What Are The Types Of Capital Structure?

How many types of capital structure are there?

two typesThere are two types of capital structure according to the nature and type of the firm, viz, (a) Simple and (b) Complex.


Simple: When the capital structure is composed of Equity Capital only or with Retained earnings, the same is known as Simple Capital Structure..

What are 2 types of capital?

In business and economics, the two most common types of capital are financial and human.

What is capital structure what are the principles of capital structure management?

Capital structure is a term which is referred to be the mix of sources from which the long term funds are required for business purposes which are raised to improve the capital of the company. To fund an organization plan this capital structure is required which is the combination of debt and equity.

Is WACC affected by capital structure?

Assuming that the cost of debt is not equal to the cost of equity capital, the WACC is altered by a change in capital structure. The cost of equity is typically higher than the cost of debt, so increasing equity financing usually increases WACC.

How does capital structure affect value?

A company’s capital structure — essentially, its blend of equity and debt financing — is a significant factor in valuing the business. The relative levels of equity and debt affect risk and cash flow and, therefore, the amount an investor would be willing to pay for the company or for an interest in it.

What is capital structure theory?

In financial management, capital structure theory refers to a systematic approach to financing business activities through a combination of equities and liabilities.

What is optimal capital structure?

The optimal capital structure of a company refers to the proportion in which it structures its equity and debt. It is designed to maintain the perfect balance between maximising the wealth and worth of the company and minimising its cost of capital. … The WACC is the weighted average of its cost of equity and debt.

What are the 3 types of capital?

Businesses will typically focus on three types of business capital: working capital, equity capital, and debt capital.

What is an example of capital structure?

1 This mix of debts and equities make up the finances used for a business’s operations and growth. For example, the capital structure of a company might be 40% long-term debt (bonds), 10% preferred stock, and 50% common stock. The capital structure of a business firm is essentially the right side of its.

What is capital structure what are the factors affecting capital structure?

Factors Affecting Capital Structure The Regularity of Earnings-A firm with large and stable incomes may incur more debt in its capital structure, unlike the one that is unstable. Conditions of the Money Markets–Capital markets are always changing.

Which capital structure theory is the best?

The optimal capital structure of a firm is the best mix of debt and equity financing that maximizes a company’s market value while minimizing its cost of capital. In theory, debt financing offers the lowest cost of capital due to its tax deductibility.

What are the elements of capital structure?

Capital Structure refers to the proportion of money that is invested in a business. It has four components and it includes Equity Capital, Reserves and Surplus, Net Worth, Total Borrowings. It represents the risk capital staked by the owners through purchase of Owners Company’s common stock.

Which is the determination of capital structure?

What Is Capital Structure? The capital structure is the particular combination of debt and equity used by a company to finance its overall operations and growth. Debt comes in the form of bond issues or loans, while equity may come in the form of common stock, preferred stock, or retained earnings.

What are the assumptions of capital structure theories?

The capital structure theories use the following assumptions for simplicity: 1) The firm uses only two sources of funds: debt and equity. 2) The effects of taxes are ignored. 3) There is no change in investment decisions or in the firm’s total assets. 4) No income is retained.

What are the different types of capital structure theories?

There are four capital structure theories for this, viz. net income, net operating income, traditional and M&M approach.

What are the factors of capital structure?

The various factors which influence the decision of capital structure are:Cash Flow Position: … Interest Coverage Ratio (ICR): … Debt Service Coverage Ratio (DSCR): … Return on Investment: … Cost of Debt: … Tax Rate: … Cost of Equity: … Floatation Costs:More items…

What is the difference between capital structure and financial structure?

Financial structure refers to the balance between all of the company’s liabilities and its equities. … Capital structure, by contrast, refers to the balance between equities and long-term liabilities. Short-term liabilities do not contribute to capital structure.