UNIT - 3

FINANCING DECISIONS
Meaning of capital structure

 Financing decision is also called as the capital structure decision of the firm.
Capital structure refers to combination of various long term sources of funds in total capitalisation of the firm

Definition
  According to Gerstenberg, 'capital structure of a company refers to the composition or makeup of its
capitalisation and it includes all long term capital resources like loans, reserves, shares and bonds'.
Factors affecting capital structure

a. Financial leverage or trading on equity

b. Growth and stability of sales
c. Cost of capital
d. Cash flow ability to service debt
e. Nature and size of a firm
f. Control
g. Flexibility
h. Requirements of investors
i. Capital market conditions
j. Assets structure
k. Purpose of Financing
l. Period of finance
m. Cost of floatation
n. Corporate tax rate
Optimum capital structure
Optimum capital structure refers to that capital structure that leads to the maximum
value of the firm. It maximises the value of the company and minimises the
company's cost of capital.

Capital gearing
      The
term capital gearing refers to the relationship between equity capital and
long term debt.
In other words, capital gearing refers to the ratio between the various types of
securities in the capital structure of the company.
UNIT - 4