Capital Structure : Capital Structure refers to the mix between the owners and borrowed funds . It refers to the Debt to Equity Ratio . It is computed as :
Capital Structure of a business affects both the Profitability and the Financial Risk .
A capital structure will be said to be optimal when the ratio of debt and equity is such that it leads to an increase in the value of the equity share , thereby increasing the wealth of the shareholders .
Factors Affecting the choice of Capital Structure :
- Cash Flow Positions : If the cash flow position of the business is good , it may use debt . As against this , If the cash flow position of the business is dad , it may use equity .
- Return on Investment (RoI) : If the return on investment is high , the business may use Debt. On the other hand , if the interest coverage ratio is low , the business may use Equity .
- Cost of Debt : If cost of Debt is low , more Debt can be employed . As against it , If the cost of Debt is high , more of Equity may be used .
