Capital Structure-Description, types and significance

Capital is the most significant element for starting a business. The company's foundation is based on capital, and its primary sources are debt and equity. It can be defined as the combination of debt and equity used by an organisation to manage itself.

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Capital structure is an important part of corporate finance, and different industries use different capital structures for managing their business. Let’s discover some essential information about capital structure, its uses and features.

What are the Different Types of Capital Structure?

Capital arrangement using different sources of long-term funds like debt and equity is called capital structure. An organisation raises various funds, including preference shares, retained earnings, long-term debts, etc.

Organisations raise such funds for the smooth running of their business. Let’s discuss the common capital structure types in detail below. However, if you need guided assistance from an expert for understanding every aspect of capital structure, you can get help from Capital Structure Assignment writing services.

The most significant capital structure types include the following:

Equity Capital

It is the capital or money that is free from debt. Equity capital is raised by providing shares or share capital. This money is used as a company's capital to grow and develop its business. Below are some examples of equity capital:

Retained earning

These are part of the profit an organisation keeps separately to strengthen the business. And will help strengthen the business.

Contributed Capital

It is the amount invested by a company owner when opening the company. Sometimes, it is also the amount they receive from the shareholders as an ownership price of the company. 

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Debt Capital

As the name is, debt capital refers to the money borrowed by an organisation to use in their business. There are different forms of debt capital. It includes bank loans, personal loans, credit cards etc.

Long-Term Bonds

Long-term bonds are the safest loan since they have an extended period for repayment. The one who takes it has to repay only the interest, while the principal amount must be paid on the loan's maturity.

Short Term Commercial Paper

Companies use these types of debt to raise capital for a short period.

Optimal capital structure

The combination of debt and equity financing helps to maximise a company’s value in the market and minimises the capital cost is known as optimal capital structure.

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Different industries have different capital structures. It depends upon the company type when it comes to a high-debt ratio.

Financial Leverage

A part of the debt that is a part of an organisation’s total capital is called financial leverage.

What is the Significance of Capital structure?

Capital structure is a very significant part of an organisation. It identifies the overall stability of an organisation. Some of the significant aspects of capital structure are stated below:

Improves the valuation of an organisation in the market

A good capital structure of an organisation leads to enhanced shares and market prices. This ultimately improves the valuation of a firm in the market.

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Ensures the Effective use of fund

An organisation with a good capital structure can use the fund judiciously for the growth and development of the organisation.

Brings more profit

Using the fund effectively and another positive impact of a good capital structure helps a company gain more profit. Besides, it also ensures a higher return to the shareholders, bringing more organisational profit.

What Factors Determines the Capital Structure?

Given below are some of the common factors that determine the capital structure and growth of an organisation:

Capital Cost

The cost that occurs while raising capital is called capital cost.AN organisation must generate enough find to meet the cost of capital and ensure the smooth running of the business.