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CAPITAL STRUCTURE






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Boards and Debentures

A company may not with to possess it self of the use of more share capital or ownership securities, and yet desire more available money. It may invite persons to kind their money as a loan, instead of contributing it as a part of the capital.

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Ordinary or Equity Shares

Rank after preference shares for dividend, buy are entitled to task the whole of the remaining dividend profit after the fixed preference dividend has been paid. Equities, like cumulative preference, show to the owners not only a dividend yield but a potential capital appreciations.

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Preference shares

Preference share is defined by the new Act as that part f the share capital of the company which fulfills both the following requirements, namely, that it carries preferential right in respect of dividends and also that it carries preferential right in regard to repayment of capital in case of wining up.

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Shares

The need for money is certainly the root of all industrial and trading activity. Money is needed because it commands services and commodities. The citizens wish to find a profitable use for their money.

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Financing of Extensions and Improvements

The financing of extensions and improvements is very important in the case of Indian industries, particularly at the present juncture, because of warperiod arrears and because of the need for development.

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Financing of Working Capital

The working capital of industries may be raised in three ways

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Financing of Fixed Capital

The finance for fixed capital by our major or large-scale industries is raised at present through

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Methods of raising finance

The methods of financing should be adjusted to the stage or phase of the trade cycle. The total capital shall be raised by different means, or what is sometimes called “geared”, according to the phase of the cycle.

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Necessity of Maintaining balanced debt equity ratio

A company should always maintain the balanced capital structure that is a proper relation between the amounts raised through various securities. If a company raises funds for most of its capital requirements through various securities.

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Standard Debt Equity Ratio

It is very difficult to fix a standard for the debt equity ratio. It depends very much on the circumstances. However, a standard of debt equity ratio may be 1 :1 but it does not always hold good. In the present circumstances, the debt equity ratio has been on increase.

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Debt equity ratio

Capitalisation of a company consists of funds raised by issuing various types of securities, i.e.,ordinaryshares, preference shares, debentures etc.

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Trading on equity

The term 'equity' means stock or ordinary shares of a company and 'trading means taking an advantage of. Hence trading on equity means taking advantage of ordinary equity share capital to borrow fund on reasonable basis.

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Significance of Capital Gearing

A proper capital gearing is very important for the smooth running of the enterprise It affects the profitability of the concern.

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Hight and low Gearing

If the proportion of equity capital to the total capital is small or in other words the ration of other fixed cost capital to total capital is high, it is said to be a state of high gearing of capital. Reverse is the case of low gearing of capital,i.e., low proportion of equity capital or high proportion of fixed cost capital to the total capital is an indication of low gearing of capital.

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Capital gearing

The most important factor which must be taken into account by the promoters while drafting the financial plan of a company is capital gearing.

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Balanced Capital Structure

Capital structure or financial plan refers to the composition of long-term sources of funds such as debentures, long-term debts, preference and ordinary share capital and retained earnings (reserves and surpluses).

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