CAPITAL STRUCTURE

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What is Capital Stricture??

The similar proportion of various sources of reserves used in business is called as financial structure. Capital structure is a part of the financial nd economical structure hence it refers to the proportion of the several long-term sources of funding. It is mainly concerned with the making of an array of the sources of the supplies in a decent man­ner, which is in relative proportion and magnitude.

The capital structure of an organization is formed up of debt and equity securities that constitute a firm’s funding of its assets. It is the continuing financing of a business firm represented by long-term debt, approved stock, and net worth. So it corresponds to the composition of capital and excludes short-term investments. It denotes some point of permanency as it eliminates short-term sources of investment.

Each material and components are the main elements required to form a capital structure for a company. In the case of proprietors, they are mainly concerned about the capital which is employed and is entirely contributed by their owners. This context upon the study of capital structure helps us to understand the meaning of the term capital which is mainly constituted by the total of funds and stocks supplied by the long-term creditors and that too by the owners as well.

Here a question arises that what will be the exact proportion in between debt and owned capital? This mainly depends on the financial rules and regulations for different business entities. As in one of the many companies here and there in the world may be in a state of “NIL” while in other such company the capital is much greater than the owned capital. This type of proportion is called as a ratio. This helps in understanding the primary structure of a capital structure of a company or an organization.

After reading this passage, many may ask that what is the exact meaning of a capital structure? So the answer is that capital structure is the mixture of long-term funds which are mainly used by different organizations. It is formed by equity securities and debt which later on helps in the financing of any business entity. It is also composed of preference share capital, shareholders fund, and long-term debts.

IMPORTANCE OF CAPITAL STRUCTURE IN AN ORGANIZATION

Capital structure is required in every organization. Now we will help you to understand that why it is necessary for the field of study and why it is required in Financial Studies. Below are some pointers which will help us to understand in a detailed way that why capital structure is required, they are as follows:-

REDUCTION IN THE OVERALL RISK OF AN ORGANIZATION
When we execute a capital structure before getting the actual money from the suppliers, we can make many improvements for decreasing our overall risk. Suppose, we have done a capital structure in which we add three roots of a fund, one is equity share, and other is debenture, and last is press stocks. We know that we have to settle the debt according to its maturity level at any price and its interest at a fixed rate. So, we seek to get the least debt in a new business market, because in a new business our rate of return will be limited than the rate of interest, for acquiring more loan amounts. Which implies taking a high risk of return, more amount of interest and there will be no signs of profit.

But, if our business succeeds, at that point, we can enhance an estimated amount of debt by just adjusting the value of debt in capital structure in an excel sheet. We can simply pay the interest because our ROI or Rate Of Interest is very essential. At that time a company can experience the trading on equity. But finance managers have to be very careful, as they will have to watch whether shareholders are expecting more than the actual amount concerning dividend or not. As high expectation will stand against the growth of a company.

GENERATING IDEAS FOR NEW SOURCE OF FUNDS
A proper planning of capital structure will make a variation towards a finance manager for getting the supply of money from new sources. One would precisely realize that how investment managers of a company are helping in generating new ideas for getting the primary source of money from the citizens at low risk. Promoters or administrators do ten to twenty minutes of meeting with investors by discussing relevant factors and help them motivating about the company's financial structure in such a way, by showing the special events which they have made in PPT or by the aid of photographic slides.

ADJUSTMENTS REQUIRED ACCORDING TO THE BUSINESS ENVIRONMENT
Various companies need to adjust their sources in such a way so that they can expect the amount accordingly to that of a business environment. For instance, if a Government of any country cuts off the relations with another country then this will primarily affect the market conditions. And all the different business sectors will be in a big dilemma that how on earth they are going to adjust this damage and can run their business to earn the profit just the way they used to do earlier. Thus a proper planning is required to form the capital structure in such a way, so there will be no signs of vulnerabilities to any business entities hence it will be easier for them to acquire more supplies of money. In other terms, it is called as maneuverability which means creating a source of mobility of fund by maximizing the chance alternative plans of forming capital structures for the upcoming years.

