What is the Importance of Capital Structure?

The importance of capital structure is as follows:

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• Increase in the value of the firm

A proper capital structure of a company helps in increasing the market price of the shares and securities that, in turn, will lead to an increase in the value of the company.

• Utilizing the available funds

An organized capital structure permits a business to utilize the available funds completely. An appropriately planned capital structure guarantees the assurance of the money related necessities of the firm and raises the assets in such extents from different hotspots for their most ideal use. A sound capital structure shields the business venture from over-capitalization and under-capitalization.

• Maximization of return

A sound capital structure empowers the board to expand the benefits of an organization as better yield to the value investors, i.e., increment in income per share. This should be possible by the system of exchanging on value, i.e., it alludes to increment in the extent of obligation capital in the capital structure, which is the least expensive wellspring of capital. In the event that the pace of profit for capital utilized surpasses the fixed pace of premium paid to obligation holders, the organization is supposed to exchange on value.

• Minimizing the cost of capital

A sound capital structure of any business undertaking expands investors' riches through the minimization of the usual expense of capital. This must likewise be possible by joining long term debt capital in the capital structure as the expense of debt capital is lower than the expense of value or inclination share capital since the enthusiasm on the obligation is charge deductible.

• Solvency or Liquidity position

A proper capital structure will never allow a business to go for too much raising of debt capital because, during the time of poor earning, the solvency is disturbed for mandatory payment of interest to the supplier of debt.

• Flexibility

A proper capital structure gives room for expansion or reduction of the debt capital so that, as per the changing conditions, the adjustment of capital can be made.

• Undisturbed controlling

A better capital structure does not permit the equity shareholders' control on business that is to be diluted.

• Minimization of financial risk

In the event that obligation part increments in the capital structure of an organization, the budgetary hazard will likewise increment. A sound capital structure shields a business endeavour from such monetary hazard through a wise blend of obligation and value in the capital structure.