Question

What is meant by capital structure? Explain three factors affecting capital

structure.
plz give a long answer ​

Answer 1

Answer:

Capital structure is also influenced by government regulations. For instance, banking companies can raise funds by issuing share capital alone, not any other kind of security. Similarly, it is compulsory for other companies to maintain a given debt-equity ratio while raising funds.

Explanation:

hope it helps you

follow me

Answer 2

ANSWER :

• ↬ The term, "Capital Structure" refers to the mix between owners' funds and borrowed funds of business finance.

It can be calculated as debt-equity ratio or as the proportion of debt out of total capital.

Capital structure calculated as Debt-equity ratio :

$\: \: \: \: \: \: \: \: \: \: \: \: \: \huge{ \sf{ \frac{Debt}{ Equity }}}$

Capital structure calculated as proportion of debt out of total capital :

$\: \: \: \: \: \: \: \: \: \: \: \: \: \huge{ \sf{ \frac{Debt}{ Debt + Equity }}}$

↬ Three factors affecting the choice of capital structure are :

• 1) Cash Flow Position : Cash flow position of the business is an important factor affecting the capital structure. Size of projected cash flow should be considered before borrowing funds. A company has cash payment obligations for the following : a) normal business operations, b) for investment in fixed assets and c) for meeting the debt service commitments. The cash flows of the business/company must cover not only the fixed cash payment obligations, but there must be sufficient buffer also.

• 2) Return on Investment : Return on Investment, simply known as RoI is another factor affecting the choice of capital structure. RoI is an important determinant of a company's ability to use Trading on equity. A company having higher RoI can choose to use trading on equity to increase its EPS; that means, its ability to use debt is greater.

• 3) Stock Market Conditions : Another factor affecting the choice of capital structure for a company is stock market conditions. The equity shares are more easily sold even at a higher price when the stock markets are bullish. In such situation, a company often prefers to use of equity. On the other hand, during thr bearish phase of stock market, a company may find it difficult to raise equity capital. Hence, in such situation, the company may opt for debt capital.

NOTE :

↬ On the basis of ownership, the sources of business finance can be classified into two broad categories. These are :

• 1. Owners' Funds and 2. Borrowed Funds.

➥ Owners' funds include equity shares capital, preference shares capital, reserve and surpluses or retained earnings.

➥ Borrowed funds include different types of loans, debentures, public deposits etc.

➥ Capital structure of a company affects both the profitability and the financial risk.

➥ To decide the capital structure of a company or busines firm involves determining the relative proportion of various types of funds which is depends on various factors. Hence, these factors affect the choice of capital structure.