Capital structure refers to the combination of equity and debt capital employed by a firm to finance assets and perform overall operational activities. A sound capital structure helps to lower business risk, increase productivity, profitability and market value of the company.
Features of ideal capital structure
Essential features or characteristics of ideal or sound capital structure can be highlighted as follows:
1. Should Minimize The Cost Of Capital
Good capital structure enables the firm to raise fund at lower cost of capital. Therefore, it helps ti minimize the cost of capital that leads to increase in the profit and shareholders' wealth.
2. Should Be Flexible
Ideal capital structure should be flexible to fulfill financial requirements when needed. It should facilitate the management to cope with the changing environment.
3. Should Minimize Business Risk
Company's capital structure should be able to reduce financial risk so that the safety of the fund can be ensured.
4. Proper Utilization Of Fund
Ideal capital structure should ensure proper use of available funds to avoid over or undercapitalization.
5. Availability Of Sufficient Cashflow
Capital structure should ensure sufficient cashflow to maintain proper liquidity and solvency position of the firm.
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Importance Of Optimal Capital Structure
6. Should Attract More Investors
Simple, profitable, flexible and less risky capital structure attracts more investors.
7. Government Rules
Capital structure should be formed according to the rules and policies of government.
