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MGT215 Fundamentals of Financial Management

Fundamentals of Financial ManagementTU Board 2082

Write the meaning of capital structure.

2

Answer

· Based on the official syllabus and past papers
Updated
Capital Structure Components (Simplified)Dr.Cr.**Debt (Long-term Liabilities)0**Equity (Shareholders' Funds)0**Hybrid Instruments (e.g., Preference Shares)0
Breakdown of a firm's capital structure: sources and key features

Capital structure refers to the mix of long-term sources of funds used by a firm to finance its operations and growth. It includes:

  • Debt (e.g., bonds, loans): Fixed interest payments, tax-deductible, higher risk but lower cost.
  • Equity (e.g., common stock, retained earnings): No fixed obligation, residual claim on profits, higher cost but lower risk.
  • Hybrid instruments (e.g., preference shares, convertible bonds): Combine features of debt and equity.

The optimal capital structure balances cost of capital and risk to maximize shareholder wealth. Firms aim for a mix that minimizes the weighted average cost of capital (WACC) while maintaining financial stability. The choice depends on industry norms, tax benefits, and investor preferences.

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