Capital Structure•Capital structure is the proportion of debt, preference and equity shares on a firm’s balance sheet.
•When a company is analyzing what capital structure to adopt it can opt forCapital structure with equity shares onlyCapital structure with equity and preference sharesCapital structure with equity shares and debenturesCapital structure with equity, preference shares and debentures
•Factors Affecting Capital StructureSize of Company-Nature of Business–The Regularity of Earnings-Conditions of the Money Markets–Government policy.Cost of Floating–Debt -Equity Ratio–
Optimal Capital Structure•Optimum Capital Structure is the capital structure at which the weighted average cost of capital is minimum and thereby maximum value of the firm.
Assumptions of Capital Structure•There are only two sources of funds used by a firm: perpetual riskless debt and equity shares.•Perpetual life of the firm•Investment decision of the firm remain same.•Maximisation of value of the firm is consistent with maximisation of shareholders’ wealth •Optimal capital structure is one that minimises WACC •No retained earnings