OPTIMUM CAPITAL STRUCTURE AND ITS FEATURES






OPTIMUM CAPITAL STRUCTURE AND ITS FEATURES 



(#) Capital Structure

------> " Capital Structure is qualitative term that gives the ratio in which the total capital is contributed by different sources"

* Capital Structure may be high geared or low geared

* Capital Structure influenced by external factors .

* Capital Structure is a proportion of debts and equity in the total capital of a company.

 -- Debts such as all borrowings from government , semi government  and other agencies , loan from bank , debenture , etc .

-- Equity such as equity  share capital , Preferential share capital , contingency reserve  , surplus profit and other .

* Capital Structure denotes mix of owners' funds and outsider's fund 

(#)Optimum capital structure  

Optimum capital structure is the best debt-to-equity ratio for a firm that minimizes  the firm's cost of capital.

 - Debt financing generally offers the lowest cost of capital.
- Since a company's risk generally increases as debt increases.
- Debt usually costs less than equity.
- Debt need to pay by company from there future earning even           when earning are declining.
- Equity does not need to be paid back .
- Analyses other high growth company in the same industries.


(#)Features of Optimum capital structure 

1> Maximum return : Best relationship of debt and equity which gives maximum profit .

 2> Less risky : Determines the proportion of debt and equity in such a manner that the financial risk remains low .

 3> Economy : Cost of capital at its minimum and market price of share becomes maximum . 

 4> Safety : Ensure safety of investment by determined future fluctuations in earning in company.

 5> Flexibility : If it has surplus fund, the company should have to    reply its debt and reduce interest obligations (according to situation)

 6> Control : Capital structure should not divert the control to equity shareholder of the company.

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