Capital Structure of a Company

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During the course of operations of any company, once the capital budgeting decisions have been made and proposals selected, the most important question before the finance manager is to arrange sufficient funds to finance them. Funds are also required to keep existing projects going on and the company can raise funds required for investment either by increasing the owners' claims or the creditors' claims or both. The claims of the owners increases when the company raises the funds by issuing equity shares or ploughs backs its earnings. The claims of the creditors increase when the funds are raised by the borrowings. The various means used to raise the funds represent the financial or the capital structure of the company.

Planning the capital structure is one of the most complex areas of financial decision making because of the inter-relationships among components of the capital structure and also its relationship to risk, return and value of the firm. The term, "capital" usually denotes the long term funds of the firm. Debt capital and ownership capital are the two basic components of capital. Equity capital, as one of the components of capitalization, comprises equity share capital and retained earnings.

Preference share capital is another distinguishing component of total capital. According to E W Walker, the concept of capital structure includes the following namely; • The proportion of long term loans;

• The proportion of equity capital and
• The proportion of short term obligations

In general, the experts in finance define the term capital structure to include only long term debt and total shareholders' investment.

Financial structure means the composition of the entire left hand side (liabilities side) of the balance sheet. Financial structure refers to all financial resources acquired by the firm. It includes all forms of long as well as short term debts and equity. Thus practically speaking there is no difference between capital structure and...
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