OMTEX CLASSES: Components / parts of Capital Structure?

Components / parts of Capital Structure?



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