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3. Debentures.
4. Traditional approach.
(3) Maximizes the benefit to the shareholders, by giving best earning per
share and maximum market price of the shares in the long run.
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(2) Flexibility:
The capital structure should be flexible so that whenever the circumstances
so warrant, it is capable of being altered. For example, a sound capital
structure should be such that the capital can be increased or reduced when
the concern wants to expand or limit its activities respectively. Usually the
increase in capital is not a problem but reduction of capital is very difficult.
Equity capital is considered to be something sacred which cannot be
reduced except in accordance with the provisions of Companies Act, 1956.
Flexibility can be introduced into capital structure by opting for redeemable
preference shares or redeemable debentures as one of the securities to be
issued for raising finance.
(3) Profitability:
An optimum capital structure is one that is most profitable to the company.
The cost of financing should be the minimum and the earnings per share
should be maximum.
(4) Solvency:
In an optimum capital structure, debts should only be a reasonable
proportion of the total capital employed in the business because extensively
used and huge debts always threaten the solvency of the company.
ADVERTISEMENTS:
(5) Control:
Sound capital structure should provide maximum control of the equity
shareholders on the company’s affairs. When owners want to have control
over the business, debt is preferred to equity.
(6) Conservation:
The capital structure should be conservative in the sense that the debts
shall not be raised beyond a certain limit so that the company is in a
position to repay the principal sum together with the interest due thereon
in time.