Capitalisation, Capital Structure and Financial Structure

The terms, capitalization, capital structure and financial structure, do not mean the same. While capitalisation is a quantitative aspect of the financial planning of an enterprise, capital structure is concerned with the qualitative aspect. Capitalisation refers to the total amount of securities issued by a company while capital structure refers to the kinds of securities and the proportionate amounts that make up capitalisation.

For raising long-term finances, a company can issue three types of securities viz. Equity shares, Preference Shares and Debentures. A decision about the proportion among these type of securities refers to the capital structure of an enterprise.

Some authors on financial management define capital structure in a broad sense so as to include even the proportion of short-term debt. In fact, they refer to capital structure as financial structure. Financial structure means the entire liabilities side of the balance sheet.

In the words of Nemmers and Grunewald, “Financial structure refers to all the financial resources marshalled by the firm, short as well as long-term, and all forms of debt as well as equity.” Thus, financial structure, generally, is composed of a specified percentage of short- term debt, long-term debt and shareholder’s funds.

Illustration 1:

Given the following information, you are required to compute:

(i) Capitalisation,

(ii) Capital Structure, and

(iii) Financial Structure.

Capitalisation, Capital Structure and Financial Structure with Illustration 1

Solution:

Solution

Solution

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