CAPITAL STRUCTURE ANALYSIS
Capital structure refers
to the mix of long term sources of funds such as debentures, long term debt,
preference shares capital and equity share capital including reserves and
surpluses(i.e., Retained earnings). Every time the firm makes an investment
decision. It is at the same time making a financing decision also. The
investment projects of a company an be financed either by increasing the owners
claims or the creditors claims. The owners claims increase when the firm raises
funds by issuing common shares or by retaining the earning; the creditors
claims increase be borrowing.
The financing or capital structure,
decision is a significant managerial decision. It influences the shareholders
return and risk. Consequently the market value of the share may be affected by
the capital structure decision. The company will have to plan its capital
structure initially at the time of its promotion. The decision will involve an
analysis of the existing capital structure and factors, which will govern the
decision at present shareholders equity position, strengthen by retention of
earnings. Thus, the dividend decision has a bearing on the capital structure
decision, the dividend policy of the company should be considered the new
financing decision of the company may affect its debt equity mix.
Equity Shares: Equity shares represent the ownership position
in a company and they provide permanent capital. They have voting rights and
receive dividend at the discretion of the board of directions.
Preference Shares: The holders of the preference shares have a
preference over the equity share holders in the event of the liquidation of the
company. The preference dividend rate is fixed and known. A company may issue
preference with maturity period. A preference share may also provide for the
accumulation of dividend. It is called cumulative preference share.
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