CAPITAL STRUCTURE IN A

COMPANY: A DETAILED STUDY

PROJECT SUBMITTED TO

Dr. Mr. Dipak Das

(Associate Professor of Corporate Laws)

PROJECT SUBMITTED BY

Vinamra Shrivastava

Semester-V, Roll No.

173 Section-C

Date of Submission-30-11-2020

HIDAYATULLAH NATIONAL LAW

UNIVERSITY RAIPUR,CHHATTISGARH

Page 1
 DECLARATION

I hereby declare that this project work titled “Capital Structure in a Company: A Detailed
Study” is my own work and represents my own ideas, and where others’ ideas or words have been
included, I have adequately cited and referenced the original sources. I also declare that I have
adhered to all principles of academic honesty and integrity and have not misrepresented or
fabricated or falsified any idea/data/fact/source in my submission.

Vinamra Shrivastava

Semester-5 ,Section-C

Roll No.173
 CERTIFICATE

This is to certify, that the research project submitted by me is an outcome of my independent and
original work. I have duly acknowledged all the sources from which the ideas and extracts have
been taken. The project is free from any plagiarism and has not been submitted elsewhere for
publication.have not misrepresented or fabricated or falsified any idea/data/fact/source in my
submission.

Vinamra Shrivastava

Semester-5,Section-C

Roll No.173
 ACKNOWLEDGEMENT

I feel highly elated to work on the topic “Capital Structure in a Company: A Detailed Study”.
No creation in this world is a sole effort, nor is this work of mine. The practical realisation of this
project has obligated the assistance of many persons. First of all I want to thank my Subject teacher
Dr. Mr. Dipak Das Sir for his invaluable suggestions and guidance. It would have not been possible
for me to frame this project of mine without his support.

I would like to thank my family and friends without whose support and encouragement, this project
would not have been a reality.

I take this opportunity to also thank the University and the Vice Chancellor for providing extensive
database resources in the Library and through Internet. Some typing errors might have crept in,
which are deeply regretted. I would be grateful to receive comments and suggestions to further
improve this project report.

Vinamra Shrivastava

Semester-5,Section-C

Roll No.173
 TABLE OF CONTENTS

S. No. Content Page No.

1 Introduction 6

2 Research methodology and sources of 7

data

3 Contributor of study 7

4 Objective 7

5 Capital structure in a company 8

6 Importance of capital structure 11

7 Concept of recapitalisation 13

8 Conclusion 14

9 References 15
 INTRODUCTION

The Capital Structure of a company can understood as the combination of Debt and Equity
employed in its operations and assets. It is typically expressed as debt to equity or debt to capital
ratio. In a company Debt and equity capital are used to fund a business’s operations, capital
expenditures, acquisitions, and other investments.Capital Structure is the mix between owner’s
funds and borrowed funds.n short, Capital Structure is the mixture of long-term sources of funds.
Capital Structure is optimal when the proportion of debt and equity maximises the value
of the equity share of the company. However, a company heavily funded by debt has an aggressive
capital structure and poses a greater risk to investors. This risk, however, may be the primary source
of the firm’s growth.1
Business leaders got to severally return up with a capital structure that works best for his or her
operation. ought to a lot of debt finance be wont to defend possession and earn the next return?
ought to a lot of equity finance be wont to avoid the danger of excessive debt and bankruptcy?
These selections have to be compelled to be created on a independent basis, at each tiny businesses
and enormous firms.
Any variety of debt or equity is accounted for the capital structure. for example, debt includes
ancient business loans, however it additionally includes any provider credit the business receives.
Both debt and equity go together with prices, and these square measure called the value of capital.
an easy price of capital is that the charge per unit paid on a loan, however all styles of finance have
their price. Equity finance comes at the value of some possession stake within the business.The
different varieties of prices of capital build it necessary for businesses to balance their capital
structure.
The capital with all-time low prices ought to, ideally, structure the most important proportion of a
business's capital structure.
In follow, the prices of capital have to be compelled to be balanced with a capital structure that
matches the business model. for example, a alternate business might not be ready to afford to
require on a lot of debt, although the interest rates cause a lower price of capital than alternatives
like equity finance. If it cannot afford to create the loan payments throughout the slow periods of its
variation, the business should instead build a capital structure with alternative styles of finance.

