{"id":6536,"date":"2021-09-19T18:36:44","date_gmt":"2021-09-19T13:06:44","guid":{"rendered":"https:\/\/scholarsclasses.com\/blog\/?p=6536"},"modified":"2024-12-16T18:09:49","modified_gmt":"2024-12-16T12:39:49","slug":"components-of-capital-structure","status":"publish","type":"post","link":"https:\/\/scholarsclasses.com\/blog\/components-of-capital-structure\/","title":{"rendered":"Components of Capital Structure &#8211; Scholarszilla"},"content":{"rendered":"\n<figure class=\"wp-block-image size-large is-resized\"><img decoding=\"async\" width=\"1024\" height=\"576\" data-src=\"https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/09\/Components-of-Capital-Structure-1024x576.jpg\" alt=\"Components of Capital Structure\" class=\"wp-image-6544 lazyload\" style=\"--smush-placeholder-width: 1024px; --smush-placeholder-aspect-ratio: 1024\/576;width:768px;height:432px\" title=\"\" data-srcset=\"https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/09\/Components-of-Capital-Structure-1024x576.jpg 1024w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/09\/Components-of-Capital-Structure-300x169.jpg 300w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/09\/Components-of-Capital-Structure-768x432.jpg 768w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/09\/Components-of-Capital-Structure-1536x864.jpg 1536w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/09\/Components-of-Capital-Structure-640x360.jpg 640w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/09\/Components-of-Capital-Structure.jpg 1920w\" data-sizes=\"(max-width: 1024px) 100vw, 1024px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" \/><\/figure>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69f1109841b9a\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69f1109841b9a\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/scholarsclasses.com\/blog\/components-of-capital-structure\/#Components_of_Capital_Structure\" >Components of Capital Structure<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/scholarsclasses.com\/blog\/components-of-capital-structure\/#Definition_of_Capital_Structure\" >Definition of Capital Structure<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/scholarsclasses.com\/blog\/components-of-capital-structure\/#Components_of_Capital_Structure-2\" >Components of Capital Structure<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/scholarsclasses.com\/blog\/components-of-capital-structure\/#1_Equity_share_capital\" >(1) Equity share capital<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/scholarsclasses.com\/blog\/components-of-capital-structure\/#2_Preference_share_capital\" >(2) Preference share capital<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/scholarsclasses.com\/blog\/components-of-capital-structure\/#3_Retained_earnings\" >(3) Retained earnings<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/scholarsclasses.com\/blog\/components-of-capital-structure\/#4_Borrowed_capital\" >(4) Borrowed capital<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading has-text-align-center\"><span class=\"ez-toc-section\" id=\"Components_of_Capital_Structure\"><\/span><strong>Components of Capital Structure<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><a href=\"https:\/\/en.wikipedia.org\/wiki\/Capital_structure\" target=\"_blank\" rel=\"noreferrer noopener\">Capital structure<\/a> means \u2018<strong><em>mix up of various sources of funds in desired proportion<\/em><\/strong>\u2019. To decide capital structure means, to decide upon the ratio of different types of capital.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Definition_of_Capital_Structure\"><\/span>Definition of Capital Structure<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p><strong>R. H. Wessel:<\/strong> \u201c <strong><em>The long term sources of funds employed in a business enterprise<\/em><\/strong>\u201d.<\/p>\n\n\n\n<p><strong>John Hampton:<\/strong> \u201c<strong><em>A firm\u2019s capital structure is the relation between the debt and equity securities that make up the firm\u2019s financing of its assets<\/em><\/strong>\u201d.<\/p>\n\n\n\n<p>Thus capital structure is composed of owned funds and borrowed funds. Owned funds include share capital, free reserves and surplus, whereas, borrowed funds represent debentures, Bank loans, and long-term loans provided by financial institutions.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Components_of_Capital_Structure-2\"><\/span><strong>Components of Capital Structure<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>There are four basic components of capital structure. They are as follows :<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"1_Equity_share_capital\"><\/span><strong>(1) Equity share capital<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>It is the basic source of financing activities of business. Equity shares are shares that get dividend and repayment of capital after it is paid to preference shares. They own the company. They bear ultimate risk associated with ownership. They carry dividend at fluctuating rate depending upon the profits.