In this article, you’re going to know about optimum capital structure. And 10 features of optimum capital structure or the characteristics of optimum capital structure.
What is the optimum capital structure?
An optimal capital structure is the best mix of debt, preferred stocks, and common stock. Which maximizes the market value of a company while reducing the cost of capital. In principle, loan financing provides the lowest cost of capital due to its tax deduction. However, too much debt increases the return on financial risk. And equity to shareholders that they need. Thus, companies will have to find the optimum point. At which the marginal profit of the loan is equal to the marginal cost.
According to economists Modigliani and Miller, in the absence of taxes, the cost of bankruptcy, the cost of the agency and asymmetric information. In an efficient market, the value of a firm is unaffected by its capital structure. Read below about characteristics of optimum capital structure or features of optimum capital structure
10 features of optimum capital structure
Determining the ideal or optimum capital structure for any business company is not an easy, logical, while on the one hand. The increase in the amount of the loan in the total capital has increased in earnings per share. However, on the other hand, investment risk increases due to the high debt component. And as a result, the market value of the stock goes down. Here are the 10 features of optimum capital structure. Characteristics of optimum capital structure.
The ideal or optimum capital structure should be the quality of simplicity. Here, simplicity means that in the beginning, the raising of funds should be done through certain types of securities. Which means that only equity and preference shares should be issued and debentures should be issued. Thus, with the development of business, diversification insecurity should be introduced gradually. It will increase investor confidence and make money easier. Apart from this, keeping the capital structure simple. It should also be kept in mind that it can’t be cheaper than the requirement.
Minimization of Risk
There are various risks associated with every business, such as business competitions, changes in demand of goods, natural climate, increase in taxes, increase in interest rates, decreasing purchasing power, increasing business costs, etc. These risks are affected. . Capital structure planning and construction.
Therefore, the capital structure should be such that these risks are minimal and if necessary, the business can be successfully loaded. To reduce the risks, the component of high-class securities is essential in the capital structure.
There should be a facility of expansion and contraction of money in a sound capital structure. The company should be able to purchase more capital at the time of need and be able to pay all its loans when it does not require money.
The structure and asset structure of the institution should be such that the institution can always maintain adequate liquidity. Therefore, the company can issue such debentures, which can repurchase in the market and has sold again if needed.
Apart from this, these days the terms of the repurchase terms are increasing the amount of debenture issue and sufficient liquidity for the system.
While capitalizing, the institution should keep in mind that the money purchased has fully utilized. Which means that the quantity of capital should determine. So that the institution can neither have capitalization nor its downfall It is possible.
Capitalization should be fair. When capitalization is appropriate in the institute. The institution’s capital resources are not inactive and they have used well.
This is the features of optimum capital structure. The ideal capital structure for any business institution is that. With which business profitability maximized. Although profitability depends on the efficiency of business management. But it has also influenced by the cost of capital.
Therefore, the capital structure should manage so that the cost of capital is minimal. So that it is available according to the capital requirements and to avoid wastage.
Attraction for Investors
The capital structure should have the quality of attracting, otherwise, capital structure has no significance. Therefore, if investors have invited to invest in capital. Then, the various aspects related to attraction should take into consideration as well.
Investors have usually attracted to those securities. Which provide high security for money security, income regularity, and capital growth.
Cash flow efficiency
It is necessary to focus on cash flow efficiency for any commercial institution’s balanced capital structure. It should manage so that the institution can be able to meet its expenses. Even after the fixed expenses of the meeting.
Generally, the amount of loan, interest on it. And other discount messages etc. has included in the fixed expenses. Therefore, if the institute’s cash flow is more stable. Then the credit capacity of the institution will be even higher.
This is the features of optimum capital structure. Generally, the organization controlled by the equity shareholders. However, under these special circumstances, rights can transfer to rights holders. And debenture holders by giving them the right to vote.
Therefore, the institution’s capital structure should be such that the management and control of the company can in the safe hands of equity shareholders. However, if the percentage of shares held by them falls short, their control over the company may be over. Therefore, while preparing the capital structure of an institution, various should keep in mind.
Maximum Returns on Equity Capital
We know that equity shareholders are the actual owners of a company and only they take the actual risk on the investment. Therefore, the capital structure should be such that they get the maximum profit.
But, this is possible only if the institution is able to regularly give some definite and substantial income. However, the provision of this income should depend on the efficiency of the managers. But, nevertheless, by developing a proper capital structure, income can raise by purchasing capital at a lower cost.
Thus, Now You all know that what are the features or Characteristics of Optimal Capital Structure.