English

What is Meant by Capital Structure? - Business Studies

Advertisements
Advertisements

Question

What is meant by capital structure?

Short Note

Solution

Capital structure is the proportion of debt and equity used for financing business operations. It represents the proportion of debt capital and equity capital in the capital structure. It is not easy to define the best capital structure for a firm. It should increase the value of the equity share or maximize the wealth of the equity shareholders.

`"Capital Structure"="Dept"/"Equity"`

shaalaa.com
  Is there an error in this question or solution?
Chapter 9: Financial Management - Very Short Answer [Page 253]

APPEARS IN

NCERT Business Studies - Part 2: Business Finance and Marketing [English] Class 12
Chapter 9 Financial Management
Very Short Answer | Q 1 | Page 253

RELATED QUESTIONS

Viyo Ltd.' is a company manufacturing textiles. It has a share capital of Rs 60 lakhs. The earnings per share in the previous year was Rs 0.50. For diversification, the company requires additional capital of Rs 40 lakhs. The company raised funds by issuing 10% debentures for the same. During the current year the company earned profit of Rs 8 lakhs on capital employed. It paid tax @ 40%.

a. State whether the shareholders gained or lost, in respect of earning per share on diversification. Show you calculations clearly.

b. Also, state any three factors that favour the issue of debentures by the company as part of its capital structure.


Sakshi Ltd. is a company manufacturing electronic goods. It has a share capital ofRs 120 lakhs. The earning per share in the previous year wasRs 0.5. For diversification, the company requires additional capital ofRs 80 lakhs. The company raised funds by issuing 10% debentures for the same. During the current year the company earned profit ofRs 16 lakhs on capital employed. It paid tax @ 40%.

a. State whether the shareholders gained or lost in respect of earning per share on diversification. Show your calculations clearly.

b. Also state any three factors that favour the issue of debentures by the company as part of its capital structure.


Veronica Ltd., a reputed truck manufacturing company, needs rupees twenty crores as additional capital to expand its business. Mr Alind Jindal, the CEO of the company, wants to raise funds through equity. The Finance Manager, Mr Nikhil Sachdeva, suggests that the existing shareholders be offered the privilege to subscribe to the new issue of shares as per the terms and conditions of the company which was agreed by Mr Alind Jindal.

Name the method through which the company decided to raise additional capital.


Explain the following as factor affecting the choice of capital structure:

Floatation costs


Explain the following as factors affecting the choice of capital structure:

Stock-Market conditions


Explain the following as factors affecting the choice of capital structure:

Return on Investment


Explain the following as factors affecting the choice of capital structure:

Flexibility


Explain the following as factors affecting the choice of capital structure:

Risk Consideration


Explain the following as factors affecting the choice of capital structure:

Control


Write the external factors influencing capital structure. 


“Capital structure decision is essentially optimisation of risk-return relationship.” Comment.


Explain the term ‘Trading on Equity’? Why, when and how it can be used by company.


Owned Capital Borrowed Capital


Answer the following question.
'Determining the relative proportion of various types of funds depends upon various factors.' Explain any six such factors.


Financial leverage is called favourable if : 


The Board of directors of Medex Pharma Ltd. decided to issue debentures worth ₹ 40 lakhs in order to finance a major Research and Development project. This would increase the Debt Equity ratio from 1:1 to 2:1.However, at the same time it would increase the Earnings per share.

The reason that will justify the above situation is ______.


Share
Notifications

Englishहिंदीमराठी


      Forgot password?
Use app×