• Financial structure : Financial structure includes both long-term and short-term source of capital.
• Capitalisation: It refers to only long term assts excluding current liabilities from the capital structure.
A company requires finance in order to run its business properly. It is mostly obtained from the following sources:
1. Equity share capital
2. Preference shares capital
3. Borrowed capital
4. Retained profit
5. Current liabilities
Tax saving...........
In an economy , at the end of the accounting period a firm get EBIT{ EARNING BEFORE INTEREST ON TAX} . First preference is given to payment of interest on the debt followed by EBT{EARNING BEFORE TAX} Tax to the government and the remaining EAT{ EARNING AFTER TAX} is being distributed among the shareholders . In shareholders Preference shareholders are given priority over Equity shareholders.
After the payment of every expenditure the remaining amount is distributed among the shareholders in agreed proportion or in equally if no such agreement is made.
{ A bond fund or debt fund is a fund that invests in bonds, or other debt securities. Bond funds typically pay periodic dividends that include interest payments on the fund's underlying securities plus periodic realized capital appreciation. Debt fund have high risk because whether the firm is making profit or not the interest on debt fund is to be paid.}. Every sources of finance have it's own cost { the cost of capital is the cost of a company's funds, or, from an investor's point of view "the required rate of return on a portfolio company's existing securities". It is used to evaluate new projects of a company.} so cost refers to the interest paid for that particular source . For example : If debt or loan is taken form the bank of amount 1,00,000 and it is said that 5% p.a. is to be paid on it , so here the cost of the debt is 5000 as 1,00,000 is the loan which is to be returned .
Now let's see how tax is being saved and helps in increment of benefit of the shareholder :
Two companies { R Ltd.} and (S Ltd.} , both have equal numbers of shares (10000) ,they don't have any debt in the capital. government charges tax @40% p.m. The firm made a profit of 10,00,000.
| | R Ltd. | S. Ltd |
| EBIT | 10,00,000 | 1,00,000 |
| Interest | 000 | 000 |
| EBT@40% p.a. tax | (4,00,000) | (4,00,000) |
| EAT | 6,00,000 | 6,00,000 |
| Interest that each shares EAT/number of shares | 6,00,000/10,000 | 6,00,000/10,000 |
Financial manager of R Ltd. analysed the capital structure and decided to include debt in the capital of amount 10,00,000 and interest on debt is 10%p.m. The also decreased the number of shares from 10,000 to 6,0000 because the firm can make the same capital amount with debt and 6,000 shares .other hand S Ltd. make no changes in their firm. So the change in R Ltd.firm are
Hence, Now interest for each shares is increased form 60 to 90
| R Ltd. | |
| EBIT | 10,00,000 |
| Interest @ 10% p.a. | (1,00,000) |
| EBT | 9,00,000 |
| Tax @40% p.a. | (3,60,000) |
| EAT | 5,40,000 |
| Interest that each share will get | 5,40,000/6000 |
Financial status and tax is analysed and then necessary changes in the capital structure is made . And hence we can save the tax....
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