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Capital structure refers to the amount of debt and/or equity employed by a firm to fund its operations and finance its assets. A firm’s capital structure is typically expressed as a debt-to-equity or debt-to-capital ratio.


Capital structure relates to how much money—or capital—is supporting a business, financing its assets, and funding its operations. It can also show company acquisitions and capital expenditures that can influence the business’s bottom line.

Frequently Asked Questions

What are capital structure issues?

“Capital structure” is defined as the mix of debt and equity securities used to finance real investment. Capital structure reflects the firm’s financing strategy, for example, its overall target debt-equity ratio, and also financing tactics, for example, the design and timing of a particular debt issue.

What is capital structure definition?

Capital structure refers to the specific mix of debt and equity used to finance a company’s assets and operations. From a corporate perspective, equity represents a more expensive, permanent source of capital with greater financial flexibility.

What is capital structure with example?

1 This mix of debts and equities make up the finances used for a business’s operations and growth. For example, the capital structure of a company might be 40% long-term debt (bonds), 10% preferred stock, and 50% common stock. The capital structure of a business firm is essentially the right side of its balance sheet.

What is capital structure and its types?

The meaning of Capital structure can be described as the arrangement of capital by using different sources of long term funds which consists of two broad types, equity and debt. The different types of funds that are raised by a firm include preference shares, equity shares, retained earnings, long-term loans etc.

What is capital structure and its factors?

Capital Structure is referred to as the ratio of different kinds of securities raised by a firm as long-term finance. The capital structure involves two decisions- Type of securities to be issued are equity shares, preference shares and long term borrowings (Debentures).

What is capital structure Wikipedia?

Capital structure in corporate finance is the mix of various forms of external funds, known as capital, used to finance a business. It consists of shareholders’ equity, debt (borrowed funds), and preferred stock, and is detailed in the company’s balance sheet.

What issues managers should consider when making capital structure decisions?

The key factors influencing capital structure decisions to be investigated include industry leverage, profitability, firm size, growth opportunities, asset tangibility, expected inflation, and stock market return.

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How does capital structure affect a company?

A company’s capital structure — essentially, its blend of equity and debt financing — is a significant factor in valuing the business. The relative levels of equity and debt affect risk and cash flow and, therefore, the amount an investor would be willing to pay for the company or for an interest in it.

What are the principles of capital structure?

Main concern of this principle is to earn maximum Earnings per share with minimum cost of financing. Interest rates and tax rates controls cost of financing. Debt capital is cheaper.

What are the 4 theories of capital structure?

A company has to decide the proportion in which it should have its finance and outsider’s finance, particularly debt finance. Based on the ratio of finance, WACC and Value of a firm are affected. There are four capital structure theories: net income, net operating income, and traditional and M&M approaches.

What is a capital structure decision?

A company’s financing decision or capital structure decision is concerned with the sources of funds from where long term finance is raised and the proportion in which the total amount is raised using these sources of funds. It involves determining how the selected assets/project will be financed.

What are the internal factors affecting capital structure?

The size of the business has great impact on its capital structure. Large manufacturing companies have huge investments in fixed assets such as land, machinery, building etc. further this fixed assets can be offered as securities against issue of debentures.

What are the external factors affecting capital structure?

The general factors which are affecting the capital structure are as follows:-Company constitution, Company characteristics, Stability of Earnings… Compare Component cost and Composite cost.

What is the best capital structure theory?

The optimal capital structure of a firm is the best mix of debt and equity financing that maximizes a company’s market value while minimizing its cost of capital. In theory, debt financing offers the lowest cost of capital due to its tax deductibility.

What are the techniques of capital structure analysis?

Important ratios used to analyze capital structure include the debt ratio, the debt-to-equity ratio, and the long-term debt to capitalization ratio. Credit agency ratings help investors assess the quality of a company’s capital structure.

What are the 5 types of capital?

The concept of capital has a number of different meanings. It is useful to differentiate between five kinds of capital: financial, natural, produced, human, and social. All are stocks that have the capacity to produce flows of economically desirable outputs.

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