ISSN: 2319-7285
Naseraldeeen Jamil Najjar
The term ‘structure’ means the arrangement of the varied parts. So capital structure means the arrangement of capital from different sources so that the long-term funds needed for the business are raised. Thus, capital structure refers to the proportions or combinations of equity share capital, preference share capital, debentures, long-term loans, retained earnings and other long-term sources of funds in the total amount of capital which a firm should raise to run its business. The term capital structure shouldn't be confused with Financial structure and Assets structure. While financial structure consists of short-term debt, long-term debt and share holders’ fund i.e., the whole left side of the company’s record . But capital structure consists of long-term debt and shareholders’ fund. So, it may be concluded that the capital structure of a firm is a part of its financial structure. In that case, there is no difference between the two terms— capital structure and financial structure. So, capital structure is different from financial structure. On the opposite hand, financial structure refers to internet worth or owners’ equity and every one liabilities (long-term also as short-term). The term capitalisation means the entire amount of long-term funds at the disposal of the corporate, whether raised from equity shares, preferred stock , retained earnings or institutional loans. A good capital structure enables a business enterprise to utilise the available funds fully. A properly designed capital structure ensures the determination of the financial requirements of the firm and lift the funds in such proportions from various sources for his or her absolute best utilisation. If debt component increases in the capital structure of a company, the financial risk (i.e., payment of fixed interest charges and repayment of principal amount of debt in time) will also increase. The sudden withdrawal of debt funds from the corporate can cause cash insolvency.. If return on investment on total capital employed (i.e., shareholders’ fund plus long-term debt) exceeds the rate of interest , the shareholders get a better return. The use of fixed interest bearing securities alongside owner’s equity as sources of finance is understood as trading on equity. It is an appointment by which the corporate aims at increasing the return on equity shares by the utilization of fixed interest bearing securities (i.e., debenture, preferred stock etc.).If the existing capital structure of the corporate consists mainly of the equity shares, the return on equity shares are often increased by using borrowed capital. This is so because the interest paid on debentures may be a deductible expenditure for tax assessment and therefore the after-tax cost of debenture becomes very low. Any excess earnings over cost of debt are going to be added up to the equity shareholders. If the speed of return on total capital employed exceeds the speed of interest on debt capital or rate of dividend on preference share capital, the corporate is claimed to be trading on equity. Capital structure is influenced by Government policies, rules and regulations of SEBI and lending policies of monetary institutions which change the financial pattern of the corporate totally. Monetary and monetary policies of the govt also will affect the capital structure decisions.
Published Date: 2021-04-29;