Simple capital structure definition
/What is a Simple Capital Structure?
A corporation with a simple capital structure does not have any securities outstanding that could potentially dilute the value of its earnings per share . This means that its capital structure includes no more than common stock and non-convertible preferred stock . When this type of financing structure is present, there are no securities that could potentially be converted into common stock, thereby diluting the ownership interests of existing shareholders . Smaller companies frequently have simple capital structures, while larger entities are more likely to have complex capital structures .
Benefits of a Simple Capital Structure
The key benefit of a simple capital structure is that only a firm’s board of directors has the power to issue or buy back shares . This is not the case with a more complex capital structure, where convertible bond holders and stock option holders can decide whether and when to convert their holdings into more shares.
Disadvantages of a Simple Capital Structure
The main concern with a simple capital structure is that a business is not taking advantage of the lower-cost debt options that are available to it as part of a complex capital structure. For example, investors typically accept a lower interest rate on convertible bonds, since they see a benefit in the convertibility feature of the bond. A business that does not want to offer convertible bonds would have to accept higher interest rates on its debt.