Capital structure refers to the combination of debt and equity that a company uses to finance its operations. It involves determining the appropriate mix of different types of securities like equity shares, preference shares, debentures, and long-term loans. An optimal capital structure maximizes the firm's value by minimizing its overall cost of capital. It provides the ideal balance between debt and equity financing.

1. FINANCIAL MANAGEMENT
CAPITAL STRUCTURE
By:
Smt.UMA MINAJIGI REUR
HEAD, DEPT. OF COMMERCE & Management
Smt. V G Degree College for Women, Kalaburagi

2. CAPITAL STRUCTURE
• The most crucial component of starting a
business is capital.
• Capital acts as the foundation of the
company.
• Debt and Equity are the two primary types
of capital sources for a business.

3. • Meaning:
Capital structure is defined as the
combination of equity and debt that is put
into use by a company in order to finance
the overall operations of the company and
for its growth.
Capital Structure is a mixture of the capital
put in to the business.
CAPITAL STRUCTURE

4. • Meaning:
Capital structure means the total combined
investment of a business consisting of equity
share capital, debentures, retained earnings,
preference shares and other long-term
borrowed funds.
CAPITAL STRUCTURE

5. • Definition:
According to Gertensberg: “Capital structure
refers to the make-up of a firm’s
capitalisation i.e, the type of securities to be
issued and relative proportion of each type
of securities in the total capitalisation.”
CAPITAL STRUCTURE

6. Capital Gearing refers to the relationship
between owned funds and borrowed funds or
fixed interest or dividend carrying funds.
Capital Gearing is the relationship between
equity share capital (with reserves and
surplus)and borrowed funds carrying fixed
interest/dividend.
CAPITAL GEARING

7. Low Geared:
If the proportion of equity share capital (with reserves
and surplus) is higher than the other borrowed funds
carrying fixed interest/dividend.
Highly Geared:
If the proportion of equity share capital (with reserves
and surplus) is lower than the other borrowed funds
carrying fixed interest/dividend.
Evenly Geared:
If the proportion of equity share capital (with reserves
and surplus) is equal to other borrowed funds carrying
fixed interest/dividend.
CAPITAL GEARING

8. Advantages of Capital Gearing
When the organisation is Highly Geared:
In this case, organisation makes remarkable profit, the
Equity shareholders stand to gain, because after paying
fixed rate of interest to debentures and dividend to
preference shareholders, the remaining surplus goes to
equity shareholders.
CAPITAL GEARING

9. Advantages of Capital Gearing
When the organisation is Low Geared:
It means more Equity shareholders and less amount of
debentures and preference shareholders. In this case
profits earned is distributed to large number of equity
shareholders and as a result of which EPS declines.
CAPITAL GEARING

10. Equity means common stock or ordinary shares of a
company.
Trading means taking the advantage of equity share
capital.
Trading on equity means taking advantage of equity
share capital to borrowed funds on reasonable basis and
to ensure more return and control to equity
shareholders.
TRADING ON EQUITY

11. In otherwords, trading on equity increases the return on
investment of equity shareholders at the cost of funds
supplied by the debenture holders and the preference
shareholders.
According to Gertensberg, “ When a person or
corporation uses borrowed capital as well as owned
capital (i.e, Equity Capital) in the regular conduct of its
business, it is trading on equity or financial leverage.”
TRADING ON EQUITY

12. There are two types of Trading on Equity:
1. Trading on thin equity
2. Trading on thick equity
Trading on thin equity : It means ratio of Equity
capital is very low as compared to the preference capital
and long term borrowings.
Trading on thick equity : It means ratio of Equity
capital is large as compared to the preference capital and
long term borrowings.
TYPES OF TRADING ON EQUITY

13. Optimum Capital Structure means an ideal
combination of borrowed funds (i.e, long term
debts) and owned capital as to minimise the
cost of capital and maximise the market value of
shares.
OPTIMUM CAPITAL STRUCTURE

14. According to E.W. Walker, “ an Optimum Capital
Structure can be properly defined as, that security
mix that minimises the firm’s cost of cpital and
maximise the firm’s value.
Equity capital and retained earnings are called Equity. Payment of dividend is not
fixed, depends on profit.
Borrowed Fund is Debt. It is fixed liability of the company which has to pay the
fixed rate of interest, whether company makes profit or loss.
OPTIMUM CAPITAL STRUCTURE

15. There are four fundamental or basic patterns of
capital structure for a company. They are:
1. Only Equity Shares
2. Equity Shares and Preference Shares
3. Equity Share and Long term borrowings like debentures and
long term loans.
4. Equity Shares and Preference Shares and Long term
borrowings like debentures and long term loans.
BASIC PATTERNS OF
CAPITAL STRUCTURE

16. Debt Equity Mix
• Raising of funds through debt is cheaper as
compared to raising of funds through equity
shares, as interest on debt is allowed as
expenditure for tax purpose and debited to
profit & loss account.
• Hence, raising of funds by borrowing is
cheaper and results in higher profits to
shareholders. Increases the EPS the main
objective of any company.

17. Thank you