{"id":41265,"date":"2015-08-13T08:54:28","date_gmt":"2015-08-13T03:24:28","guid":{"rendered":"http:\/\/vskills.in\/certification\/blog\/?p=41265"},"modified":"2024-04-03T13:22:22","modified_gmt":"2024-04-03T07:52:22","slug":"capital-structure-3","status":"publish","type":"post","link":"https:\/\/www.vskills.in\/certification\/blog\/capital-structure-3\/","title":{"rendered":"WHAT IS CAPITAL STRUCTURE"},"content":{"rendered":"<p style=\"text-align: center\"><a ref=\"magnificPopup\" href=\"http:\/\/vskills.in\/certification\/blog\/wp-content\/uploads\/2015\/08\/CAPITAL-STRUCTURE.jpeg\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-41379\" src=\"http:\/\/vskills.in\/certification\/blog\/wp-content\/uploads\/2015\/08\/CAPITAL-STRUCTURE.jpeg\" alt=\"CAPITAL STRUCTURE\" width=\"259\" height=\"194\"><\/a><\/p>\n<p>One of the most important concern of a firm is to raise funds but there are some decisions need to be taken like thinking about the sources from where the funds need to be raised.<\/p>\n<p>Sometimes, a firm prefer to raise funds from different sources in calculated proportions so that maximum fund can be raised and total cost of raising can be minimized. for eg- a firm needs 100000 bucks and after proper calculations it is suggested that firm should raise 30000 from one source and remaining from other.<\/p>\n<p>If we categorise on the basis of ownership, the main sources are <strong>owner&#8217;s funds and borrowed funds.<\/strong><\/p>\n<p><strong>Owner&#8217;s funds consists of equity share capital, preference share capital, retained earnings, surpluses etc.<\/strong><\/p>\n<p><strong>Borrowed funds comprises of &nbsp;bank loans, debentures, public deposit etc. The providers are banks, debentures holders.<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p>So, on this part we can define <strong>CAPITAL STRUCTURE&nbsp;as a mix between owners and borrowed funds.&nbsp;<\/strong>It can be obtained as ratio of debt and equity.<\/p>\n<p><strong>Both Debt and Equity differ significantly with respect to cost and risk.<\/strong><\/p>\n<p>Cost of debt is lower than cost of equity, because it is observed that lender&#8217;s risk is less than equity shareholders risk. This is because the provider will get an assured return for funds lended along with proper &nbsp;interest, also it gonna benefit firm as intrerest paid is a deductible expense while computing tax liability and dividends are paid after tax profit.<\/p>\n<p>Now, if we look from the risk angle we can say that debt is more risky than equity because debt is an outsider or a third party money which needs to be repayed with proper interest and ultimately it becomes a liability for the firm, whereas the equity repayment is not a cumplusion.<\/p>\n<p>Thus, a lot use of debt can increase financial risk (that firm will not be able to repay its obligations) and hence there required a proper balance between debt and equity.<\/p>\n<p>Therefore, capital structure of a firm affects its profitability and financial risk. <strong>An optimal Capital Structure is when there is accurate balance between debt and equity so that it will add to the value of equity share of the firm.<\/strong><\/p>\n<p><a href=\"http:\/\/www.vskills.in\/certification\/accounting-banking-and-finance\">Click here for government certification in Accounting, Banking &amp; Finance<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>One of the most important concern of a firm is to raise funds but there are some decisions need to be taken like thinking about the sources from where the funds need to be raised. Sometimes, a firm prefer to raise funds from different sources in calculated proportions so that maximum fund can be raised&#8230;<\/p>\n","protected":false},"author":1353,"featured_media":41379,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_joinchat":[],"footnotes":""},"categories":[1519],"tags":[5637,2105,1767,1915,2384,5901,3112,4276],"class_list":["post-41265","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-accounting-banking-and-finance","tag-borrowed","tag-capital","tag-debt","tag-equity","tag-funds","tag-owner","tag-shareholder","tag-structure"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.3 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>WHAT IS CAPITAL STRUCTURE - Vskills Blog<\/title>\n<meta name=\"description\" content=\"What is CAPITAL STRUCTURE and what are its components? Apply for a Vskills certification in Finance now. 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