Introduction of Capital Structure

Capital structure means the mixture of share capital and other long term liabilities. In the company, we know that liability of each shareholder is limited but how much be the total liability of shareholder is the important question? It can be decided by choosing best capital structure. In capital structure, we include, equity share capital, preference share capital, debenture and long term debt. Suppose, our company's capital structure may show 50% equity share capital, 30% pref. share capital and 20% debentures. But all companies' capital structure may not be equal because different business need different type of capital structure which will be suitable according to the need of business.

Some of companies want to become smart. They slowly decrease equity share capital and increases loan excessively which may be very risky because these company has to pay fixed cost of interest and has to manage repayment of loan after some time. Some mistake in it, may be risky for its solvency. So, decision relating to capital structure is very important for company

Related : Financial Management