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"2_Preference_share_capital\"><\/span><strong>(2) Preference share capital<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Preference shares carry preferential right as to payment of dividend and have priority over equity shares for return of capital when the company is liquidated. These shares carry dividend at fixed rate.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"3_Retained_earnings\"><\/span><strong>(3) Retained earnings<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>It is an internal source of financing. It is nothing but ploughing back of profit.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"4_Borrowed_capital\"><\/span><strong>(4) Borrowed capital <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>It comprises the following :<br><strong>a) Debenture :<\/strong> <br>It is an acknowledgment of loans raised by company. Company has to pay interest at an agreed rate.<br><strong>b) Term loan :<br><\/strong>Term loans are provided by bank and other financial institutions. They carry a fixed rate of interest.<\/p>\n\n\n\n<p>To understand the above concept, we shall consider the following Balance sheet and calculate the values<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Liabilities<\/strong><\/td><td class=\"has-text-align-center\" data-align=\"center\"><strong>Amount<\/strong><\/td><td><strong>Assets<\/strong><\/td><td class=\"has-text-align-center\" data-align=\"center\"><strong>Amount<\/strong><\/td><\/tr><tr><td><strong>Share Capital<\/strong><\/td><td class=\"has-text-align-center\" data-align=\"center\"><\/td><td><strong>Fixed Assets<\/strong><\/td><td class=\"has-text-align-center\" data-align=\"center\"><\/td><\/tr><tr><td>10,000 equity shares of<br>Rs 10 each fully paid<\/td><td class=\"has-text-align-center\" data-align=\"center\">1,00,000<\/td><td>Building<br>Plant and Machinery<\/td><td class=\"has-text-align-center\" data-align=\"center\">4,00,000<br>2,00,000<\/td><\/tr><tr><td>5,000 preference shares of&nbsp;&nbsp;&nbsp;&nbsp; <br>Rs 100 each fully paid.<\/td><td class=\"has-text-align-center\" data-align=\"center\">5,00,000<\/td><td><strong>Current Assets<\/strong><\/td><td class=\"has-text-align-center\" data-align=\"center\"><\/td><\/tr><tr><td><strong>Reserves and Surplus<\/strong><\/td><td class=\"has-text-align-center\" data-align=\"center\">50,000<\/td><td>Sundry Debtors<\/td><td class=\"has-text-align-center\" data-align=\"center\">1,00,000<\/td><\/tr><tr><td><strong>Liabilities<\/strong><\/td><td class=\"has-text-align-center\" data-align=\"center\"><\/td><td>Inventories<\/td><td class=\"has-text-align-center\" data-align=\"center\">50,000<\/td><\/tr><tr><td>1000, 10% Debentures<br>of Rs 100 each fully paid<\/td><td class=\"has-text-align-center\" data-align=\"center\">1,00,000<\/td><td>Cash in hand<br>Cash at bank<\/td><td class=\"has-text-align-center\" data-align=\"center\">10,000<br>&nbsp;40,000<\/td><\/tr><tr><td>Sundry creditors<\/td><td class=\"has-text-align-center\" data-align=\"center\">30,000<\/td><td><\/td><td class=\"has-text-align-center\" data-align=\"center\"><\/td><\/tr><tr><td>Bills payable<\/td><td class=\"has-text-align-center\" data-align=\"center\">20,000<\/td><td><\/td><td class=\"has-text-align-center\" data-align=\"center\"><\/td><\/tr><tr><td><\/td><td class=\"has-text-align-center\" data-align=\"center\"><\/td><td><\/td><td class=\"has-text-align-center\" data-align=\"center\"><\/td><\/tr><tr><td><\/td><td class=\"has-text-align-center\" data-align=\"center\"><strong>8,00,000<\/strong><\/td><td><\/td><td class=\"has-text-align-center\" data-align=\"center\"><strong>8,00,000<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>Capital Structure = Equity Share Capital + Pref. Share Capital + Reserves + Debentures<br>                              = 1,00,000 + 5,00,000 + 50,000 + 1,00,000<br>                              = 7,50,000<\/p>\n\n\n\n<p><strong><a href=\"https:\/\/scholarsclasses.com\/blog\/factors-affecting-working-capital\/\" target=\"_blank\" data-type=\"URL\" data-id=\"https:\/\/scholarsclasses.com\/blog\/factors-affecting-working-capital\/\" rel=\"noreferrer noopener\">Factors affecting Working Capital requirement<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>&#46;&#46;&#46;<\/p>\n","protected":false},"author":1,"featured_media":6544,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[1],"tags":[5306],"class_list":["post-6536","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-misc","tag-components-of-capital-structure"],"_links":{"self":[{"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/posts\/6536","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/comments?post=6536"}],"version-history":[{"count":2,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/posts\/6536\/revisions"}],"predecessor-version":[{"id":35056,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/posts\/6536\/revisions\/35056"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/media\/6544"}],"wp:attachment":[{"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/media?parent=6536"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/categories?post=6536"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/tags?post=6536"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}