Meaning: -Capital structure constitutes two words i.e.
capital and structure. Capital refers to investment of funds in the
business while structure means arrangement of different components in proper
proportion. Thus capital structure means' mix-up of various sources of funds in
desired proportion'.
Definition: -" The
long term sources of funds employed in a business enterprise." (R.H. Wessel)
Components
/ parts of Capital Structure
There are four basic components of capital
Structure. They are as follow:
1.
Equity Share
capital: -It is the basic of
financing activities of business. Equity share capital is provided by equity
shareholders. They buy equity shares and help a business firm to raise
necessary funds. They bear ultimate risk associated with ownership. Equity
shares carry dividend at fluctuating rate, depending upon profit.
2.
Preference Share
Capital: -Preference shares
carry preferential right as to payment of dividend and have priority over
equity shares for return of capital when the company is liquidated. These
shares carry dividend at a fixed rate. They have limited voting rights.
3.
Retained earnings: -it is an internal source financing.
It is nothing but ploughing back of profit.
4.
Borrowed Capital: -
(a)
Debentures: -A debenture is an acknowledgement of loan
raised by company. Company has to pay interest at an agreed rate.
(b)
Term loan: -Term loans are
provided by bank and other financial institutions. They carry fixed rate of
interest.
To understand above concept thoroughly, we shall
consider following balance sheet.
|
Liabilities
|
Amount
|
Assets
|
Amount
|
|
Share Capital
5000 Equity Shares of Rs 10 each fully paid
1000, 10% Preference Shares of 100 each
Reserves
& Surplus
General Reserves & Surplus
Liabilities
1000, 12% Debentures of Rs. 100 each fully paid
Sundry Creditors
Bank Overdraft
Bills Payable
|
50,000
1,00,000
20,000
1,00,000
40,000
20,000
10,000
|
Fixed Assets
Building
Plant & Machinery
Current
Assets
Cash in hand
Cash at bank
sundry Debtors
Inventories (stock)
|
2,00,000
80,000
14,000
24,000
12,000
10,000
|
|
|
3,40,000
|
|
3,40,000
|
