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‡ The funds required by a business organization can be

raised either through the Ownership securities like
Equity & Preference Shares or Creditorship Securities
like Debentures or Term Loans.
‡ A business enterprise has to maintain a proper mix of
both these types of securities in a manner that both the
Cost & Risk are minimum.
‡ The mix of different securities is portrayed by the Firm¶s
Capital structure.
‡ Capital Structure refers to the ³Make up of a Firm¶s
Capitalisation´.
‡ ³Capital Structure represents the mix of different sources
of Long Term Funds (Equity & Preference Shares,
Bonds, Term Loans, Retained Earnings) in the total
Capitalisation of the Company´.
‡ E.g. A Co. has Equity shares of Rs.1Lakhs, Debentures
of Rs.1Lakhs, Preference Shares of Rs.1Lakhs &
Retained Earnings of Rs.50,000.The term Capitalisation
is used for Long Term Funds which is in this case
Rs.3,50,000.The term Capital structure is used for the
mix of Capitalisation which in this case consists of Equity
& Pref. Shares, Debentures & Retained Earnings.
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Financial
Structure refers to the way the Firm¶s Assets are
financed. I.e. it includes both Short as well as Long term
sources of funds.
‡ Where as Capital Structure is the Permanent Financing
of the Company represented by Long Term Debt &
Shareholder¶s Fund but excluding all Short term credit.
Hence,it can be concluded that a company¶s Capital
Structure is only a part of its Financial Stricture.
  
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 It
depends on a no. of factors such as the Nature of
Company¶s business, Regularity of Earnings, Conditions of
the Money market, Attitude of the Investor, Etc.
‡ However, we should know the basic difference between
Debt & Equity in the context of a Capital Structure.
‡ A high proportion of Debt content in the capital Structure
increases the risk & may lead to financial insolvency of the
co. in adverse times. But, raising funds through Debt is
cheaper as compared to raising funds through Ownership
Capital.
‡ This is because Interest on Debt is allowed as an Expense
for Tax purposes to the company while Dividend is
considered as an appropriation of Profits & hence payment
of Dividend doesn¶t result in any tax benefit for the Co.
‡ This means if a Co. Which is in 50% tax bracket , pays
Interest at 12% to Debenture holders, the effective
cost to it comes only 6%.While if the same amount is
raised by Equity or Preference Shares, the cost of
raising the amount would be 12%.
‡ Thus, raising of funds by Borrowing is cheaper
resulting in higher availability of profits for
Shareholders. This increase the Earning Per Equity
Share of the Company which is the basic objective of
Financial Manger.
1. Capital Structure with Equity Shares only.
2. Capital Structure with Equity & Preference Shares.
3. Capital Structure with Equity Shares& Debentures.
4. Capital Structure with Equity Shares, Preference
Shares & Debentures.
 Factors Affecting Capital Structure
‡ Before deciding the µMix of Long Term Funds in a
Capital Structure¶, it is necessary to consider the
following factors:
A. Internal Factors
B. External Factors
C. General Factors

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1. Cost Of Capital : The process of raising the funds
involves some cost. While planning the Capital
Structure, it should be ensured that the use of the
Capital should be capable of earning the revenue
enough to meet the Cost of Capital.
  

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4. Taxation Policy.

5. Statutory Restrictions.