Capital structure

Introduction
Definition:

According to Gerestenbeg. Capital structure of a

company refers to the composition or make-up of its
capitalization and it includes all long-term capital
resources viz: loans, reserves, shares and bonds
Meaning:
Thus capital structure refers to the permanent long
term financing of the company, including long
term debt, common stock and preferred stock
and retained earnings
Capitalization & Capital Structure

Capitalization refers to the total amount of securities

issued by a company. It is a quantitative aspect

Capital structure refers to the kinds of securities and

the proportionate amounts that make up capitalization.
It is a qualitative aspect.
Financial Structure

Definition:
According to Nemmers & Grunewald, Financial structure refers to all
the financial resources marshaled by the firm, short as well as long
term, and all forms of debt as well as equity.

Thus financial structure includes short term debt, long term debt and
share holders funds

In short, Financial structure means the entire liability side of the

balance sheet.
 Factors influencing capital structure

Financial leverage or trading on equity

Growth and stability of sales -higher growth-higher debt
Cost of capital -WACC minimum
Cash flow to service debt -stable cash flow-more debt
Nature and size of a firm small private equity; large
public-debt & equity
Control -more control more debt
Flexibility redeemable -convertible etc
Types of investors -
Factors (Contd..)

Capital market conditions

Assets structure
Purpose of financing productive-debt
Period of finance limited period- debt or redeemable
preference shares
Floatation costs
Nature of Management experienced & enterprising-
debt
Corporate tax rate high rate more debt
Legal requirements
 Optimum capital structure

Optimum capital structure may be defined as that capital

structure or combination of debt and equity that leads to the
maximum value of the firm
Optimum capital structure maximizes the value of the
company and hence the wealth of its owners and minimizes
the companys cost of capital (Solomen, Ezra, The Theory of
Financial Management)