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Write Notes on Capital Structure and Its Components. - Secretarial Practice

Answer in Brief

Write notes on Capital structure and its components. 

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Solution

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:

  1. 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.
  2. 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.
  3. Retained earnings: -it is an internal source financing. It is nothing but ploughing back of profit.
  4. 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


12,000


10,000

 

3,40,000

 

3,40,000

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