CAPITAL STRUCTURE

A View of Capital Structure

A View of Capital Structure

Capital Structure tells that how a corporation invests funds and assets with fractional arrangement of debt, equity and securities (Baker & Martin, 2011, p. 17). A business's capital structure is, in fact, the arrangement or composition of its liabilities. Suppose a business, which uses 30 million dollars in equity, and 70 million dollars in debt will be known as 30 percent financed with equity and 70 percent financed with debt.

Businesses require capital to run their business, do necessary investments and grow larger. These all actions are related with high costs where evenly internal and external financing can be appropriate. Capital structure is a relation between debt and equity (Baker & Martin, 2011, p. 17-20). The business' ratio of debt to entire financing is 70% in the aforementioned case is brought up as the business' leverage. In actuality, capital structures are very composite and may consist of a number of sources

Dimensions of Capital Structure

In finance, capital structure refers to the way a company finances its assets through a combination of equity, debt or hybrid securities. Then the composition or 'structure' of its liabilities. There are several dimensions of capital structure are there. Some most important dimensions of capital structure are following:

Cost of capital

It is a very complex subject to measure the costs of different sources of funds and requires separate treatment. It is always pleasing to reduce the cost of capital. Therefore, cheaper sources are preferred by keeping other things constant (Gitman, 2007, p. 485).

Cash flow

When companies imagine raising further debt, it analyzes its estimated potential cash flows to meet up the fixed charges. It is compulsory to pay interest and return the principal total of debt. If a company do not have the capability to produce sufficient cash to meet its fixed ...