Capital Structure | Characteristics of ideal capital structure | BCom Sem 5 |

Описание: Meaning of capital Structure:
"Capital Structure of a company refers to the make up of its capitalisation. i.e. combination of debt and equity used by a company to finance its overall operations and growth.

CHARACTERISTICS OF AN IDEAL CAPITAL STRUCTURE :
1) Simplicity :
A simple capital structure is easy to manage. Hence, it should be as simple as possible. A simple capital structure is one that includes a few varieties of securities. It leaves enough scope to raise additional funds in future.
2) Balance:
A capital structure is balanced if different types of securities are held in correct proportion. Of course, which ratio between ordinary shares and preference shares is appropriate depends on the nature of business. It is generally believed, however, that the amount of ordinary shares should be more than 50 per cent of total capital, while that of preference shares should be less than 50 per cent. It is also held that the amount of ownership capital (that is, ordinary shares) should be twice the borrowed capital (that is debentures)
3) Liquidity :
To maintain the prestige of business, it is necessary that there is enough cash to meet the current liabilities as and when they arise. The proper ratio of cash to total capital depends on the credit standing of the company, size, nature of business etc.
4) Flexibility :
Capital requirements of a business change with circumstances. Hence, capital structure should be so devised that both increase and decrease in the proportion of various types of securities is possible, whenever need arises.
5) Provision Against Contingencies :
It should be possible to raise enough finance to meet unforeseen events in business world. Generally, ordinary shares are issued first and enough provision is made to raise additional funds in times of contingencies.
6) Economical :
The capital structure should be devised in such a manner that it allows raising enough finance at a right time at minimum cost. There is a fixed burden of interest on debentures and of dividend on preference shares. Hence, in a business in which earning is unstable, high proportion of ordinary shares is considered economical.
7) Consistent :
Capital structure should be consistent with the objectives of the company. A trading concern should have more of working capital and less of fixed capital. An industrial enterprise, on the other hand, needs more capital in the form of fixed assets.
8) Sound :
Capital structure should not endanger the soundness of the business. The debt capital should be used to the extent that the business can pay interest on it without difficulty. A cash inflow should be properly estimated before preparing a financial plan.


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