Effectiveness of capital structure on profitability-it companies perspective

Abstract

Every company needs money or capital not only for its establishment but also for day to day operations. In order to acquire the money or capital a company will have its own variety sources that can be elucidated by capital structure. There are two ways or sources for financing a firm i.e. debt finance and equity finance also known as debt and equity capital. Debt Capital comes from bonds, debentures, long term notes payable etc. whereas equity capital comes from stock/shares may be equity or preference, retained earnings etc. Working capital is also a part of capital structure. Each category has its own pros and cons. Decisions related to finance is the integral element of any company. In this connection, the finance manager plays a vital role in arriving at a decision. He is always in dilemma that which proportion of capital leads to optimum utilization of funds. The widely accepted solution is a combination of equity capital and debt capital. Generally capital structure is formulated as per the interest of equity share holders. Hence rather than collecting funds totally from share holders, it is better to have a long term loan also, even though it is an expense to the company, this method is followed by many companies. This research paper primarily focuses on effectiveness of capital structure on profitability of Information Technology (IT) firms in India.