Capital structure planning which aims at the maximization of profits and wealth of the shareholders ensures the maximum value of a firm or the minimum cost of capital. It is very important for the financial manager to determine the proper mix of debt and equity for his firm.

Capital Structure, as the name suggests, means arranging capital from various sources, in order, to meet the need of long-term funds for the business. Also, capital structure decisions impact the risk and return of equity owners.

Capital Structure refers to the proportion of money that is invested in a business. It has four components and it includes Equity Capital, Reserves and Surplus, Net Worth, Total Borrowings. It represents the risk capital staked by the owners through purchase of Owners Company’s common stock.

A company’s capital structure is arguably one of its most important choices. From a technical perspective, the capital structure is defined as the careful balance between equity and debt that a business uses to finance its assets, day-to-day operations, and future growth.

Capital structure of a firm refers to the mixture of the proportions of borrowed funds and owner’s funds. Debt and equity are the two main components of the capital structure. Yes, a firm need both the components because debt provides a tax-saving interest benefit, which results in the increase of EPS.

• Funding from Personal Savings. Funding from personal savings is the most common type of funding for businesses.
• Debt Financing. Debt financing is a fancy way of saying “loan.” In debt financing, the lender (often a bank) gives you funding that you must repay over time with interest.

Types of Capital Structure

• Equity Capital. Equity capital is the money owned by the shareholders or owners.
• Debt Capital. Debt capital is referred to as the borrowed money that is utilised in business.
• Optimal Capital Structure.
• Financial Leverage.
• Importance of Capital Structure.