Question

Question # 1. Critically evaluate the features of all capital structure components and respond the following questions with justifications:

a) Which capital structure component(s) is/are considered as a true equity for the company?

b) Which capital structure component(s) is/are considered as liability for the company?

c) Which capital structure component(s) is/are considered as non-interest based liability for the company?

Answer 1

Capital structure is simply how the capital of the firm is structured. Capital structure is mix of debt equity and preferred shares.it is considered while taking decisions

A)equity share capital and retained earnings are treated as true equity they are called shareholders funds because they are the amount invested with no fixed payments

b) components that are considered liabilities are bonds issued, debentures isued, term loans.they will have a fixed coupon rate on interest rates which are needed to be paid even though the company do not make profits

C)non interest bearing liabilities means that the interest on that liabilities will not be accured untill paid. Preferred shares will come under this category.dividends needed to paid as a fixed percentage but it will not accrue