30 May 2008
CAPITAL CAN BE OWN OR BORROWED. OWNERS CAPITAL IS SHARE CAPITAL AND FREE RESERVES. BORROWED MONEY IS LOAN OR DEBT.-LOMG TERM OR SHORT TERM. THE RATIO BETWEEN OWNERS FUNDS AND LONG TERM LENDERS FUNDS IS CALLED DEBT EQUITY RATIO. ( FOR PURPOSE OF DEBT EQUITY RATIO,SHORT TERM LOANS OR WORKING CAPITAL BORROWINGS ARE ELIMINATED AS THEY ARE OF SHORT TERM NATURE AND NOT PERMANENT). AGAIN SHARE CAPITAL MAY BE EQUITY SHARES OR PREF. SHARES . PROFITABILITY IS AFFECTED BY DEBT EQUITY RATIO.THE MORE DEBT MEANS MORE INTERST PAYMENT REDUCING PROFITS AVAILABLE TO EQUITY SHAREHOLDERS FOR DECLARING DIVIDEND. IN VIEW OF THIS FACTOR ,THE TAXABLE PROFITS WILL BE LESS. THE SHAREHOLDERS WHO OWN EQUITY ARE REWARDED BY DIVIDENDS. THE LENDERS ARE REWARDED BY PAYMENT OF INTEREST(INTEREST ID A CHARGE AGAINST PROFITS AND REDUCE TAXABLE PRIFITS AS SAD ABOVE. DIVIDEND IS AN APPROPRIATION OF PROFITS BUT NOT A CHARGE AGAINST PROFITS(LIKE INT. ON DEBT) AND HENCE DOES NOT REDUCE TAXABLE PROFITS. THISIS TOO SHORT ON CAPITAL STRUCTURE. MR RAHUL . I SUGGEST PL. TYPE "CAPITAL STRUCTURE " IN GOOGLE SEARCH BAR. YOU GET FLOOD OF INFORMATION AND MUCH MORE ELABORATE. R.V.RAO
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