Capital structure refers to how a corporation finances its assets through a combination of equity, debt, or securities. A firm's capital structure composition includes liabilities like debt and equity shares. Equity shares make shareholders owners but do not burden the company, while debt provides tax advantages but requires regular payments. An optimal capital structure considers advantages and disadvantages of different sources to maximize utilization of resources.

1. CAPITAL STRUCTURE
In finance, capital structure refers to the
way a corporation finances
its assets through some combination
of equity, debt, or securities. A firm's
capital structure is then the composition or
'structure' of its liabilities.

2. EXAMPLE..
 For example, a firm that sells 200000 in
debts and 800000 in equity is said to be
20% debt-financed and 80% equity-financed.
In reality, capital structure may be highly
complex and include dozens of sources.
Gearing Ratio is the proportion of the capital
employed of the firm which come from
outside of the business finance, e.g. by
taking a short term loan etc.

3. SOURCES OF FINANCE..
 Equity shares- In simple Words, a share or
stock is a document issued by a company,
which entitles its holder to be one of the
owners of the company. A share is issued by
a company or can be purchased from the
stock market.

4. ADVANTAGES OF EQUITY SHARES…
 Equity shareholders are the real owners of the
company. They have full voting rights. They elect
directors to manage the company.
 Equity shares are not a burden on the resources of
the company. If the company has sufficient profits
and the directors also recommend, dividend may be
declared.
 Since the equity shares are of small face value,
even poor people can because members of big
companies. This helps the capital formation of the
country.

5. DISADVANTAGES OF EQUITY SHARES…
 If there arises over capitalization because of
wrongful equity share issues, the excess amount
cannot be refunded.
 Because of the uncertainty of the return on the
equity shares, conservative investors hesitate to
purchase them.
 Since equity shares are not refundable they are
treated as illiquid.
 Rights issue may lead to concentration of control of
the company in the hands of a few persons.

6. PREFERENCE SHARES…
 a share which entitles the holder to a fixed
dividend, whose payment takes priority over
that of ordinary share dividends.
 ADVANTAGES OF THESE SHARES:-
 Redeemable, convertible and participating
preference shareholders are more attractive. There
are very helpful to investors and so they have ready
market.

7. CNTD…
 In case of debentures, generally a change (or)
mortgage on the assets is created. But the issue of
preference share require no such creation.
 Equity shareholders will get good amount of
dividend by issue of preference shares.
 DISADVANTAGES OF THESE SHARES:-
 Usually, preference shares carry a higher rate of
dividend than the rate of interest on debentures.
 Comparing to debentures, financing of preference
shares in more costly.

8. DEBTS..
 A debt is created when a creditor agrees to lend a
sum of assets to a debtor. Debt is usually granted
with expected repayment; in modern society, in
most cases, this includes repayment of the original
sum, plus interest.

9. ADVANTAGES AND DISADVANTAGES
OF DEBTS:-
 Utilization of Resources – When a business use debt
to finance its operation, they got no option than to fully
utilize their resources because they will have to payback
the debt and interest to their creditor.
 Short Term Needs – Debt finance can easily be
secured on a short term bases. This make it very
advantageous to the small business as finance of this
type can easily be secured for short term business
needs.
 Tax Advantage – Debt financing also offers tax
advantage to business as interest is deductible for
income tax purposes.
 No Future Lender Claims - Lenders has no direct claim
on future earnings

10. CNTD..
 The main disadvantage of this type of financing is
that it requires a small business to make regular
monthly payments of principal and interest.Because
of shortage of cashflow experience by young
business it is usually difficult to make regular
payment of to creditors.
 Most lenders provide severe penalties for late or
missed payments, which may include charging late
fees, taking possession of collateral, or calling the
loan due early.
 Failure to make payments on a loan, even
temporarily, can adversely affect a small business’s
credit rating and its ability to obtain future financing.

11. TRADE ON EQUITY-
 Trading on equity occurs when a corporation uses
bonds, other debt, and preferred stock to increase
its earnings on common stock. For example,
a corporation might use long term debt to purchase
assets that are expected to earn more than the
interest on the debt. The earnings in excess of the
interest expense on the new debt will increase the
earnings of the corporation’s common stockholders.
The increase in earnings indicates that the
corporation was successful in trading on equity.

12. RETAIN EARNINGS…
 In accounting, retained earnings refers to
the portion of net income of a corporation
that is retained by the corporation rather
than distributed
to shareholders as dividends, or as the
amount available to the corporation for
distribution to shareholders.

13. OPTIMUM UTILIZATION OF RESOURCES
 As a cost manager, I will choose equity
shares more for capital structure then debts
because debts are loan for the company. As
my company is not new, it is a growing and
well known company I will chose equity
shares for capital structure because it has
more benefits and people can easily trust
the company and can buy shares.