meaning of capital structure

by sabitha 2010-04-30 15:24:42

Capital Structure is referred to as the ratio of different kinds of securities raised by a firm as long-term finance. The capital structure involves two decisions-

1. Type of securities to be issued are equity shares, preference shares and long term borrowings( Debentures).
2. Relative ratio of securities can be determined by process of capital gearing. On this basis, the companies are divided into two-
1. Highly geared companies- Those companies whose proportion of equity capitalization is small.
2. Low geared companies- Those companies whose equity capital dominates total capitalization.

For instance - There are two companies A and B. Total capitalization amounts to be Rs. 20 lakh in each case. The ratio of equity capital to total capitalization in company A is Rs. 5 lakh, while in company B, ratio of equity capital is Rs. 15 lakh to total capitalization, i.e, in Company A, proportion is 25% and in company B, proportion is 75%. In such cases, company A is considered to be a highly geared company and company B is low geared company.

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