Financial Management

IV SEM BCom
Chapter 2 Financing Decisions

Introduction
Once the anticipation of required fund is completed the next

job of financial manager is to finance the selected investment

project.
Sources of fund Long term sources and short term sources.

Capital Structure
The way in which a corporation finances its assets through

some combination of equity, debt, or any other securities.

A firm's capital structure is then the composition or
'structure' of its liabilities.
For example
The firm's ratio of debt to total financing, is referred to as
the firm's leverage.

Capitalization: Process of combining various types of

securities of a business concern

Objective of Capitalization :maximize the return by
minimizing the cost of capital.
Proper mix of debt to equity
Capital Structure vary from industry to industry and
company to company in the same industry.
There is no common format for developing a capital
structure.
Capital Structure = Total Assets Current Liabilities

Optimum Capital Structure:

Level of Debt-equity proportion where the market value
per share is maximum and cost of capital is minimum
Should consider the nature of business and risk capacity.
Balance between debt and equity capital - a balance
between minimizing the cost of capital and control.
Features of an appropriate Capital Structure:
Profitability
Solvency
Flexibility
Conservation
control

Factors affecting Capital Structure

INTERNAL FACTORS
Financial Leverage
Risk
Growth and Stability
Retaining Control
Cost of Capital
Cash Flows
Flexibility
Purpose of Finance
Asset Structure

EXTERNAL FACTORS
Size of the Company
Nature of the Industry
Investors
Cost of Floatation
Legal Requirement
Period of Finance
Level of Interest Rate
Level if Business Activity
Availability if Funds
Taxation Policy
Level of Stock Prices
Condition of the Capital