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Question
Justify the following statement.
Capital structure is composed of owned funds and borrowed funds.
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Solution
Justification:
- Capital structure constitutes two words i.e.
capital and structure. 'Capital' refers to the investment of funds in the business while 'structure' means the arrangement of different components in proper proportion. - Thus, capital structure means 'mix-up of various sources of funds in desired proportion'. A company can raise its capital from different sources i.e. owned capital or borrowed capital or both.
- The owned capital consists of equity share capital, preference share capital, reserves, and surplus. On the other hand, borrowed capital are debentures, loans, etc. The proportion of different sources are used in the capital structure.
- Thus, it is rightly justified that, capital structure is composed of owned funds and borrowed funds.
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