Capital Structure
                     Capital Structure
Introduction
The most crucial component of starting a business is capital. It 
acts as the foundation of the company. Debt and Equity are the 
two primary types of capital sources for a business.
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Definition
Capital structure is defined as the combination of equity and 
debt that is put into use by a company in order to finance the 
overall operations of the company and for its growth.
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Types of Capital Structure
The different types of funds that are raised by a firm include 
preference shares, equity shares, retained earnings, long-term 
loans etc. These funds are raised for running the business.
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Equity Capital 
Equity capital is the money owned by the shareholders or 
owners. It consists of two different types
a) Retained earnings: Retained earnings are part of the profit 
that has been kept separately by the organisation and which 
will help in strengthening the business.
b) Contributed Capital: Contributed capital is the amount of 
money which the company owners have invested at the time of 
opening the company or received from shareholders as a price 
for ownership of the company.
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Debt Capital 
Debt capital is referred to as the borrowed money that is 
utilised in business. There are different forms of debt capital.
1. Long Term Bonds: These types of bonds are considered 
the safest of the debts as they have an extended 
repayment period, and only interest needs to be repaid 
while the principal needs to be paid at maturity.
2. Short Term Commercial Paper: This is a type of short 
term debt instrument that is used by companies to raise 
capital for a short period of time
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Optimal Capital Structure
Optimal capital structure is referred to as the perfect mix of 
debt and equity financing that helps in maximising the value of 
a company in the market while at the same time minimises its 
cost of capital.
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Capital Structure across Industries
Capital structure varies across industries. For a company 
involved in mining or petroleum and oil extraction, a high debt 
ratio is not suitable, but some industries like insurance or 
banking have a high amount of debt as part of their capital 
structure.
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Financial Leverage
Financial leverage is defined as the proportion of debt that is 
part of the total capital of the firm. It is also known as capital 
gearing. A firm having a high level of debt is called a highly 
levered firm while a firm having a lower ratio of debt is known 
as a low levered firm.
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Importance
1. A firm having a sound capital structure has a higher 
chance of increasing the market price of the shares and 
securities that it possesses. It will lead to a higher 
valuation in the market.
2. A good capital structure ensures that the available funds 
are used effectively. It prevents over or under 
capitalisation.
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Importance Cont.
1. It helps the company in increasing its profits in the form 
of higher returns to stakeholders.
2. A proper capital structure helps in maximising 
shareholder’s capital while minimising the overall cost of 
the capital.
3. A good capital structure provides firms with the flexibility 
of increasing or decreasing the debt capital as per the 
situation.
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