Capital Structure

Topics: Finance, Capital structure, Stock Pages: 19 (5576 words) Published: February 1, 2013
PPA Education Centre (Where Success Begins . . .)

Advanced Financial Management
Subject Faculty:
CMA Dipak N Joshi

9922159279, 2571545

PPA Education Centre (Where Success Begins . . . )
Capital Structure theories.
Chapter 2

CMA. Dipak Joshi

Capital Structure Theories
Q1. What is capital, define the types of capital? Ans: Financial planning and decision play a major role in the field of financial management which consists of the major area of financial management such as, capitalization, financial structure, capital structure, leverage and financial forecasting. Financial planning includes the following important parts: ● Estimating the amount of capital to be raised. ● Determining the form and proportionate amount of securities. ● Formulating policies to manage the financial plan. MEANING OF CAPITAL The term capital refers to the total investment of the company in terms of money, and assets. It is also called as total wealth of the company. When the company is going to invest large amount of finance into the business, it is called as capital. Capital is the initial and integral part of new and existing business concern. The capital requirements of the business concern may be classified into two categories: (a) Fixed capital (b) Working capital. (a)Fixed Capital Fixed capital is the capital, which is needed for meeting the permanent or long-term purpose of the business concern. Fixed capital is required mainly for the purpose of meeting capital expenditure of the business concern and it is used over a long period. It is the amount invested in various fixed or permanent assets, which are necessary for a business concern. Character of Fixed Capital ● Fixed capital is used to acquire the fixed assets of the business concern. ● Fixed capital meets the capital expenditure of the business concern. ● Fixed capital normally consists of long period. ● Fixed capital expenditure is of nonrecurring nature. ● Fixed capital can be raised only with the help of long-term sources of finance. (b) Working Capital Working capital is the capital which is needed to meet the day-to-day transaction of the business concern. It may cross working capital and net working capital. Normally working capital consists of various compositions of current assets such as inventories, bills, receivable, debtors, cash, and bank balance and prepaid expenses. According to the definition of Bonneville, “any acquisition of funds which increases the current assets increase the Working Capital also for they are one and the same”. Working capital is needed to meet the following purpose: ● Purchase of raw material ● Payment of wages to workers ● Payment of day-to-day expenses ● Maintenance expenditure etc. Q2. WHAT IS CAPITALIZATION Ans: Capitalization is one of the most important parts of financial decision, which is related to the total amount of capital employed in the business concern. Understanding the concept of capitalization leads to solve many problems in the field of financial management. Because there is a confusion among the capital, capitalization and capital structure.




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PPA Education Centre (Where Success Begins . . . )
Capital Structure theories. CMA. Dipak Joshi
Meaning of Capitalization Capitalization refers to the process of determining the quantum of funds that a firm needs to run its business. Capitalization is only the par value of share capital and debenture and it does not include reserve and surplus. Definition of Capitalization Capitalization can be defined by the various financial management experts. Some of the definitions are mentioned below: According to Guthman and Dougall, “capitalization is the sum of the par value of stocks and bonds outstanding”. “Capitalization is the balance sheet value of stocks and bonds outstands”. — Bonneville and Dewey According to Arhur. S. Dewing,...
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