Capital structure planning which aims at the maximization of profits and wealth of the shareholders ensures the maximum value of a firm or the minimum cost of capital . It is very important for the financial manager to determine the proper mix of debt and equity for his firm.
What is the importance of capital structure planning?
Reduces Financial Risk : Balancing the proportion of debt and equity in the business through capital structure assist the business firms in managing and minimizing risk. Minimizes Cost of Capital: It provides for planning the long term debt capital of the company strategically and thus reducing the cost of capital.
What does capital structure mean?
Capital structure is the particular combination of debt and equity used by a company to finance its overall operations and growth .
What is capital structure in simple words?
Capital structure refers to a company's use of debt and equity as a means of financing operations and purchasing assets. A company's capital structure is helpful in understanding its current financial health, risk profile and compatibility with specific investment or acquisition strategies.
What is capital structure with example?
1 This mix of debts and equities make up the finances used for a business's operations and growth. For example, the capital structure of a company might be 40% long-term debt (bonds), 10% preferred stock, and 50% common stock . The capital structure of a business firm is essentially the right side of its balance sheet.
What are the principles of capital structure?
Main concern of this principle is to earn maximum Earnings per share with minimum cost of financing . Interest rates and tax rates controls cost of financing. Debt capital is cheaper.
What is capital structure and its features?
The term capital structure is used to represent the proportionate relationship between the various long-term kinds of capital arrangements – equity, debentures, preference shares, long- term debt, capital surplus, and retained earnings.
What are the types of capital structure?
- Equity Capital. Equity capital is the money owned by the shareholders or owners. ...
- Debt Capital. Debt capital is referred to as the borrowed money that is utilised in business. ...
- Optimal Capital Structure. ...
- Financial Leverage. ...
- Importance of Capital Structure.
What are capital structure decisions?
Capital structure refers to the specific mix of debt and equity used to finance a company's assets and operations . ... A company's capital structure is the result of such financing decisions that may be guided by capital structure policies or targets set by management and the board.
What are the objectives of capital structure?
The capital structure of a business refers to the balance of its finance in terms of how much is equity (or share capital) and how much is is in the form of debt. The two key capital structure objectives tend to be: Gearing ratio (the percentage of total business finance that is provided by debt)
What are the 3 types of capital?
When budgeting, businesses of all kinds typically focus on three types of capital: working capital, equity capital, and debt capital .
What are two types of capital?
In business and economics, the two most common types of capital are financial and human .
What are the sources of capital structure?
1 Subsequent theoretical work has taken into account the imperfections of financial markets and has shown that firm capital structure emerges from three sources: firm-specific, country of incorporation institutional, and macroeconomic factors .
What is the capital structure of a bank?
Bank capital structure basically represents the bank's choice of how to finance its balance sheet , that is, what mix of equity, subordinated debt, and deposits to use. It is an issue of central importance in any discussion of bank stability, and thus of great interest to regulators.
What is capital structure risk?
The financial or capital structure decision of a firm to use a certain proportion of debt or otherwise in the capital mix involves two types of risks: ... A firm using debt in it capital has to pay fixed interest charges and the lack of ability to pay fixed interest increases the risk of liquidation.
What are the working capitals?
What Is Working Capital? Working capital, also known as net working capital (NWC), is the difference between a company's current assets (cash, accounts receivable/customers' unpaid bills, inventories of raw materials and finished goods) and its current liabilities, such as accounts payable and debts.
