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Capital Structure Definition

Posted on: Januari 5, 2011

Basically, the task of the company’s financial manager is trying to find a financial balance sheet that is needed and seek qualitative composition of the balance sheet is the best way possible. “Selection of the qualitative composition of the assets will determine the structure of corporate wealth, while the selection of the qualitative composition of the liabilities and equities will determine the financial structure and corporate capital structure” (Riyanto, 1984, P.4). Wasis (1981) states that capital structure should be distinguished from financial structure. Financial structure of state in what way the company financed property. Therefore, the overall financial structure is contained in the credit balance. On the credit side there is an outstanding balance of long-term and short term, and equity-term good
Long and short term. So the financial structure includes all expenditure both long term and short term. Instead of spending its capital structure involves only long-term course. Excludes short-term spending.
Weston and Copeland (1992) gives the definition of capital structure as the permanent financing of long-term debt, preferred stock, and shareholders equity. The book value of shareholders’ capital consists of common stock, paid-up capital or capital surplus and accumulated retained earnings. If the company has a preferred stock, the shares will be added to shareholders equity.
According to Lawrence, Gitman (2000, p.488), the definition of capital structure is as follows: “Capital Structure is the mix of long term debt and equity maintained by the firm”. Company’s capital structure illustrates the comparison between long-term debt and equity capital used by the company. There are two types of capital by Lawrence Gitman (2000) of debt capital (debt capital) and capital (equity capital). But in relation to capital structure, type of debt capital is taken into account only long-term debt.

Capital Structure Components
1. Long Term Debt
Total debt on the balance sheet will show the amount of loan capital which is used in company operations. Loan capital can be either short-term debt and long-term debt, but in general long-term loans much larger than the short-term debt.
According Sundjaja and Barlian (2003, p.324), “Long-term debt is one of the forms of long-term financing with maturity of more than one year, usually 50-20 years.” Borrowing long-term debt can be either a term loan (loans used to finance permanent working capital needs, to pay off other debts or to purchase machinery and equipment) and the issuance of bonds (debt acquired through the sale of bonds, the par value of bonds is determined , interest per year, and period of repayment of the bonds).
Measuring the amount of company assets financed by creditors (debt ratio) was done by dividing the total long term debt by total assets. The higher debt ratio, the greater the amount of loan capital which is used in making a profit for the company.

Some things that are considered by management to choose to use the debt according to Sundjaja at. al (2003) are as follows:
1. The cost of debt is limited, although the company obtained a large gain, the amount of interest paid the amount fixed.
2. The expected result is lower than the ordinary shares
3. There is no change in control of the company when using debt financing.
4. Payment of interest is an expense that can reduce your taxes
5. Flexibility in financial structure can be achieved by including the rules of redemption in the bond agreement.
Creditors (investors) prefer to invest in long-term debt due to several considerations. According Sundjaja at. al (2003), the selection of investments in the form of long-term debt from the investors based on the following points:
1. Payable to give priority both in terms of revenue or liquidation to the holders.
2. Have a definite maturity date.
3. Protected by the contents of long-term debt agreements (in terms of risk.)
4. Holders to obtain returns that are fixed (except for revenue bonds).

2. Equity
According Wasis (1981), in a conservative capital structure, the composition of capital focused on their own capital to take into consideration that the use of debt in corporate financing is the risk greater than the use of their own capital. According Sundjaja at al. (2003, p.324), “own capital / equity capital is
the company’s long-term funds provided by the owner of the company (shareholders), which consists of various types of stock (preferred stock and common stock) and retained earnings. ”
Financing with equity capital will lead to opportunity cost. The advantage of owning shares in a company for the owner is the control of the company. However, the return from shares is uncertain and the shareholders are the first to bear the risk of the company. Own capital or equity is a long-term capital obtained from the company owners or shareholders. Capital itself is expected to remain in the company for an indefinite period while the loan capital has a maturity date. There are 2 (two) main source of its own capital, namely:
a) Capital preferred stock
Preferred stock gives shareholders some privileges that make it more seniority or priority over ordinary shareholders. Therefore, the company did not provide the preferred stock in large numbers.
Some of the benefits of preferred stock for management according to Sundjaja at. al (2003) are as follows:
1. Having the ability to increase the financial impact.
2. Flexible since the preferred stock allow the publisher to remain in position without taking the risk of delay to enforce if business was slow that by not sharing or paying interest anyway.
3. Can be used in corporate restructuring, merger, purchase of shares by the company with new debt and payment through divestment.
b) Capital common stock
The owner of the company are ordinary shareholders who invest their money in hopes of getting the return in the future. Holders of ordinary shares is sometimes called the residual owners because they only receive the remainder after all charges against income and assets have been met.
There are several benefits of financing with the common stock for management purposes (company), according to Sundjaja at. al (2003), namely:
1. Ordinary shares do not give fixed dividend. If the company can earn profits, ordinary shareholders will receive dividends. But contrary to the interest of the bonds that are fixed (a fixed cost for companies), companies do not
required by law to always pay dividends to ordinary shareholders.
2. Ordinary shares have no maturity date.
3. Because of the common stock provides the basis for a buffer to the loss suffered by its creditors, the sale of common stock will increase the credibility of the company.
4. Common shares may, at certain moments, sold more easily than other forms of debt. Ordinary shares have an attraction for certain groups of investors because (a) may give a higher return than other forms of debt or preferred stock, and (b) represent ownership of the company, ordinary shares provide investors protection against inflation fort better than preferred stock or bonds. Generally, common stock increased in value if the value of real assets also increased during periods of inflation.
5. Returns obtained in the ordinary shares in the form of capital gains subject to income tax rates are low. (Weston & Copeland) According Wasis (1981, p.81), “owner of a paid in capital will become the first insurer risk. This means that the non-owners will not suffer losses before the liability of the owner entirely fulfilled.
The loss company must first be charged to the owner. In terms of investors (Sundjaja, 2003), the benefits of using stock (own capital) are as follows:
1. Have voting rights (rights of control) in the company.
2. There is no expiration.
3. Because bear greater risks, then the compensation to holders of equity capital is higher than with the holder of the loan capital.


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