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What is Capital Structure?

  • Also known as financial plan
  • Refers to composition of long-term sources of funds
  • Includes debentures, long-term debts, share capital and ordinary share capital with reserves and surpluses
  • It means total of all liabilities and ownership claims the sum of what is usually the credit side of balance sheet
  • Capital structure is composed of owned funds and borrowed funds

Formula for Capital Structure:

Capital structure = Long-term Debt + Preferred Stock + Net Worth


Capital structure = Total assets – Current liabilities

All formulae and examples are explained when you avail approaches to determine appropriate Capital Structure homework help from

Composition of Capital Structure:

  • Cost principle:

This principle suggests that the concept of capital structure tends to maximise the earnings per share and minimise the cost of the capital.

  • Risk Principle:

According to this principle, the pattern should be such that the capital does not have to suffer any risk while bringing up a new structure.

  • Control Principle:

The controlling positions of the present owners should stay undisturbed.

  • Flexibility principle:

The management should find it easier to manoeuvre sources of funds while achieving a combination of securities.

  • Timing Principle:

Timing is always critical in financing and more particularly in a growing concern.

Determinants of Capital Structure:

  • Nature of the business:

Adoption of equity financing since the sales and the earnings aren’t stable to warrant the issue of debentures with fixed interest.  Having an assumed market, steady sales and free from competition easily employ debt in the capital structures.

  • The size of the Business and Capacity to raise Funds:

It is hard for smaller companies to assemble resources. On the other hand, larger companies with greater stability of earnings, strength and reputation, find it easy to raise funds.

  • Age of the Companies:

The earnings of younger companies are unpredictable, irregular or uncertain. So, they find it difficult to raise capital.

  • Growth Rate: It is a major factor
  • Assets Structure
  • Market Condition
  • Early Repay ability
  • The attitude of Investors
  • The attitude of Management
  • Financial Leverage
  • Taxation
  • Government Regulations

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