Business Finance — Part 2: Capital Structure, Fixed Capital and Working Capital: visual lesson, ISC Class 12 Commerce

Lesson

Capital Structure, Fixed and Working Capital

Part 2: the mix of debt and equity, trading on equity, and how much fixed and working capital a firm needs.

In this lesson you will

Discuss the factors that decide the mix of debt and equity, including trading on equity
Explain the factors affecting fixed capital requirements
Distinguish types of working capital, explain its factors and compare it with fixed capital

Part 2 at a glance

Diagram

Capital structure balances the cost and control benefits of debt against its risk.

Capital structure is the proportion of debt (borrowed funds) and equity (owners' funds) in long-term finance.

Concept

Table of seven factors affecting capital structure and the condition under which each favours more debt
Factor	Points towards more debt when…
Cost of debt and tax	Interest is low and the tax rate is high
Return on investment	Return exceeds the interest rate (trading on equity)
Cash flow position	Cash inflows are steady and strong
Risk	Business risk is low
Control	Owners do not want new voting shareholders
Flexibility	Unused borrowing capacity will remain
Market conditions	Share prices are depressed