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प्रश्न
Write notes on Capital structure and its components.
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उत्तर
Meaning: -Capital structure constitutes two words i.e. capital and structure. Capital refers to investment of funds in the business while structure means arrangement of different components in proper proportion. Thus capital structure means' mix-up of various sources of funds in desired proportion'.
Definition: -" The long term sources of funds employed in a business enterprise." (R.H. Wessel)
Components / parts of Capital Structure
There are four basic components of capital Structure. They are as follow:
- Equity Share capital: -It is the basic of financing activities of business. Equity share capital is provided by equity shareholders. They buy equity shares and help a business firm to raise necessary funds. They bear ultimate risk associated with ownership. Equity shares carry dividend at fluctuating rate, depending upon profit.
- Preference Share Capital: -Preference shares carry preferential right as to payment of dividend and have priority over equity shares for return of capital when the company is liquidated. These shares carry dividend at a fixed rate. They have limited voting rights.
- Retained earnings: -it is an internal source financing. It is nothing but ploughing back of profit.
- Borrowed Capital: -
(a) Debentures: -A debenture is an acknowledgement of loan raised by company. Company has to pay interest at an agreed rate.
(b) Term loan: -Term loans are provided by bank and other financial institutions. They carry fixed rate of interest.
To understand above concept thoroughly, we shall consider following balance sheet
|
Liabilities |
Amount |
Assets |
Amount |
|
Share Capital 5000 Equity Shares of Rs 10 each fully paid 1000, 10% Preference Shares of 100 each
Reserves & Surplus General Reserves & Surplus
Liabilities 1000, 12% Debentures of Rs. 100 each fully paid
Sundry Creditors Bank Overdraft Bills Payable |
50,000
1,00,000
20,000
1,00,000
40,000 20,000 10,000 |
Fixed Assets Building Plant & Machinery
Current Assets Cash in hand Cash at bank sundry Debtors Inventories (stock)
|
2,00,000 80,000
14,000
24,000
|
|
|
3,40,000 |
|
3,40,000 |
APPEARS IN
संबंधित प्रश्न
Sakshi Ltd. is a company manufacturing electronic goods. It has a share capital ofRs 120 lakhs. The earning per share in the previous year wasRs 0.5. For diversification, the company requires additional capital ofRs 80 lakhs. The company raised funds by issuing 10% debentures for the same. During the current year the company earned profit ofRs 16 lakhs on capital employed. It paid tax @ 40%.
a. State whether the shareholders gained or lost in respect of earning per share on diversification. Show your calculations clearly.
b. Also state any three factors that favour the issue of debentures by the company as part of its capital structure.
Explain the following as factor affecting the choice of capital structure:
Floatation costs
Explain the following as factors affecting the choice of capital structure:
Return on Investment
Explain the following as factors affecting the choice of capital structure:
Flexibility
Explain the following as factors affecting the choice of capital structure:
Risk Consideration
Explain the following as factors affecting the choice of capital structure:
Control
Explain any four factors that affect the choice of capital structure of a company.
Write the external factors influencing capital structure.
State, with reasons, whether the following statements are True or False (Any THREE) :
It is not possible to go ahead without financial plan.
Sunrises Ltd. dealing in readymade garments, is planning to expand its business operations in order to cater to international market. For this purpose the company needs additional Rs. 80,00,000 for replacing machines with modern machinery of higher production capacity. The company wishes to raise the required funds by issuing debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was Rs. 8,00,000 and total capital investment was Rs. 1,00,00,000. Suggest whether issue of debenture would be considered a rational decision by the company. Give reason to justify your answer. (Ans. No, Cost of Debt (10%) is more than ROI which is 8%).
“Capital structure decision is essentially optimisation of risk-return relationship.” Comment.
Explain the term ‘Trading on Equity’? Why, when and how it can be used by company.
Owned Capital Borrowed Capital
Answer the following question.
'Determining the relative proportion of various types of funds depends upon various factors.' Explain any six such factors.
Financial leverage is called favourable if :
ICR = ______
Which component of capital structure determines the overall financial risk?
Assertion (1): Higher the flotation cost, less attractive the source.
Reason (R): The choice between the payment of dividend and retaining the earnings is, to some extent, affected by the difference in the tax treatment of dividends and capital gains.
Krish limited is in the business of manufacturing and exporting carpets and other home decor products. It has a share capital of ₹ 70 lacs at the face value of ₹ 100 each. Company is considering a major expansion of its production facilities and wants to raise ₹ 50 lacs. The finance manager of the company Mr. Prabhakar has recommended that the company can raise funds of the same amount by issuing 7% debentures. Given that earning per share of the company after expansion is ₹ 35 and tax rate is 30%, did Mr. Prabhakar give a justified recommendation?
Show the working.
The Board of directors of Medex Pharma Ltd. decided to issue debentures worth ₹ 40 lakhs in order to finance a major Research and Development project. This would increase the Debt Equity ratio from 1:1 to 2:1.However, at the same time it would increase the Earnings per share.
The reason that will justify the above situation is ______.
