Capital structure is composed of owned funds and borrowed funds.

Question

Justify the following statement.

Capital structure is composed of owned funds and borrowed funds.

Answer 1

• Capital structure means to mix up of various sources of funds in desired proportions.
• To decide capital structures means to decide upon the ratio of different types of capital.
• A firm’s capital structure is the relation between the debt and equity securities that make up the firm’s financing of its assets.
• The capital structure is composed of own funds which include share capital, free serves, and surplus, and borrowed funds which represent debentures, bank loans, and long-term loans provided by financial institutions.
• Thus capital structure = Equity share capital + preference share capital + reserves + debentures.
• Thus, it is rightly said that capital structure is composed of owned funds and borrowed funds.