capital structure

1. Presented by –Suraj giri
BCH(B) 209014

2. Meaning- Capital structure refer to the
proportion between the various long term
capital of finance in the total capital of firm. A
financial manager choose that source of
finance which include minimum risk as well as
well minimum cost of capital. Debt and equity
capital are used to fund a business’s
operations or investments.

3.  Increase in value of the firm:-A sound capital
structure of a company helps to increase the market
price of shares and securities which, in turn, lead to
increase in the value of the firm.
 Utilization of available funds:-A good capital
structure enables a business enterprise to utilize the
available funds fully.
 Maximization of return:-A properly designed capital
structure capital structure enables management to
increase the profits of a company in the form of higher
return to the equity shareholders i.e., increase in
earnings per share.

4.  Minimization of cost of capital:-A sound capital
structure of any business enterprise maximizes
shareholders’ wealth through minimization of the
overall cost of capital.
 Flexibility:-A sound capital structure provides a room
for expansion or reduction of debt capital so that,
according to changing conditions, adjustment of
capital can be made.
 Undisturbed controlling:-A good capital structure
does not allow the equity shareholders control on
business to be diluted.

5.  The terms, capitalization, capital structure and
financial structure, do not mean the same. While
Capitalization is a quantitative aspect of the financial
planning of an enterprise, Capital structure is
concerned with the qualitative aspect. Capitalization
refers to the total amount of securities issued by a
company while capital structure refers to the kinds of
securities and the proportionate amounts that make up
capitalization . Financial structure means the entire
liabilities side of the balance sheet.

7.  While deciding on the appropriate capital structure for an organization, the first thing is to
understand the affect on Earning Per Share (EPS) due to the changes in Earning Before Interest and
Taxes (EBIT) under different financing alternatives.
 The relationship between EBIT and EPS is as follows:
 (EBIT – I) (1-t)
 EPS = ---------------------
 n
 Where,
 EBIT = earnings before interest and taxes
 EPS = earnings per share
 I = interest
 t = tax rate
 n = number of equity shares