What is current capital structure?

What is current capital structure?

The capital structure is the particular combination of debt and equity used by a company to finance its overall operations and growth. Debt comes in the form of bond issues or loans, while equity may come in the form of common stock, preferred stock, or retained earnings.

Where can I find a company’s capital structure?

In a capital structure, equity consists of a company’s common and preferred stock plus retained earnings. This is considered invested capital and it appears in the shareholders’ equity section of the balance sheet. Invested capital plus debt comprises capital structure.

What is a company’s target capital structure?

A company’s target capital structure refers to capital which the company is striving to obtain. In other words, target capital structure describes the mix of debt, preferred stock and common equity which is expected to optimize a company’s stock price.

Which capital structure is ideal for the company?

The optimal capital structure of a firm is the best mix of debt and equity financing that maximizes a company’s market value while minimizing its cost of capital. In theory, debt financing offers the lowest cost of capital due to its tax deductibility.

Does capital structure of a company matter?

According to a Modigliani and Miller (1958 article), if there are no corporate taxes, the mix of debt and equity does not matter and does not have any impact on the value of the firm. The value of the firm is simply equal to the operating income divided by the overall cost of capital.

What is the difference between financial structure and capital structure?

Capital Structure covers only the long term sources of funds, whereas financial structure implies the way assets of the company are financed, i.e. it represents the whole liabilities side of the Position statement, i.e. Balance Sheet, which includes both long term and long term debt and current liabilities.

What is the difference between simple capital structure and complex capital structure?

As outlined above, a simple capital structure does not contain any securities that could potentially dilute the company’s earnings. In contrast, a complex capital structure contains securities that could potentially dilute the company’s basic earnings.

Which is the best capital structure for a company?

As the earnings per share are highest in alternative II, i.e., debt financing, the company should issue 25,000 8% debentures of Rs. 100 each. It will double the earnings of the equity shareholders without loss of any control over the company. A Ltd. Company has equity share capital of Rs. 5,00,000 divided into shares of Rs. 100 each.

Which is the best financial plan for AB Ltd?

In choosing a financial plan, AB Ltd. has an objective of maximising earnings per share. It is considering the possibility of issuing equity shares and raising debt of Rs. 1,00,000 or Rs. 4,00,000 or Rs. 6,00,000. The current market price per share is Rs. 25 and is expected to drop to Rs. 20 if the funds are borrowed in excess of Rs. 5,00,000.

What is the annual EBIT of AB Ltd?

AB Ltd. needs Rs. 10,00,000 for expansion. The expansion is expected to yield an annual EBIT of Rs. 1,60,000. In choosing a financial plan, AB Ltd. has an objective of maximising earnings per share. It is considering the possibility of issuing equity shares and raising debt of Rs. 1,00,000 or Rs. 4,00,000 or Rs. 6,00,000.

What is the importance of capital structure planning?

Capital structure planning, which aims at the maximisation of profits and the wealth of the shareholders, ensures the maximum value of a firm or the minimum cost of capital. It is very important for the financial manager to determine the proper mix of debt and equity for his firm.