Ms-04 Accounts Ignou

Topics: Stock, Finance, Stock market Pages: 4 (1478 words) Published: March 27, 2013
What do you mean by capital structure? Explain its features and determinants. capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this example, is referred to as the firm's leverage A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds.

Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure. A company's proportion of short and long-term debt is considered when analyzing capital structure. When people refer to capital structure they are most likely referring to a firm's debt-to-equity ratio, which provides insight into how risky a company is. Usually a company more heavily financed by debt poses greater risk, as this firm is relatively highly levered. The capital structure involves two decisions-

a.Type of securities to be issued are equity shares, preference shares and long term borrowings (Debentures). b.Relative ratio of securities can be determined by process of capital gearing. On this basis, the companies are divided into two- a.Highly geared companies - Those companies whose proportion of equity capitalization is small. b.Low geared companies - Those companies whose equity capital dominates total capitalization. For instance - There are two companies A and B. Total capitalization amounts to be USD 200,000 in each case. The ratio of equity capital...
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