Ppt presentation and Notes on Capital Structure.
Capitalization refers to the total amount of securities issued by a company while capital structure refers to the kinds of securities and the proportionate amounts that make up capitalization. For raising long term finances, a company can issue three types of securities viz., Equity shares, Preference shares and debentures. A decision about the proportion among these types of securities refers to the capital structure of an enterprise.
Financial structure refers to all the financial resources marshaled by the firm, short as well as long term, and all forms of debt as well as equity.
Forms/ Patterns of Capital Structure:
The capital structure of a new company may consist of nay of the following forms
- Equity Shares only
- Equity and preference shares
- Equity shares and debentures
- Equity shares, preference shares and debentures.
Optimal Capital Structure:
The optimum capital structure may be defined as that capital structure or combination of debt and equity that leads to the maximum value of the firm.
Theories of Capital Structure:
Net Income Approach:
A firm can minimize the weighted average cost of capital and increase the value of the firm as well as the market price of equity shares by using debt finance to the maximum possible extent.