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1. W H AT I S T H E R I G H T C AP I TAL M I X ?
INTRODUCTION TO
CAPITAL STRUCTURE

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3. DEFINITIONS OF CAPITAL STRUCTURE
• According to the definition of Gerestenbeg, “Capital Structure
of a company refers to the composition or make up of its
capitalization and it includes all long-term capital resources”.
• According to the definition of James C. Van Horne, “The mix
of a firm’s permanent long-term financing represented by
debt, preferred stock, and common stock equity”.
• According to the definition of Presana Chandra, “The
composition of a firm’s financing consists of equity,
preference, and debt”.

4. WHAT IS YOUR CAPITAL STRUCTURE
MAKE UP
A company in course of charting out its financial schema
has to take into account two things.
• 1) The amount of capital to be raised.
• 2) Make-up of the capital.
Capital structure of a firm is a combination of debt and
equity, which supports long term financing of the firm. The
pattern of capital structure has to be planned very carefully
by the finance manager in such a way that it minimizes
the cost of capital and maximizes value of stocks.

5. WHAT IS THE RIGHT CAPITAL MIX?
Following are the three fundamental ways in which the
schema of capital structure is finalized:
• Financing purely or exclusively by equity
• Financing by equity and preferred stock
• Financing by equity, preferred stocks and bonds.

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7. EQUITY
• A firm can raise substantially large amount of fund by
issuing different types of shares.
• Small and growing companies go for equity fund raising
as no banks or other financial institutions are prepared to
fund these firms in lieu of poor credit worthiness.
• Even big corporate firms opt for issuing equities when
there is a need to raise large sums.

8. PROS AND CONS OF EQUITY
PROS:
The one big advantage of equity shareholders is that they
are free to trade the shares in the market. They can sell
the shares to anybody at any time and if the market
warrants, at a higher price.
CONS:
If the company goes bankrupt, the share holders stand a
chance to receive only the residual amount, after the
creditors’ claims are cleared and satisfied.

9. DEBT
• Debt has a maturity date upon which the stipulated sum
of principal is repaid.
• It places the burden of obligation on the shoulders of
the company in the form of periodical interest
settlements and principal repayments.

10. COST AND CONTROL
Four factors are important in the purview of the finance
manager - cost, risk, control and timing.
• Cost principle supports generation of additional doses
of debt, but it might prove risky, if the company is not
able to service the additional debt.
• Control principle supports the issue of bonds in order
to tighten the rein of ownership, but maneuverability
principle discounts this and favors issue of common
stock to reduce the interest burden.

11. PROS AND CONS OF DEBT
PROS:
One good thing for the company is that, it can avail tax
rebate on the securities of debt.
CONS:
But at the other end it has to satisfy the interest
payments and factorise the cost of capital.

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