capital structure

The capital structure of a company should aim at maximising the long-term market value of its equity shares. The financial management of a company is expected to design and develop a sound capital structure which is most advantageous for the company and its equity shareholders. These special privileges are often included to make the shares more attractive to investors. As well, the special rights can allow for complex ownership structures where certain groups or individuals want to maintain a degree of control.


For instance, public utilities and railway companies will be financed through fixed interest securities such as- bonds and debentures because of their monopoly condition and stability of income. Manufacturing businesses are usually subject to competitive conditions, and rely to a large extent on equity share capital. The return on the equity capital is then lower than the average rate of the overall earnings. The general rate of earning must be higher than the fixed rate of return on debentures and preference shares.

Other features or rights

Some people believe that there is an optimum capital structure for each firm. This is the capital consisting of the number of shares that have been offered to the public for subscription for cash and to the vendors, as fully or partly paid.

  • Many Canadian issuers are financial organizations that may count capital raised in the preferred-share market as Tier 1 capital .
  • The funds may be required either for betterment expenditure or for some productive purposes.
  • Capital to be stated in the Memorandum of Association and Articles of Association of the Company.
  • The par value of the issued share capital cannot exceed the value of the authorized share capital.
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  • Like a loan, this debt instrument also pays periodic interest payments.
  • The determination of the degree of liquidity of a firm is no simple task.

Furthermore, many people are perplexed by the distinction between and shared capital. A corporation’s share capital is the money raised through the sale of equity to investors, whereas a shareholder’s share is the percentage of the money paid to the company. These phenomena may appear faster and more strongly in small and underdeveloped capital markets. This article brings the knowledge for practitioners, investors and policymakers trying to understand what influences the performance of newly listed firms. Accounting information does not captures long-term consequences and market performance is detached from the fundamentals presented in the financial statements.

Definition of Share Capital

Shares authorized include both issued and unissued but authorized by the company’s constitutional documents. Transfer funds between your bank account and trading account with ease. The rules for share transfer must be included in the company’s Articles of Incorporation. Get answers to the most common queries related to the CBSE Class 12 Examination Preparation.

Therefore, the hands of the management are tied by the restrictions that may be imposed by the law. For example, the Indian Banking Regulation Act, 1949 does not allow any banking company in India to issue any securities except equity shares. A highly geared company can pay a higher dividend to its equity shareholders. The higher the gear is the more attractive and speculative would be the equity shares. So if this fixed rate of interest or dividend is lower than the rate of over-all earnings, then the equity shareholders gain.

What are Shares?

During the period of deflation or depression, low gearing is beneficial to the concern, because the company cannot pay fixed cost out of the meagre profits. However, to meet the needs of different kinds of investors, it is necessary to issue different kinds of securities. The investors who want the security of the principal and stability of income will go in for debentures. Lastly, to successfully resort to borrowing on large scale the company must have huge investments in fixed assets which can be offered as security to the lenders. A proper blending of different sources of funds employed in the business of the concern is every much desirable from the point of view of the shareholders, debenture-holders, creditors and the concern itself. Gears have to be used in an automobile for maintaining the desired speed. Initially, the automobile starts with a low gear and as it gets momentum low gear has to be changed to high gear.

At the end of this period, they will “mature” and become redeemable . The selection of capital structure is also affected by the capacity of the business to generate cash inflows. It analyses solvency position and the ability of the company to meet its charges. Capital structure of a company is also affected by the purpose of financing. If the funds are required for manufacturing purposes, the company may procure it from the issue of long- term sources. When the funds are required for non-manufacturing purposes i.e., welfare facilities to workers, like school, hospital etc. the company may procure it from internal sources. A sound capital structure provides a room for expansion or reduction of debt capital so that, according to changing conditions, adjustment of capital can be made.

At this period deposits are at the maximum limit and loans are small in proportion to deposits. There is an anticipation of increased earnings in the future which causes the price of securities that have previously been quoted at a low figure, to advance to normal or even somewhat above it. Normally, funds which are required for a comparatively short period are raised through borrowings, because then the loan can be repaid as soon as the company comes into possession of its own funds. Another consideration that must be taken into account while drawing up the financial plan is the nature of enterprise, i.e., whether it is the manufacturing, merchandising, financing, extraction or public utility type. All these enterprises differ in regard to the amount of investment, subject to risks of failures and trade cycles and freedom from competition. Some authorities on company finance maintain that only so much loans should be raised as will absorb about 20 percent of the assured profits of the company by way of interest.

What are the types of shares?

There are majorly two kinds of shares i.e. equity shares and preference shares.

High What Is Share Capital? Meaning, Types & Features Of Share Capital discourages the issues of equity shares and encourages issuing more debentures. Investors are generally of different tastes and of economic status. Modest investors like debentures or preference shares while investors interested in speculation prefer equity shares. So, a firm will have to use a variety of securities in order to appeal to various types of investors.

In modern times, certificates are not always given and ownership may be recorded electronically by a system such as CREST or DTCC, a central securities depository. The definition of a share includes the capital or stock of a company.

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  • Suppose a company has a total investment of Rs.10,00,000 and earns a profit at the rate of 10 per cent on it.
  • Loan stock is long-term debt capital raised by a company for which interest is paid, usually half yearly and at a fixed rate.
  • The risk of the loss of control and interference in the autonomy of management should be minimum.
  • Some corporations contain provisions in their charters authorizing the issuance of preferred stock whose terms and conditions may be determined by the board of directors when issued.

The components of equity will vary from business to business and will be affected by the type of legal structure adopted by the business. This chapter will focus on the accounting used in the most common type of business organization – the corporation. Accounting and disclosure for other types of entities, such as proprietorships and partnerships, will be different.