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 stricture is how a company finances its overall operations abd groth by using different siurces of funds -Debt cones in the gorm of bond issues ir long- term notes oayable,while equity is ckassified as common stock,preferred stock or retained earnings

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.