Meaning :
Meaning Capital structure / composition of capital / pattern of securities mix is the second important aspect of financial planning. Once the financial manager has determined the firm’s financial requirements , his next task is to see that these funds are on hand. This capital comes in many forms – long and short term debts , secured and unsecured debts, preference shares , equity shares ,retained earnings and other things. To decide upon the ratio of these securities in the total capitalization is to decide the capital structure.
Slide 3:
“Capital structure is the permanent financing of the firm represented by long term debts , preferred stock and net worth.”
Determinants of capital structure :
Determinants of capital structure Nature of Business
Stability of earning
Amount of funds
Rapidity of growth
Nature of investors
Financial leverage
Optimal capital structure :
Optimal capital structure “optimal capital structure can be defined as that mix of debts and equity which will maximize the market value of a company and minimize its cost of capital ”
Theories of capital structure :
Theories of capital structure Net Income Approach
Net operating Income Approach
The Traditional Approach
Modigliani-Millar Approach
NET Income Approach :
NET Income Approach