Capital structure definition
/What is Capital Structure?
Capital structure is the mix of debt and equity that a business uses to fund its operations. A firm’s capital structure may contain many components, including common stock , multiple classes of preferred stock , bonds , debt having different terms and maturity dates , and retained earnings . All of these components of a firm’s capital structure can be discerned from its balance sheet and associated disclosures .
The precise types of debt and equity included in a firm’s capital structure dictate the cost of capital and the amount of risk that management is willing to take on. For example, management may be willing to use a high proportion of debt financing in order to reduce its cost of capital, but doing so increases the risk of bankruptcy , since the firm is at risk of being unable to fulfill its debt repayment obligations.
