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Capital structure
The document discusses capital structure, which refers to the types of securities (debt vs equity) and their proportions that make up a company's total capital. An optimal capital structure minimizes a company's cost of capital. Factors that affect a company's capital structure choice include financial leverage, growth stability, cost of capital, risk tolerance, cash flow ability to service debt, firm size and nature, control and flexibility needs, and capital market conditions.
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Capital structure
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- 2. Capital StructureCapital Structure A decision about the proportion among these type of securities refers to the capital structure of an enterprise. The cost of capital is the weighted average cost of the different components in the capital structure. The optimum capital structure is that where the firms cost of capital is minimum. A decision about the proportion among these type of securities refers to the capital structure of an enterprise. The cost of capital is the weighted average cost of the different components in the capital structure. The optimum capital structure is that where the firms cost of capital is minimum.
- 3. Capitalisation and CapitalStructureCapitalisation and Capital Structure Capitalization refers to the total amount of securities issued by a company. Capital structure refers to the kinds of securities and the proportionate amounts that make up capitalisation. Capitalization refers to the total amount of securities issued by a company. Capital structure refers to the kinds of securities and the proportionate amounts that make up capitalisation.
- 4. Features of IdealCapital StructureFeatures of Ideal Capital Structure Minimum possible use of leverage. The capital structure should be flexible so that it can be easily altered. To avoid undue financial/business risk with the increase of debt. The debt should be within the capacity of a firm. Minimum possible use of leverage. The capital structure should be flexible so that it can be easily altered. To avoid undue financial/business risk with the increase of debt. The debt should be within the capacity of a firm.
- 5. Features of IdealCapital StructureFeatures of Ideal Capital Structure It should involve minimum possible risk of loss of control. It must avoid undue restrictions in agreement of debt. It should be easy to understand and simple to operate to the extent possible. It should minimise the cost of financing and maximise earnings per share. It should involve minimum possible risk of loss of control. It must avoid undue restrictions in agreement of debt. It should be easy to understand and simple to operate to the extent possible. It should minimise the cost of financing and maximise earnings per share.
- 6. Factors affecting CapitalStructureFactors affecting Capital Structure Financial leverage orTrading on Equity Growth and Stability of Sales Cost of Capital Risk Cash flow ability to service debt Nature and size of a firm Control flexibility Financial leverage orTrading on Equity Growth and Stability of Sales Cost of Capital Risk Cash flow ability to service debt Nature and size of a firm Control flexibility
- 7. Factors affecting CapitalStructureFactors affecting Capital Structure Requirements of investors Capital market conditions Assets structure Purpose of financing Period of financing Cost of floatation Personal considerations Corporate tax rate Legal requirements Requirements of investors Capital market conditions Assets structure Purpose of financing Period of financing Cost of floatation Personal considerations Corporate tax rate Legal requirements