Introduction to Capital Structure, Accountancy and Financial management Video Lecture | Accountancy and Financial Management - B Com

today I am going to give you a brief
introduction of capital structure in
financial management estimating capital
requirement and this procurement is
necessary and it is the role of every
financial manager but the formation of
capital structure is important for
raising long-term finance a company can
issue three types of securities wherein
the number one is equally shares
second one is references and the third
one else debentures shares are also
called as own funds and debentures can
also be called as borrowed fund we often
call it as debt funds let's take an
example to make capital structure to be
more clear suppose the total capital
requirement of a company is 10 lakhs and
the form financed its capital
requirement by raising funds from long
term sources available to him that is 6
lakhs from equity shares and 4 lakhs
from debentures then we call it as from
a 60 percent equity financed and 40%
then financed here the get equity ratio
is 2 is to 3 so capital structure is the
proportion of debt and equity in which a
corporate finance its business however
the proportion of each of these could
vary from business to business but one
thing to be noted here is that every
security from which we can raise money
for business has some cost associated
with it and we often call it as cost of
capital whenever an investor lends money
to the phone either by investing his
money in Hebrew shares or debentures he
expects something in return from his
investment here we can note that what we
call as capital for a phone that same
capital
investment for an investor so by form
raise money there is always a cost
associated with every security so the
minimum required rate of return becomes
cost of capital of a form so the
quotient here is what is the best way to
finance a company in other words what I
am trying to find out is there an
optimal ratio of the capital structure
for a company so here we are trying to
find out that capital structure which
can maximize the value of form and can
minimize the cost of raising capital
that is it should minimize the weighted
average cost of capital we often call
this kind of capital structure as the
optimum capital structure but there is
no fixed optimum capital structure for
every organization the optimum capital
structure for each organization can
differ from one to another but the main
objective behind finding out the optimum
capital structure should be that kind of
capital structure which can actually
maximize the value of form or the price
of share in the market and it should
minimize the cost of raising capital or
the cost of capital by forming a optimum
capital structure for a form a number of
factors influences the capital structure
decisions and these factors could be the
growth and stability of sales a fixed
first is associated with the debt
financing that's why if a form is having
stable sales then obviously he can go
for more and more of debt financing
while if the sales of an organization
is not stable then the form should go
for equity financing because there is no
fixed cost associated with it the fixed
cost here I am talking about is the
fixed rate of interest that the form
needs to pay to the creditors now the
second one is the cost of capital the
SAC already discussed with you that the
cost of capital plays a very important
role by selecting the source of finance
and forming the capitalization of a firm
the form should analyze the costs
associated with each and every source
before making the selection about each
source of a nun's now the next one could
be the nature and the size of business a
concern which cannot provide stable
earnings due to the nature of its
business will have to rely mainly on
equal capital similarly small companies
have to depend merely upon owned capital
as it is very difficult for them to
raise long term loans the another point
could be control since equity
shareholders have voting rights in the
company so they are directly or
indirectly being involved in the working
of the company from point of view of
view of controlled debt financing it is
recommended but depending largely upon
debt financing may create other problems
such as too much restriction imposed
upon by the lenders or suppliers of the
finance so selecting the optimum capital
structure is one of the most important
part of financial management since it
can affect the value of the phone and
the price of the shares and ultimately
the cost of capital
that's why selecting a proper capital
structure is very important for an
organization and it should be done
wisely thank you