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What is the meaning of capital structure?
Capital Structure is
The way a corporation finances its assets through some combination of equity, debt, or hybrid securities
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-
A.Highly geared companies - Those companies whose proportion of equity capitalization is small.
B.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 USD 200,000 in each case. The ratio of equity capital to total capitalization in company A is USD 50,000, while in company B, ratio of equity capital is USD 150,000 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.
