Fixed Capital, Working Capital, and Capital Structure

Fixed Capital

• Purpose and Investment:
  • Money is invested in fixed capital by investors to make a future profit.
  • Fixed capital is usually required at the time of the establishment of the company.

Working Capital

• Definition and Purpose:
  • Working capital is defined as the capital that is used to carry out day-to-day business activities.
  • It ensures the smooth functioning of the business firm.
• Estimation and Operational Requirements:
  • Following the estimation of the fixed capital requirements of a business firm, it is necessary to estimate the amount of working capital needed.
  • A business firm requires funds as working capital to store adequate raw materials in stock.

Capital Structure

• Definition:
  • Capital structure is the long-term sources of funds employed in a business enterprise.
• Components of Capital Structure:
  • There are four basic components of capital structure.
  • Equity Share Capital:
  • Equity share capital serves as the basic source of financing the activities of a business.
  • Equity shares are shares that receive dividend distributions and repayment of capital after prior claims and obligations have been paid.