CAPITAL STRUCTURE

Infinance,capital structurerefers to
the way acorporationfinances
itsassetsthrough some combination
ofequity,debt, or securities. A firm's
capital structure is then the
composition or 'structure' of its
liabilities.

EXAMPLE..
For

example, a firm that sells 200000 in

debts and 800000 in equity is said to be
20% debt-financed and 80% equityfinanced.
In reality, capital structure may be highly
complex and include dozens of sources.
Gearing Ratio is the proportion of the
capital employed of the firm which come
from outside of the business finance, e.g.
by taking a short term loan etc.

SOURCES OF FINANCE..

Equity shares- In simple Words, a share or

stock is a document issued by a company,

which entitles its holder to be one of the
owners of the company. A share is issued
by a company or can be purchased from
the stock market.

ADVANTAGES OF EQUITY SHARES

Equity shareholders are the real owners of the
company. They have full voting rights. They elect
directors to manage the company.
Equity shares are not a burden on the resources
of the company. If the company has sufficient
profits and the directors also recommend,
dividend may be declared.
Since the equity shares are of small face value,
even poor people can because members of big
companies. This helps the capital formation of
the country.

DISADVANTAGES OF EQUITY
SHARES
If there arises over capitalization because of
wrongful equity share issues, the excess amount
cannot be refunded.
Because of the uncertainty of the return on the
equity shares, conservative investors hesitate to
purchase them.
Since equity shares are not refundable they are
treated as illiquid.
Rights issue may lead to concentration of control
of the company in the hands of a few persons.

PREFERENCE SHARES
a

share which entitles the holder to a fixed

dividend, whose payment takes priority
over that of ordinary share dividends.

ADVANTAGES OF THESE SHARES:-

Redeemable, convertible and participating

preference shareholders are more attractive.
There are very helpful to investors and so they
have ready market.

CNTD
In case of debentures, generally a change (or)
mortgage on the assets is created. But the issue
of preference share require no such creation.
Equity shareholders will get good amount of
dividend by issue of preference shares.

DISADVANTAGES OF THESE SHARES: Usually, preference shares carry a higher rate of

dividend than the rate of interest on debentures.
Comparing to debentures, financing of preference
shares in more costly.

DEBTS..

A debt is created when a

creditoragreestolenda sum of assets to a
debtor. Debt is usually granted with expected
repayment; in modern society, in most cases, this
includes repayment of the original sum,
plusinterest.

ADVANTAGES AND DISADVANTAGES

OF DEBTS:Utilization of Resources When a business use debt
to finance its operation, they got no option than to fully
utilize their resources because they will have to
payback the debt and interest to their creditor.
Short Term Needs Debt finance can easily be
secured on a short term bases. This make it very
advantageous to the small business as finance of this
type can easily be secured for short term business
needs.
Tax Advantage Debt financing also offers tax
advantage to business as interest is deductible for
income tax purposes.
No Future Lender Claims- Lenders has no direct
claim on future earnings

CNTD..
The main disadvantage of this type of financing is
that it requires a small business to make regular
monthly payments of principal and interest.Because
of shortage of cashflow experience by young business
it is usually difficult to make regular payment of to
creditors.
Most lenders provide severe penalties for late or
missed payments, which may include charging late
fees, taking possession of collateral, or calling the
loan due early.
Failure to make payments on a loan, even
temporarily, can adversely affect a small businesss
credit rating and its ability to obtain future financing.

TRADE ON EQUITY

Trading on equity occurs when a corporation uses

bonds, other debt, and preferred stock to increase
its earnings on common stock. For example,
acorporation might use long term debt to
purchase assets that are expected to earn more
than the interest on thedebt. The earnings in
excess of the interest expense on the new debt
will increase the earnings of the
corporationscommon stockholders. The increase
in earnings indicates that the corporation was
successful in trading on equity.

RETAIN EARNINGS
earningsrefers
to the portion ofnet incomeof
acorporation that is retained by the
corporation rather than distributed
toshareholdersasdividends, or as the
amount available to the corporation for
distribution to shareholders.

Inaccounting,retained

OPTIMUM UTILIZATION OF
RESOURCES
As

a cost manager, I will choose equity

shares more for capital structure then
debts because debts are loan for the
company. As my company is not new, it is a
growing and well known company I will
chose equity shares for capital structure
because it has more benefits and people
can easily trust the company and can buy
shares.