Capital structure management
Introduction Capital structure concept holds a major place in a financial management. Capital structure refers the proportion of debt and equity capital . A perfect balance between debt and equity is required to ensure tradeoff between risk and return. Thus, optimal capital structure means the capital structure having reasonable of proportion of debt and equity.
An optimal financial structure makes better use of society fund of capital resource ,and thus it increase the total wealth of society also by increasing he firm’s opportunity to engage in future wealth creating investment, it increase the economy of investment and growth. Capital structure is the combination of debt and equity securities that comprise a firm’s financing of its assets. Both debt and equity securities are used in most large corporations.
The choice of the amount of debt and equity is made after a comparison of certain characteristics of each kind of securities of internal factor related to the firm’s operations and of external factor that can affect to the firm. The capital structure is made up of debt and equity securities, which memories a form’s finance of its assets. It is the permanent source of financing represent by long -term debt and, plus preferred stock, plus net worth. The determination of degree of liquidity of a firm is not the simple task.
In the long term liquidity may depend on the profitability of a firm but weather it service to achieve long run profitability depend to some extend on its capital structure. This term includes only long term debt and total stockholders’ investment. It may be defined as one including short term and long term fund. Capital structure refers to the ambition of long term source of funds such as debentures, long term debt, preference share capitals and equity share capital including reserves and surpluses (retained earnings).
Capital structure represents the relationship among different kind of long term capital through the issue of common shares sometimes accompanied by preference shares. Firm rises long term capital through the issue of common shares, sometimes accompanied by preference shares . The share capital is often supplemented and other long term borrowed capital. “The term capital structure is used to represent the proportionate relationship between debt and equity. The mix of debt and equity in a firm is called its capital structure.
The capital structure decision is significant financial decision since it affects the shareholder return and risk and consequently, the market value of share. ” (Panned; 1992). Generally the term “capital structure” is referred to represent the proportionate relationship between the different forms of financing. However, sometimes a distinction is drawn between financial structure’ and ‘capital structure’. (Weston and Brigham; 1989:249-50). Capital structure is the analysis of the capital composition of company. Capital structure is the permanent financing of the firm, represent by long term debt, preferred stock and common stock but excluding all short term credit. Thus a firm’s capital structure is only a part of its financial structure I. E. Common stock, capital surplus and accumulated retained earnings. “[Weston and Brigham J “Boot EOT Ana equity are uses In most AT ten large corporations. The choice of amount of debt and equity is made after the comparison of certain characteristics of each kind of security , internal factor related to the firm’s operation and external actor they can affect the firm. (Hampton; 1986). “If a company can change its total valuation by varying its capital structure, an optimal financial mix would exist, in which market price per share could be maximized. “[Van Horned ;1983] “Under the assumption that a firm will attempt to maximize the long run market value of ownership shares, there exist an optimal capital structure for each individual firm. It varies from different industry because the typical assets structure and stability of earning which determine inherent risks vary for different type of production. “[Culinary;1983]