---
title: "Features of a sound capital structure"
subject: "Project Engineering"
chapter: 6
key: "semester_7/project_engineering:capital-structure-features-sound"
source: https://www.bctengineer.com/q/semester_7/project_engineering/capital-structure-features-sound
site: BCT Engineering
---

# Features of a sound capital structure

Project Engineering · Chapter 6: Introduction to Project Financing

- Asked in: 2082 Baisakh, 5 marks
- Video: [Features Of A Sound Capital Structure](https://www.youtube.com/watch?v=IrfFsrW2zHo) — Eeducom
- Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14
- Page: https://www.bctengineer.com/q/semester_7/project_engineering/capital-structure-features-sound
- Whole chapter: https://www.bctengineer.com/md/semester_7/project_engineering/chapter-6

## Question

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

## 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.

## Answer

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.

## Check yourself

The answer's key points as multiple-choice questions, with the correct option and why.

1. What does the profitability feature mean?
   A. Maximum cost for minimum return
   B. Maximum return to shareholders at minimum cost of capital
   C. Maximum debt regardless of return
   D. No return to shareholders
   Answer: B. A profitable structure gives highest return at lowest cost of capital. (Key point: Profitability)

2. What does solvency mean here?
   A. Debt exceeds earnings
   B. No debt at all
   C. Debt is within the ability to pay interest and principal
   D. Debt is repaid only at liquidation
   Answer: C. Solvency means debt can be serviced. (Key point: Solvency)

3. What is conservatism?
   A. Taking maximum debt
   B. Avoiding all equity
   C. Ignoring the law
   D. Not taking excess debt, keeping risk low
   Answer: D. A conservative structure avoids excess debt. (Key point: Conservatism)

4. Which example indicates a sound structure?
   A. Debt-equity about 1:1, interest cover above 3 and spare borrowing capacity
   B. Debt-equity 5:1 with interest cover below 1
   C. No flexibility and no equity
   D. Interest cover of 0.5
   Answer: A. The answer cites debt-equity of about 1:1, interest cover above 3, and some borrowing capacity kept. (Key point: Example)

## Related in Project Engineering

- [Project finance; sound capital structure; factors](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Aproject-finance-features-sound-capital-structure) — Project Engineering, chapter 6, asked 2×
- [Capital structure; cash flowability, leverage ratio](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Acapital-structure-cashflowability-leverage) — Project Engineering, chapter 6
- [Capital structure; best option by EPS, three options](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Abest-option-eps-three-options-c70) — Project Engineering, chapter 6
- [Capital budgeting and its features](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Acapital-budgeting-process-features) — Project Engineering, chapter 6
- [Project finance sources; capital structure determinants](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Aproject-finance-sources-capital-structure-determinants) — Project Engineering, chapter 6, asked 3×
- [Capital structure planning concept](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Acapital-structure-planning-concept) — Project Engineering, chapter 6, asked 2×

## Related in other subjects

- [Ownership and structure for software company](https://www.bctengineer.com/question.md?key=semester_7%2Forganization_and_management%3Aceo-software-ownership) — Organization and Management, chapter 4
- [Major characteristics of Bluetooth](https://www.bctengineer.com/question.md?key=semester_5%2Finstrumentation_ii%3Abt-characteristics) — Instrumentation II, chapter 5
- [Features and characteristics of OOP](https://www.bctengineer.com/question.md?key=semester_3%2Fobject_oriented_programming%3Aoop-features) — Object Oriented Programming, chapter 1, asked 7×
- [Features and characteristics of DSP](https://www.bctengineer.com/question.md?key=semester_6%2Fembedded_system%3Adsp-features) — Embedded System, chapter 2, asked 3×