Question

Describe what capital structure means and explain its different components. In your answer outline the various types of debt and equity and what distinguishes them.

answer in 500- 700 words

Answer 1

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Capital structure

Capital structure refers to the mix of a company's capitalisation. That is a a mix of long term sources of funds through equity or Debt or both.

Debt Financiaing such as debentures, bonds.

Equity financing preference share capital, equity share capital and retained earnings.

Difference between Debt and Equity:

1. Debt has a maturity date of repayment and stock has no maturity date.

2. Incase of debt there is a legal obligation to pay interest, whereas there is no legal obligation to the dividend in case of equity.

It is for meeting the total capital requirement.

While choosing a suitable Capital structure various factors are taken into consideration by financial managers like cost, risk, control,competition in the industry, Flexibility.

The decision in relation to the financing of firms assets is very crucial in every business. The financial manager is often in a dilemma to choose the optimum portion of debt and equity.

capital structure are made by financial managers so as to:

1. Value maximization of the company.

2. Cost minimization.

3. Growth of the company increases.

4. Increase in the share price.