12020. [online] Available at: <https://www.toppr.com/guides/business-studies/financial-management/capital-structure/>

[Accessed 27 October 2020].
 RESEARCH METHODOLOGY & SOURCES OF DATA

This Project report is based on analytical Research Methodology. This study is absolutely based
on the secondary sources such as articles; books, journal articles, which have been primarily
helpful in giving this project a firm structure. Websites, International documents and articles
have also been referred.

CONTRIBUTOR OF STUDY

This research will contribute towards the strengthening of the study of capital structure in a
company. This research will add to the knowledge and structure of capital in a company. The
components of capital and how a company manages its capital.

OBJECTIVE

Set in the broader perspective or background, the objectives of the study is to understand the
concept of capital structure in a company, its components or parts, different theories and its
different types.
 CAPITAL STRUCTURE IN A COMPANY
• Understanding Capital Structure

Capital structure refers to the proportions or combinations of equity share capital, preference share
capital, debentures, long-term loans, retained earnings and other long-term sources of funds in the
total amount of capital which a firm should raise to run its business.

“Capital structure of a company refers to the make-up of its capitalisation and it includes all long-
term capital resources viz., loans, reserves, shares and bonds.”—Gerstenberg.2

“Capital structure is the combination of debt and equity securities that comprise a firm’s financing
of its assets.”—John J. Hampton.3

“Capital structure refers to the mix of long-term sources of funds, such as, debentures, long-term
debts, preference share capital and equity share capital including reserves and surplus.”
—I. M. Pandey.4

Both debt and equity are often found on the record. Company assets, conjointly listed on the record,
that are purchased with this debt and equity. Capital structure are often a mix of a company's long-
run debt, short-run debt, stock, and stock. A company's proportion of short-run debt versus long-run
debt is taken into account once analysing its capital structure.

When analysts seek advice from capital structure, they're presumably relating a firm's debt-to-equity
(D/E) magnitude relation, that provides insight into however risky a company's borrowing practices
are. Usually, a corporation that's heavily supported by debt features a a lot of aggressive capital
structure and so poses bigger risk to investors. This risk, however, could also be the first supply of
the firm's growth.

2 Zigya.com. 2020. Define ‘Capital Structure’. From Business Studies Financial Management Class 12 UP Board.
[online] Available at: <https://www.zigya.com/study/book?
class=12&board=bhsieup&subject=Business+Studies&book=Business+Studies+II&chapter=Financial+Management&q
_type=&q_topic=Capital+Structure+&q_category=E&question_id=BSEN12111656> [Accessed 29 October 2020].
3
Civilserviceindia.com. 2020. Cost Of Capital, Cost Of Capital Concept, Cost Of Capital Assumptions. [online]
Available at: <https://www.civilserviceindia.com/subject/Management/notes/cost-of-capital.html> [Accessed
29 October 2020].
4Jiwaji.edu. 2020. [online] Available at: <http://www.jiwaji.edu/pdf/ecourse/management/MBA%20II%20SEM.pdf>
[Accessed 29 October 2020].
Debt is one among the two main ways in which a corporation will raise cash within the capital
markets. corporations take pleasure in debt results of|thanks to|attributable to its tax advantages;
interest payments created as a result of borrowing funds could also be tax deductible. Debt
conjointly permits a corporation or business to retain possession, in contrast to equity. in addition,
in times of low interest rates, debt is torrential and simple to access.

