Why is capital structure important?

A company’s capital structure is arguably one of its most important choices. From a technical perspective, the capital structure is defined as the careful balance between equity and debt that a business uses to finance its assets, day-to-day operations, and future growth.Click to see full answer. In this way, what is the importance of capital structure planning?Reduces Financial Risk: Balancing the proportion of debt and equity in the business through capital structure assist the business firms in managing and minimizing risk. Minimizes Cost of Capital: It provides for planning the long term debt capital of the company strategically and thus reducing the cost of capital.Similarly, why is capital structure irrelevant? This proposition states that in perfect markets, the capital structure a company uses doesn’t matter because the market value of a firm is determined by its earning power and the risk of its underlying assets. Proposition I: This proposition says that the capital structure is irrelevant to the value of a firm. Similarly, what does capital structure mean? Capital structure refers to a company’s outstanding debt and equity. It allows a firm to understand what kind of funding the company uses to finance its overall activities and growth. In other words, it shows the proportions of senior debt, subordinated debt and equity (common or preferred) in the funding.What are the objectives of capital structure?There is a relationship among the capital structure, cost of capital and value of the firm. The aim of effective capital structure is to maximize the value of the firm and to reduce the cost of capital.