Capital Structure
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 for
Capital structure with equity shares only
Capital structure with equity and preference shares
Capital structure with equity shares and debentures
Capital structure with equity, preference shares and
debentures
•
Factors Affecting Capital Structure
Size 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
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- Fall '19
- Finance, Cost Of Capital, Modigliani-Miller theorem, Weighted average cost of capital
