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.