Capital Structure – Objectives, Forms and Theories

CAPITAL STRUCTURE

The term Capital Structure refers to the relationship between the various long-term sources of financing such as equity capital, preference capital and debt capital.

According to Prasanna Chandra, “Capital Structure is the composition of a firm financing consists of equity, preference, and debt”.

OBJECTIVES OF CAPITAL STRUCTURE

  • Maximize the value of the firm.
  • Minimize the overall cost of capital.

FORMS OF CAPITAL STRUCTURE

Capital structure patterns vary from company to company and the availability of finance.

  • Equity shares only
  • Equity and Preference shares
  • Equity and Debentures
  • Equity and debenture and Debentures

THEORIES OF CAPITAL STRUCTURE

Capital Structure is the major part of the firm financial decision, which affects the value of the firm and it leads to the change in EBIT and Market Value of the shares. There is a relationship between the capital structure, cost of capital and value of the firm. The different theories of Capital Structure are as follows:

  • Net Income Approach
  • Net Operating Income Approach
  • Modigliani and Miller Approach

 

 

 

 

optimum capital structure

Optimum Capital Structure

factors effecting cost of capital

Factors affecting Cost of Capital