THE EFFECT OF CAPITAL STRUCTURE ON FIRM PERFORMANCE WITH REFERENCE TO SELECTED COMAPANIES IN BSE

In corporate finance, the mix of sources of funds that is revealed on the balance sheet of a company, such as preferred stock, debt/loans, and stockholders' equity, is called the capital structure. Financial leverage measures the sensitivity of a company's financial condition by comparing the amount of debt to other sources of funds such as equity shares. It is important to achieve a balance because excess use of debt can lead to increased risk, reduced financial flexibility, and increased cost of capital, which is a concern for investors. The creation of a capital structure that maintains ownership while maximizing financial leverage is important. However, there is a point beyond which it ceases to be beneficial to include debt in the capital structure of a company, for example, bonds or loans. This is because companies with debt are able to return a higher percentage of their operating income to stockholders because of the tax deductibility of interest payments. The choice between debt and equity capital is affected by a variety of factors, including the nature of the business, the prospects for growth, and control considerations. To ensure that costs are minimized and value maximized, it is essential to effectively manage the risks associated with debt and ensure that the optimal capital structure is maintained. This involves achieving a balance between debt and equity. The views of third parties on the health of the financial structure are considered in arriving at the optimal capital structure. Each business has a unique debt/equity ratio, and the considerations are affected by a variety of factors, including industry and business-specific characteristics. Recognizing that what may be beneficial to one business may not necessarily be beneficial to another, businesses must consider a variety of factors in arriving at a capital structure that is suited to their specific needs and goals.