# Capital Structure Decisions — Introduction
## What is capital structure?
Capital structure refers to the combination of capital raised from different sources of finance. A company's capital consists of:
- Equity Shareholders' Funds
- Preference Share Capital
- Long-Term External Debts
## Three guiding factors
The source and quantum of capital are decided keeping three considerations in mind:
| Factor | Objective |
|---|---|
| Control | Design the structure so existing shareholders keep a majority stake |
| Risk | Keep financial risk within a tolerable limit |
| Cost | Keep the overall cost of capital at a minimum |
In practice it is difficult to achieve all three simultaneously, so the finance manager must balance them.
## The overriding objective
The prime objective when choosing the optimal capital structure is to maximise the value of the company. A capital structure decision therefore involves:
- Which sources of financing to tap (forms of financing)
- How much to raise from each (actual requirement)
- The relative proportion (mix) of each source in total capitalisation
## Scope of the chapter
The topic can be broadly classified into four parts:
1. EBIT-EPS Indifference Point
2. Break-Even Points
3. EBIT-EPS-MPS Analysis
4. Capital Structure Theories