FINANCIAL MANAGEMENT — OCM STD 12 Commerce — Question

Introduction :

• Capital structure of company reflects the sources of fund raised by the company.
• As per company act issuing equity shares is compulsory to obtain fund by issuing shares.
• Financial management determined capital structure considering the size of business unit, its form, needs, internal and external factors’ company issues various types of securities such as equity shares, preference shares, debentures etc. and acquire capital.

• Meaning of capital structure :

• In simple words, “Capital structure means combination of various sources utilized by the company to raise required capital.”
• According to Hogland, “Capital structure means proportion and magnitude of different securities of the company.”
• According to Gestenberg, “Decision regarding types of securities are reflected in capital structure of the company.”
• In short, capital structure suggests securities such as equity share, preference share, debt etc. Issued by the company to acquire capital.

• Characteristics of ideal capital structure :

• Simplicity :

• From administrative view point it is quite easy when lesser type of securities are issued.

• Profitability :

• It is an ideal structure in which the profit remains optimum.

• Sufficient finance :

• It is an ideal structure in which required finance can be acquired with combination of various sources.

• Flexibility :

• Structure should be dynamic co that changes can be made according to the circumstances.

• Economy :

• Capital structure should be dynamic so that changes can be made according to the circumstances.

• Balancing :

• In capital structure there should be balance between owner’s capital and borrowed capital.

• Liquidity :

• Provision should be made in capital structure to pay liability and debt in time.

• Attractiveness :

• Capital structure should be attractive enough to attract various types of investors to invest in the company.

• Solvency :

• Capital structure should be such as there is no risk of insolvency and borrowed capital should not be too high to feel the burden of interest.

• Conclusion :

• All characteristics of ideal capital structure is not possible in single company.
• E.g. capital structure with less securities is considered simple.
• But it cannot be attract various investors and it become a bit difficult to acquire adequate finance.

Financial management should access as per requirement of the company the external factors and bring changes in capital structure.