Question

Question 2

What is capital structure and how important it is?

Question 3

Why do public utilities usually have capital structures that are different from those of real firms?

Answer 1

1. Capital structure refers to the mix of a company's capitalisation. That is a
a mix of long term sources of funds such as debentures,
preference share capital, equity share capital and retained
earnings. It is for meeting the total capital requirement.

While choosing
a suitable Capital structure various factors need to be taken into consideration like cost, risk,
control, flexibility and other considerations like nature of
industry, competition in the industry etc.

The decision in relation to the financing of firms assets is very crucial in every business. The financial manager is often in a dilemma to choose the optimum portion of debt and equity.

Importance of optimal capital structure is
1. Value maximization of the company.
2. 2. Cost minimization.
3. 3. Growth of the company increases.
4. 4. Increase in the share price.

2.
The public utility business is more asset-heavy than a real firm.

Generally, the capital structure of the business: Asset heavy business should more debt than compared to an asset-light business.

As debt is the least costly source of finance.

Public utility business needs more debt to fund it's existing heavy business equipment needs.