Equity permits outside investors to require partial possession within the company. Equity is costlier
than the debt, particularly once interest rates are low. However, in contrast to debt, equity doesn't
have to be compelled to be paid back. this can be a profit to the corporate within the case of
declining earnings. On the opposite hand, equity represents a claim by the owner on the long run
earnings of the corporate.

• Dynamics of debt and equity

The capital structure of a company is usually a combination of Debt and Equity. The ratio or the
percentage of the debt and equity may vary from company to company.
In debt an investor takes less risk because they have the first claim on assets of the business at the
event of bankruptcy. And for the same reason investor agrees to a lower rate of return thus making
cost of capital lower for the firm.
While in equity investor takes much more risk as they are at the receiving end of residual value
after the debt investors have been paid off. Here the return is higher as the risk factor is also higher
in equity
It is important for a company to maintain a balance between debt and equity as both have their share
of risk involved in them.
Talking about the Pros and Cons Equity
• No interest payments
• No mandatory Fixed payments
• No maturity Dates
• Owns and controls the business
• High implied cost of capital
• Investor Has Voting Rights
• Mostly high returns
• Last claim on assets of the firm
• Provides maximum operational flexibility.

Pros and Cons of Debt.

• Has Interest payments
• Has a fixed repayment schedule
• Has first claim on firm’s assets in the event of liquidation
• Requires Covenants and financial performance metrics that must be met
• Contains restrictions on operational flexibility
• Has a lower cost than equity
• Expects slower rate of return
 IMPORTANCE OF CAPITAL STRUCTURE

1. Utilisation of Available funds:- A sound capital structure enables a business enterprise to

apply the available funds fully. A well designed capital structure make sure that the
determination of the financial requirements of the firm and increment the funds in such
proportions from distinct sources for their best possible utilisation. A Stable capital structure
protects the business enterprise from over-capitalisation and under-capitalisation.

2. Maximisation of returns:- A sturdy capital structure permit 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. This can be done by the mode of trading on equity i.e., it referring to
increase in the proportion of debt capital of the capital structure which is the economical source
of capital. If the rate of return on capital employed exceeds the fixed rate of interest paid to
debt-holders, the company is said to be trading on equity.

3. Minimisation of Cost of Capital:- A stable capital structure in any business enterprise

maximises shareholders’ wealth through minimisation of the entire cost of capital. This can also
be done by incorporating long-term debt capital of the capital structure as the cost of debt
capital is lower than the cost of equity.

4. Solvency or Liquidity position:- A stable capital structure in a company never allows it to go

for too much raising of debt capital because, at the time of poor earning, the solvency is
disturbed for compulsory payment of interest to .the debt-supplier.

5. Minimisation of Financial risk:- If debt component increases in the capital structure in a

company, the financial risk (i.e., payment of fixed interest charges and repayment of principal
amount of debt in time) will also increase. A stable capital structure protects a business
enterprise from such financial risk through a judicious mix of debt and equity in the capital
structure.
Factors Determining Capital Structure

1. Risk of cash insolvency:- Risk of cash insolvency arises due to failure to pay fixed interest
liabilities. Generally, the higher proportion of debt in capital structure compels the company to
pay higher rate of interest on debt irrespective of the fact that the fund is available or not. The
non-payment of interest charges and principal amount in time call for liquidation of the
company. The sudden withdrawal of debt funds from the company can cause cash insolvency.
This risk factor has an important bearing in determining the capital structure of a company and
it can be avoided if the project is financed by issues equity share capital.

2. Cost of capital:- Cost of capital means cost of raising the capital from different sources of
funds. It is the price paid for using the capital. A business enterprise should generate enough
revenue to meet its cost of capital and finance its future growth. The finance manager should
consider the cost of each source of fund while designing the capital structure of a company.

3. Government policies:- Capital structure is influenced by Government policies, rules and

regulations of SEBI and lending policies of financial institutions which change the financial
pattern of the company totally. Monetary and fiscal policies of the Government will also affect
the capital structure decisions.

