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Page 1 CAPITAL STRUCTUR E Page 2 CAPITAL STRUCTUR E MEANING OF CAPITAL STRUCTURE Capital structure refer to the proportion between the various long term source of finance in the total capital of firm A financial manager choose that source of finance which include minimum risk as well as minimum cost of capital. Page 3 CAPITAL STRUCTUR E MEANING OF CAPITAL STRUCTURE Capital structure refer to the proportion between the various long term source of finance in the total capital of firm A financial manager choose that source of finance which include minimum risk as well as minimum cost of capital. Sources of long term finance Proprietor’s funds Equity capital Preference capital Reserve and surplus Borrowed funds Long term debts Page 4 CAPITAL STRUCTUR E MEANING OF CAPITAL STRUCTURE Capital structure refer to the proportion between the various long term source of finance in the total capital of firm A financial manager choose that source of finance which include minimum risk as well as minimum cost of capital. Sources of long term finance Proprietor’s funds Equity capital Preference capital Reserve and surplus Borrowed funds Long term debts ? Capital structure determine the risk assumed by the firm ? Capital structure determine the cost of capital of the firm ? It affect the flexibility and liquidity of the firm ? It affect the control of the owner of the firm Page 5 CAPITAL STRUCTUR E MEANING OF CAPITAL STRUCTURE Capital structure refer to the proportion between the various long term source of finance in the total capital of firm A financial manager choose that source of finance which include minimum risk as well as minimum cost of capital. Sources of long term finance Proprietor’s funds Equity capital Preference capital Reserve and surplus Borrowed funds Long term debts ? Capital structure determine the risk assumed by the firm ? Capital structure determine the cost of capital of the firm ? It affect the flexibility and liquidity of the firm ? It affect the control of the owner of the firm ? Nature and Size of the firm ? Stability of the earning ? Stages of life cycle of the firm ? Cash flow ability of the firm ? Cost of capitalRead More
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FAQs on PPT - Capital Structure - Accountancy and Financial Management - B Com
| 1. What is capital structure and why is it important for businesses? |  |
Ans. Capital structure refers to the mix of debt and equity financing used by a company to fund its operations and investments. It represents the way a company finances its activities and determines how the company's assets are financed. Capital structure is important for businesses because it affects their ability to raise funds, manage risk, and optimize their cost of capital. It also influences the company's financial stability, growth prospects, and overall value.
| 2. How does debt financing affect a company's capital structure? | |
Ans. Debt financing involves borrowing money from external sources, such as banks or bondholders, and it increases the company's debt component in its capital structure. This means that the company has more financial leverage and a higher proportion of debt compared to equity. Debt financing can provide tax benefits, as interest payments are tax-deductible, but it also increases the company's financial risk and interest expenses. It is important for companies to carefully manage their debt levels to maintain a healthy capital structure.
| 3. What are the advantages and disadvantages of equity financing in a company's capital structure? | |
Ans. Equity financing involves raising funds by selling shares of ownership in the company, either privately or publicly. The advantages of equity financing include not having to repay the funds, sharing risk with investors, and potential access to expertise and networks of equity investors. However, equity financing dilutes the ownership and control of existing shareholders, and it may be more expensive than debt financing due to the need to offer investors a return on their investment. Equity financing also requires disclosing financial information to investors and complying with regulatory requirements.
| 4. How does a company's capital structure affect its cost of capital? | |
Ans. A company's cost of capital is the required rate of return that investors expect for providing funds to the company. The capital structure of a company influences its cost of capital because different sources of financing have different costs. Debt financing tends to have a lower cost because interest payments are tax-deductible, while equity financing generally has a higher cost due to the expected return on investment. The optimal capital structure for a company is the mix that minimizes its overall cost of capital and maximizes shareholder value.
| 5. What factors should companies consider when determining their capital structure? | |
Ans. Companies should consider several factors when determining their capital structure. These include their industry and business risk, cash flow stability, growth prospects, access to different sources of financing, tax implications, and the company's desired level of financial flexibility. Additionally, companies should consider the expectations of their shareholders and investors, as well as the prevailing market conditions and interest rates. It is important for companies to strike a balance between debt and equity financing that aligns with their specific circumstances and objectives.
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