Different forms of capital structure

I have already discussed the meaning of capital structure. Today I will discuss the different forms of capital structure

  1. equity share capital only
  2. equity share capital + preference share capital
  3. equity share capital + long term debentures
  4. equity share capital + preference share capital+ long term debentures

The different forms of capital structure can be explained with the help of suitable example.

For example the company already has 2000 equity shares @ 100 each. The company needs more 30 lakhs.

i)                    the company can issue 30000 equity share @ 100 each

ii)                   the company can issue 10% debentures @ 100 each

iii)                 the company can issue 10% preference share @ 100 each

Earning before interest and tax is 10 lakhs, tax is 50%

I Case

II Case

III Case





Less interest


Earning after interest before tax




Less tax @ 50%




Less preference dividend




Earning available to equity shareholder

5 lakhs

3.5 lakhs

3 lakhs

Number of equity shares




Earning per share




As per the II Case the earning per share (EPS) is the best which is the combination of equity + debentures.

Optimal capital structure

Optimal capital structure means the best combination of equity+ debentures+ preference share capital which helps in getting maximum value of firm and minimizes the cost of capital. To have optimal capital structure the firm must fulfill the following conditions:

i)                    return on investment should be greater than cost of investment

ii)                   there should be no financial risk

iii)                 the capital structure should be flexible

This entry was posted in Financial Management and tagged , . Bookmark the permalink.

3 Responses to Different forms of capital structure

  1. naziah mohammed kutty says:

    its good.excellent;;;;;;;;;;;;;

Leave a Reply

Your email address will not be published. Required fields are marked *

*Please enter the above code to post your comments

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>