What Are The Features Of Capital Structure?

What is capital structure theory?

In financial management, capital structure theory refers to a systematic approach to financing business activities through a combination of equities and liabilities..

What is capital structure and its features?

What is Capital Structure? When a business wants to grow it will need capital to drive its expansion. These funds may come from long-term debt or equity. The mix of debt and equity used to finance the company’s future profitable investment opportunities is referred to as capital structure.

What is optimal capital structure and its features?

An optimal capital structure is the objectively best mix of debt, preferred stock, and common stock that maximizes a company’s market value while minimizing its cost of capital. However, too much debt increases the financial risk to shareholders and the return on equity that they require.

What is capital structure explain its features and the factors affecting capital structure?

Capital structure means the proportion of debt and equity used for financing the operations of business. ADVERTISEMENTS: In other words, capital structure represents the proportion of debt capital and equity capital in the capital structure.

What is appropriate capital structure?

An Appropriate Capital Structure is that capital structure at that level of debt — equity proportion where the market value per share is maximum and the cost of capital is minimum. It is important for a company to have an appropriate capital structure.

What is an example of capital structure?

A firm’s capital structure is the composition or ‘structure’ of its liabilities. For example, a firm that has $20 billion in equity and $80 billion in debt is said to be 20% equity-financed and 80% debt-financed. … In reality, capital structure may be highly complex and include dozens of sources of capital.

What is the importance of capital structure?

Capital structure maximizes the market value of a firm, i.e. in a firm having a properly designed capital structure the aggregate value of the claims and ownership interests of the shareholders are maximized. Cost Minimization: Capital structure minimizes the firm’s cost of capital or cost of financing.

What are the types of capital structure?

Types of Capital StructureEquity Capital. Equity capital is the money owned by the shareholders or owners. … Debt Capital. Debt capital is referred to as the borrowed money that is utilised in business. … Optimal Capital Structure. … Financial Leverage. … Importance of Capital Structure.

What are the factors that influence capital structure decisions?

Capital Structure: 10 Factors Influencing Capital Structure –…Financial Leverage or Trading on Equity:Expected Cash Flows:Stability of Sales:Control over the Company:Flexibility of Financial Structure:Cost of Floating the Capital:Period of Financing:Market Conditions:More items…

What are the factors affecting working capital?

Factors Affecting the Working Capital:Length of Operating Cycle: The amount of working capital directly depends upon the length of operating cycle. … Nature of Business: … Scale of Operation: … Business Cycle Fluctuation: … Seasonal Factors: … Technology and Production Cycle: … Credit Allowed: … Credit Avail:More items…

How does capital structure affect value?

A company’s capital structure — essentially, its blend of equity and debt financing — is a significant factor in valuing a business. The relative levels of equity and debt affect risk and cash flow and, therefore, the amount an investor likely would pay for the company or for an interest in it.