Question

what does it mean to manipulate capital structure and why do firms do that

Answer 1

Capital Structure

Capital Structure is a combination of Debt and Equity of a Company, which was used to finance the company's Operations and Growth. Debt Includes Loans, bonds, etc whereas Equity includes Common Stock, Preferred stock, Retained Earnings, etc. Both Debt and Equity can be easily seen on the Face of Balance Sheet of a Company.

Manipulating Capital Structure

Manipulating Capital Structure involves reducing debt and/or Increasing Equity to get a better and ideal Debt to Equity ratio. By Manipulating Capital Structure, Earning per share of the Business can be maximised and the best possible return to the Investors can be provided by the business.

It is goal of Every company to make an Ideal Capital Structure , also known as Optimal Capital Structure.

Why Manipulations?

As discussed above, the capital structure is a combination of Debt and Equity of a Company. Whenever Investors and analysts refer to the capital structure of the company, they are most likely to refer to Debt - to - Equity Ratio.

Manipulated capital structure leads to a attractive of Debt - to - Equity Ratio, which attracts a large number of Investors who are ready to fullfill the finance needs of the business.

Also, the better capital structure leads to maximised EPS. As per various stock pricing theories, EPS is used for valuation of the business and its stock as well. Higher the EPS will lead to Higher Stock price and as a Result high market capitalisation.