Financial Glossary: Efficiency of Capital Structure


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Efficiency of Capital Structure

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Efficiency of Capital Structure

Efficiency of Capital Structure

The acceptable Debt/Equity ratio varies according to the segment a company is active in.

Depending on the nature of a company's business, greater or lower Debt levels can be tolerated. In order to finance its operations, a company hardly ever uses the gains reaped from the issue of new shares but rather raises capital on the markets. For a company to retain its creditworthiness, the Debt/Equity ratio has to remain within a defined Range.

A sufficient level of Equity capital is necessary to lessen the Risk of Default on Debt obligations and to give a credit status High enough to encourage those with fund surpluses to become creditors. Equity capital protects lenders. This is the most explicit link between Debt and Equity markets.

The advantages of Tax-relevant deductions in relation to an elevated financial Risk determine a company's Debt/Equity ratio.

Posted by marcus evans limited

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