--- title: "Capital structure planning concept" subject: "Project Engineering" chapter: 6 key: "semester_7/project_engineering:capital-structure-planning-concept" source: https://www.bctengineer.com/q/semester_7/project_engineering/capital-structure-planning-concept site: BCT Engineering --- # Capital structure planning concept Project Engineering · Chapter 6: Introduction to Project Financing - Asked in: 2080 Baisakh, 3 marks; 2071 Chaitra, 5 marks (asked 2 times) - Video: [Corporate Management - Determining capital structure](https://www.youtube.com/watch?v=fRn5cdHShIw) — TutorialsPoint - 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-planning-concept - Whole chapter: https://www.bctengineer.com/md/semester_7/project_engineering/chapter-6 ## Question Explain capital structure planning (with examples). ## Short answer Capital structure planning decides the mix of long-term funds (equity, preference, retained earnings, debt) to minimize WACC and maximize firm value and EPS with acceptable risk. Plans are compared by debt-equity ratio; for Rs 10 lakh, Plan B (1:1 debt-equity) balances return and risk. Steps include estimating capital need, comparing mixes by EBIT-EPS, and checking risk, control and flexibility. ## Answer #### Concept **Capital structure** is the mix of long-term sources of funds (equity shares, preference shares, retained earnings and long-term debt) used by a firm to finance its total capital. **Capital structure planning** is the process of deciding the best proportion of these sources so that the cost of capital is lowest and the value of the firm and return to shareholders are highest. A firm can finance with ordinary shares, preference shares, retained earnings, debentures and loans. Planning decides the debt-equity ratio so that the **weighted average cost of capital (WACC)** is minimum and the **EPS and value of the firm** are maximum, with acceptable risk. #### Objectives - Maximise shareholders' wealth - Minimise the cost of capital - Maintain liquidity and flexibility - Keep control and reduce financial risk #### Example Total capital needed = Rs 10 lakh. | Plan | Equity | Debt (10%) | Debt-equity | |---|---|---|---| | A | Rs 10,00,000 | Nil | 0 : 1 | | B | Rs 5,00,000 | Rs 5,00,000 | 1 : 1 | | C | Rs 3,00,000 | Rs 7,00,000 | 2.33 : 1 | Plan A is safest but gives low EPS; plan C has high EPS if profits are good but high risk when profit falls. The planner selects the plan which balances return and risk, for example plan B, by using the determinants such as cash flowability, cost, control and flexibility. #### Steps 1. Estimate the total capital requirement. 2. Find the available sources and their costs. 3. Compare different mixes by EPS-EBIT analysis and cost of capital. 4. Check risk, control, flexibility and legal limits. 5. Select the optimal capital structure and review it from time to time. ## Check yourself The answer's key points as multiple-choice questions, with the correct option and why. 1. What is capital structure planning? A. Deciding only the dividend each year B. Deciding the best proportion of long-term sources so that the cost of capital is lowest and value is highest C. Choosing the cheapest short-term loan D. Planning the physical layout of a plant Answer: B. It is deciding the best mix of long-term funds to minimise cost of capital and maximise value and EPS. (Key point: Capital structure planning) 2. Which is an objective of capital structure planning? A. Maximise the cost of capital B. Lose control of the firm C. Minimise cost of capital and maximise shareholders' wealth D. Eliminate liquidity Answer: C. Objectives are maximum shareholder wealth, minimum cost of capital, liquidity, flexibility, control and low risk. (Key point: Objective) 3. In the plan comparison (Rs 10 lakh), which is true? A. Plan A has the highest EPS and risk B. Plan C is safest C. All plans have equal risk D. Plan C has high EPS in good profits but high risk when profits fall Answer: D. Plan C has most debt (2.33:1), so higher EPS in good times and higher risk; plan A is safest but low EPS. (Key point: Example plans) 4. Which step compares alternative mixes? A. EPS-EBIT analysis and cost of capital B. Post-audit only C. Payback of buildings D. Ignoring legal limits Answer: A. Different mixes are compared by EPS-EBIT analysis and cost of capital, then risk, control and legal limits are checked. (Key point: Steps) ## Related in Project Engineering - [Short note: Capital structure planning](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Acapital-structure-planning-notes) — Project Engineering, chapter 6, asked 2× - [Capital structure planning importance, determinants](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Acapital-structure-planning-importance-determinants) — Project Engineering, chapter 6 - [Project financing; structures; capital structure steps](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Aproject-finance-define-structures-steps) — Project Engineering, chapter 6 - [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 - [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× - [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× ## Related in other subjects - [DSM concept; planning and implementation steps](https://www.bctengineer.com/question.md?key=semester_7%2Futilization_of_electrical_energy%3Adsm-concept-planning-implementation) — Utilization of Electrical Energy, chapter 6 - [MRP concept, inputs and outputs](https://www.bctengineer.com/question.md?key=semester_6%2Findustrial_engineering_and_management%3Amrp-concept-inputs-and-outputs) — Industrial Engineering and Management, chapter 5 - [Flange width concept in T and L beams](https://www.bctengineer.com/question.md?key=semester_7%2Fdesign_of_rcc_structure%3Aflange-width-concept-in-t-and) — Design of RCC Structure, chapter 4 - [Staircase design concept and detailing](https://www.bctengineer.com/question.md?key=semester_7%2Fdesign_of_rcc_structure%3Astaircase-design-concept-and-detailing) — Design of RCC Structure, chapter 9