VALUE MAXIMIZATION
Capital structure helps in maximizing the market value of a company. This helps in designing the capital structure in such a way so that it can yield the gross value of the claims and ownership interests of the shareholders in a maximized way.

INVESTMENT OPPORTUNITY
Working as per the word investment is stated in the dictionaries, it implies purchase of an appropriate commodity with an expectation of favorable returns producing from the same. On the other side, it may also indicate buying a business or products keeping in mind the possibility of future stability or improved profits. There are various ups and downs as well as risks associated with investment opportunities, and dealing is always necessary to have encouraging returns. Investment is a very relevant topic. There is no relevant domain where this particular risk may be deemed suitable or unsuitable. Today, there are a countless amount of investment possibilities in all areas. All one needs to do is a thorough market analysis and use opportunities respectively. A decent investment opportunity if understood accurately may produce consistent results for an extended period, but as there are many numbers of such possibilities in every field, people are often deceived and find it challenging to select the precise investment opportunity which may sometimes be unfavorable. But there are various other investments those are risk-free. These may be awarded by individual governments and are mostly inadequate. In most of the cases, investment opportunities involve handling of vast sums of money, so assuming where and when to invest often determines the outcome.

ASSIGNMENT TOPICS ON CAPITAL STRUCTURE

There are many such topics in Capital Structure Assignments which help Financial Accounting and Finance students to get equipped before they appear for their examinations, seminars as well as prepare their assignments or outlines on time. Following are the names and short descriptions about the topics presented below:-

  1. CORPORATE GOVERNANCE- Corporate governance is the practice of rules, methods, and manners by which a company is managed and controlled. Corporate governance necessarily includes balancing the interests of an organization's stakeholders, like shareholders, management, customers, financiers, suppliers, government and the association. Since corporate governance also implements the structure for achieving an organization's purposes, it encompasses substantially every sphere of administration, from internal controls and action plans to corporate disclosure till performance management.
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  3. MANAGERIAL OWNERSHIP- The governance problems mainly arise from the parting of ownership from authority, and the capacity to regulate managerial and shareholder benefits via the managerial ownership of equity is an essential topic of analysis. The verdicts of the primarily US-based research imply that management is controlled at low and moderately high levels of ownership but is established at intermediate occupancy levels.
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  5. DIVIDEND POLICY- Dividend policy is the collection of guidelines an association uses to determine how much of its earnings and profits it will pay out to shareholders and suppliers. Some testimony suggests that investors are not bothered with a company's dividend policy because they can sell a part of their portfolio of assets if they want in hand cash values. This testimony or proof is called the "dividend irrelevance system," and it necessarily indicates that an issuance of shares should have limited to no influence on stock price.
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  7. INFLATION- Inflation is the rate at which the global level of prices for commodities and services is soaring, and consequently, the purchasing authority of money is declining. Central banks strive to limit inflation and bypass deflation, to keep the economy in a balanced manner and position.
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  9. HEDGE- A hedge is an investment in diminishing the risk of adverse price movements in an asset. Usually, a hedge comprises of taking an offsetting situation in a similar security, such as a futures agreement.
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  11. CREDIT RATIONING- Credit rationing is the limiting by bankers of the accumulation of extra credit to borrowers who require funds, even if the latter are prepared to pay higher interest charges. As an Instance market blemish, or market crash, as the price mechanism, breaks to bring about stability in the business. It should not be cluttered with events where credit is utter "too expensive" for some borrowers, that is, positions where the interest rate is considered too high. With credit rationing, the borrower would like to obtain the funds at the prevailing rates, and the shortcoming is the deficiency of balance. In other words, at the current market interest valuation, demand surpasses supply, but bankers are not ready to either loan more reserves or boost the interest rate imposed, as they are maximizing earnings.

 

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