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A good capital structure enables a business enterprise to utilise the available funds fully. A properly designed capital structure ensures the determination of the financial requirements of the firm and raise the funds in such proportions from various sources for their best possible utilisation.
UNIT 10 CAPITAL STRUCTURE. Objectives. The objectives of this unit are to: . Understand the importance of decisions regarding Capital Structure. . Discuss the concept of an appropriate Capital Structure. . Identify the factors that have bearing on determining the Capital Structure. Structure . 10.1 Introduction.
Capital structure is the permanent financing of the company represented primarily by long-term debt and equity and deciding the suitable capital structure is the important decision of the financial management because it is closely related to the value of the firm.
Capital Structure Theory. Capital Structure: How a firm finance –i.e., equity (E) or debt (D)- its assets. Modigliani-Miller Theorem (MMT): Uses a simple model of valuation. No arbitrage –i.e., equal rates of return for equal risks. Risk-free debt.
Capital structure refers to the proportions or combinations of equity share capital, preference share capital, debentures, long-term loans, retained earnings and other long-term sources of funds in the total amount of capital which a firm should raise to run its business.
A proper capital structure helps in maximising shareholder’s capital while minimising the overall cost of the capital. A good capital structure provides firms with the flexibility of increasing or decreasing the debt capital as per the situation.
1 Capital Structure — Theory 1.1 Modigliani-Miller and the “Trade-OffTheory” Modigliani-Miller Theorem • Proposition (1958): Capital structure irrelevance. — Intuition: ∗Value additivity. If operating cashflows are fixed, value of the pie unaffected by split-up of the pie.
