The capital structure of a company refers to the proportion of debt and equity in its capital, and it is an important factor to consider when determining the cost of a company's debt and equity.
What is Capital Structure?
Capital Structure is the composition of a company's liabilities and shareholders' equity. It is also known as the capitalization of a company. The components of capital structure are:
1) Debt: This is money that a company borrows from others. The debt may be in the form of a loan, a bond, or a line of credit.
2) Equity: This is money that a company raises from its own shareholders. Equity can be in the form of common stock, preferred stock, or warrants.
The capital structure of a company affects its profitability and risk. A company with a lot of debt is riskier than a company with little debt, because the company with a lot of debt is more likely to go bankrupt if it faces financial difficulty. A company with a lot of equity is more profitable than a company with little equity, because the company with a lot of equity has more money to invest in its business.
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