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Features of a sound capital structure

Short answer

A sound capital structure should be simple, profitable, solvent, flexible, and conservative. It must preserve control, ensure liquidity and marketability of securities, provide adequate capital, and comply with legal requirements.

What are the major characteristics (features) of a sound capital structure of a company? Explain briefly.

A sound capital structure gives the highest value to the firm with an acceptable risk. Its main features are:

  1. Simplicity: easy to understand and manage.
  2. Profitability: gives maximum return to shareholders at minimum cost of capital.
  3. Solvency: debt is within the firm's ability to pay interest and principal.
  4. Flexibility: can be changed when needs change, with spare borrowing capacity.
  5. Control: keeps control with the existing owners.
  6. Conservatism: does not take excess debt, risk is kept low.
  7. Liquidity and marketability: securities can be sold easily in the market.
  8. Adequate capital: enough funds for fixed and working capital.
  9. Legal compliance: follows the Companies Act and regulatory limits.

An example is a firm with a debt-equity ratio of about 1:1, interest cover above 3, and some borrowing capacity kept for the future.

✓ Answer checked by Claude Opus 5.5 (high effort)

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