4. Size of company:- Availability of funds is influenced by the size of company. For A small
company it is difficult to raise debt capital. The terms of debentures and long-term loans are
less favourable to such enterprises. Small sized companies have to depend more on the equity
shares and retained earnings.

5. Flexibility:- The capital structures of a company shall be of such nature that it can raise funds
when required. Flexibility assures room for expansion, both in terms of lower impact on cost
and with no significant rise in risk profile.
 CONCEPT OF
RECAPITALISING

During a business's life, it should opt to alter its capital structure. this can be referred to as
recapitalising. even as forming Associate in Nursing initial capital structure is a private method, the
method of recapitalising will take many various forms. A business will recapitalise by primarily
exchanging debt for equity. It will acquire additional debt either by issue company bonds or by
seizing a business loan and then use that leverage to get back a number of its equity within the
variety of a share redemption.
Conversely, if a business sounds like its debt is obtaining out of hand, it'd issue new stock. The new
issue can usher in make the most exchange for equity, which money may be accustomed pay off a
loan or otherwise scale back the business's debt.
A firm that decides they should optimise their capital structure by changing the mix of debt and
equity has a few options to effect this change.5
Methods of recapitalisation:-

1. Issue debt and repurchase equity- the firm borrows money by issuing debt then uses all of its
capital to repurchase shares from its equity investors,. This increases the amount of debt and
increases equity on balance sheet.

2. Issue debt and pay a large dividend to equity investors- the firm will borrow money and use
that to pay a one time special dividend which has the effect of reducing the value of equity by
the value of dividend.

3. Issue equity and repay debt- the firm moves in opposite direction and issues equity by selling
new shares, then takes the money and use it to repay debt. Since equity is costlier than debt, this
approach is used only when firm is over leveraged and needs to reduce its debt.

5 Corporate Finance Institute. 2020. Capital Structure - What Is Capital Structure & Why Does It Matter?. [online]
Available at: <https://corporatefinanceinstitute.com/resources/knowledge/finance/capital-structure-overview/>
[Accessed 5 November 2020].
 CONCLUSION
The capital structure provides the basic structure of the company which provides the funds to carry
on its business. The Capital Structure of a corporation will understood because the combination of
Debt and Equity used in its operations and assets. it's generally expressed as debt to equity or debt
to capital quantitative relation. in an exceedingly company Debt and equity capital square measure
accustomed fund a business’s operations, capital expenditures, acquisitions, and different
investments.Capital Structure is that the combine between owner’s funds and borrowed funds.n
short, Capital Structure is that the mixture of long sources of funds. Capital Structure is perfect once
the proportion of debt and equity maximises the worth of the equity share of the corporate.
However, a corporation heavily funded by debt has associate aggressive capital structure and poses
a bigger risk to investors. This risk, however, is also the first supply of the firm’s growth
The Capital Structure is the mixture of long-term sources of funds. Capital Structure is optimal
when the proportion of debt and equity maximises the value of the equity share of the company.
However, a company heavily funded by debt has an aggressive capital structure and poses a greater
risk to investors. This risk, however, may be the primary source of the firm’s growth..
 REFERENCES

WEBSITES
• www.toppr.com
2020. [online] Available at: <https://www.toppr.com/guides/business-studies/
financial-management/capital-structure/> [Accessed 5 November 2020].

• www.investopedia.com
Investopedia. 2020. Capital Structure Definition. [online] Available at: <https://
www.investopedia.com/terms/c/capitalstructure.asp> [Accessed 5 November 2020].

• WWW.BANKNAZAAR.COM
Bankbazaar.com. 2020. Compare And Apply For Loans, Credit Cards, Insurance In
India. [online] Available at: <https://www.bankbazaar.com> [Accessed 22 October 2020].

• WWW.FREEAGENT.COM
FreeAgent. 2020. Easy-To-Use Accounting Software For UK Small Businesses.
[online] Available at: <https://www.freeagent.com> [Accessed 22 October 2020].