up of a firm’s capitalization. It represents the mix of different sources of
long term funds. It is the permanent financing of the company represented primarily by long-term debt and
equity.
Equity shares
Preference shares
Long-term loans
Debentures or Bonds
Retained earnings
LONG TERM FUNDS

3. DEFINITION
“Capital Structure of a company refers to the composition or
make up of its capitalization and it includes all long-term capital
resources”.
Gerestenbeg
“The mix of a firm’s permanent long-term financing
represented by debt, preferred stock, and common stock
equity”.
James C. Van Horne

4. DEFINITION
 “The composition of a firm’s financing consists of equity, preference,
and debt”.
Presana Chandra

5. FINANCIAL STRUCTURE VS CAPITAL STRUCTURE
The term financial structure is different from the capital structure. Financial
structure shows the pattern of total financing. It measures the extent to which
total funds are available to finance the total assets of the business.
Financial Structure = Total liabilities
Or
Financial Structure = Capital Structure + Current liabilities.

6. FINANCIAL STRUCTURE VS CAPITAL STRUCTURE
Financial Structures
1.It includes both long-term and short-term sources of
of funds
2.It means the entire liabilities side of the balance sheet.
sheet.
3.Financial structures consist of all sources of capital.
capital.
4.It will not be more important while determining the
the value of the firm.
Capital Structures
1. It includes only the long-term sources of funds.
2. It means only the long-term liabilities of the
company.
3. It consist of equity, preference and retained earning
capital.
4. It is one of the major determinant of value of the firm.

7. OBJECTIVES OF CAPITAL STRUCTURE
OBJECTIVES
MINIMIZE THE OVERALL
COST OF CAPITAL
MAXIMIZE THE VALUE
OF THE FIRM

8. PATTERNS OF CAPITAL STRUCTURE

9. OPTIMUM CAPITAL STRUCTURE
• Optimum capital structure may be defined as the capital structure or
combination of debt and equity, that leads to the maximum value of the
firm.
• The optimum capital structure is obtained when the market value per
share is maximum while the average cost of capital is minimum.

10. Considerations for achieving the goal of optimum capital structure
considerations
Borrow when
cheap
Tax
advantage of
corporate tax
Avoid
perceived risk
Flexible
structure

11. FEATURES OF AN APPROPRIATE CAPITAL STRUCTURE
Profitability
Solvency
Flexibility
Conservatism
Control

12. FACTORS DETERMINING CAPITAL STRUCTURE
TRADING ON EQUITY
RETAINING CONTROL
NATURE OF ENTERPRISE
LEGAL REQUIREMENTS
PURPOSE OF FINANCE
PERIOD OF FINANCING
MARKET SENTIMENTS
REQUIREMENT OF INVESTORS
SIZE OF THE COMPANY
GOVERNMENT POLICY
PROVISION FOR THE FUTURE