PPT - Factors Determining Capital Structure | Accountancy and Financial Management - B Com PDF Download

 Page 1


FACTORS AFFECTING CAPITAL 
STRUCTURE
?
Page 2


FACTORS AFFECTING CAPITAL 
STRUCTURE
?
CAPITAL STRUCTURE 
DEFINITION
? The capital structure is how a firm finances its overall operations and 
growth by using different sources of funds. Debt comes in the form of 
bond issues or long-term notes payable, while equity is classified 
as common stock, preferred stock or retained earnings. Short-term 
debt such as working capital requirements is also considered to be part of 
the capital structure.
Page 3


FACTORS AFFECTING CAPITAL 
STRUCTURE
?
CAPITAL STRUCTURE 
DEFINITION
? The capital structure is how a firm finances its overall operations and 
growth by using different sources of funds. Debt comes in the form of 
bond issues or long-term notes payable, while equity is classified 
as common stock, preferred stock or retained earnings. Short-term 
debt such as working capital requirements is also considered to be part of 
the capital structure.
COMPONENTS
? A firm's capital structure can be a mixture of long-term debt, short-term 
debt, common equity and preferred equity. A company's proportion of 
short- and long-term debt is considered when analyzing capital structure. 
? When analysts refer to capital structure, they are most likely referring to a 
firm's debt-to-equity (D/E) ratio, which provides insight into how risky a 
company is.
? Usually, a company that is heavily financed by debt has a more aggressive 
capital structure and therefore poses greater risk to investors. This risk, 
however, may be the primary source of the firm's growth.
Page 4


FACTORS AFFECTING CAPITAL 
STRUCTURE
?
CAPITAL STRUCTURE 
DEFINITION
? The capital structure is how a firm finances its overall operations and 
growth by using different sources of funds. Debt comes in the form of 
bond issues or long-term notes payable, while equity is classified 
as common stock, preferred stock or retained earnings. Short-term 
debt such as working capital requirements is also considered to be part of 
the capital structure.
COMPONENTS
? A firm's capital structure can be a mixture of long-term debt, short-term 
debt, common equity and preferred equity. A company's proportion of 
short- and long-term debt is considered when analyzing capital structure. 
? When analysts refer to capital structure, they are most likely referring to a 
firm's debt-to-equity (D/E) ratio, which provides insight into how risky a 
company is.
? Usually, a company that is heavily financed by debt has a more aggressive 
capital structure and therefore poses greater risk to investors. This risk, 
however, may be the primary source of the firm's growth.
FACTORS INFLUENCING
1.CONTROL INTERESTS
? According to this factor, at the time of preparing capital structure, it should be 
ensured that the control of the existing shareholders (owners) over the affairs 
of the company is not adversely affected. If funds are raised by issuing equity 
shares, then the number of company’s shareholders will increase and it directly 
affects the control of existing shareholders. In other words, now the number of 
owners (shareholders) controlling the company increases.
2.RISKS
? The economy where a firm conducts business is also subject to unforeseen 
risks. In the contemporary business world, size no longer assures economic 
survival. Therefore, finance executives attempt to consider every possibility 
imaginable to mitigate negative economic events.
Page 5


FACTORS AFFECTING CAPITAL 
STRUCTURE
?
CAPITAL STRUCTURE 
DEFINITION
? The capital structure is how a firm finances its overall operations and 
growth by using different sources of funds. Debt comes in the form of 
bond issues or long-term notes payable, while equity is classified 
as common stock, preferred stock or retained earnings. Short-term 
debt such as working capital requirements is also considered to be part of 
the capital structure.
COMPONENTS
? A firm's capital structure can be a mixture of long-term debt, short-term 
debt, common equity and preferred equity. A company's proportion of 
short- and long-term debt is considered when analyzing capital structure. 
? When analysts refer to capital structure, they are most likely referring to a 
firm's debt-to-equity (D/E) ratio, which provides insight into how risky a 
company is.
? Usually, a company that is heavily financed by debt has a more aggressive 
capital structure and therefore poses greater risk to investors. This risk, 
however, may be the primary source of the firm's growth.
FACTORS INFLUENCING
1.CONTROL INTERESTS
? According to this factor, at the time of preparing capital structure, it should be 
ensured that the control of the existing shareholders (owners) over the affairs 
of the company is not adversely affected. If funds are raised by issuing equity 
shares, then the number of company’s shareholders will increase and it directly 
affects the control of existing shareholders. In other words, now the number of 
owners (shareholders) controlling the company increases.
2.RISKS
? The economy where a firm conducts business is also subject to unforeseen 
risks. In the contemporary business world, size no longer assures economic 
survival. Therefore, finance executives attempt to consider every possibility 
imaginable to mitigate negative economic events.
3.TAX CONSIDERATION
? Debt payments are tax deductible. As such, if a company's tax rate is high, using 
debt as a means of financing a project is attractive because the tax deductibility of 
the debt payments protects some income from taxes.
4.COST OF CAPITAL
? Cost of capital determines the type of securities to be issued. During depressions it 
is better to raise capital structure through preference shares and debentures and 
during boom equity shares are better.
5.FLEXIBILITY
? The firm while deciding the capital structure shall ensure flexibility in its capital 
structure. The capital structure should be such that it always provides scope for 
raising funds through debts.