CAPITAL STRUCTURE IN THE INDIAN CORPORATE SECTOR an INDEPTH STUDY

Abstract

In a developing economy, Industrialisation accelerates the economic newlinedevelopment at a faster rate. India is a developing economy. It inherited a newlineweak industrial base and a stagnant economy at the time of independence newlineand development which took its momentum only after independence. A good newlinenumber of new industries like transport, basic chemical, electrical equipment, newlinepower, machine tools etc came up during this period. newlineThe capital structure of a company is a particular combination of debt, newlineequity and other sources of finance that it uses to fund its long-term asset. newlineThe key division in capital structure is between debt and equity. The proportion newlineof debt funding is measured by gearing or leverages. There are different newlinefactors that affect a firm s capital structure, and a firm should attempt to newlinedetermine what its optimal, or best, mix of financing. But determining the newlineexact optimal capital structure is not a science, so after analyzing a number newlineof factors, a firm establishes a target capital structure which it believes is newlineoptimal. Capital structure policy also involves a trade-off between risk and newlinereturn. Using more debt raises the risks in the firm s earnings stream, but a newlinehigher proportion of debt generally leads to a higher expected rate of return newlineand the higher risk associated with greater debt tends to lower the stock s newlineprice. At the same time, however, the higher expected rate of return makes newlinethe stock more attractive to investors, which, in turn, ultimately increases the newlinestock s price. Therefore, the optimal capital structure is the one that strikes a newlinebalance between risk and return to achieve our ultimate goal of maximizing newlinethe stock prices. newline