Capital Structure

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DEFINITION of 'Capital Structure'

A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds.

Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure.

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BREAKING DOWN 'Capital Structure'

A company's proportion of short and long-term debt is considered when analyzing capital structure. When people refer to capital structure they are most likely referring to a firm's debt-to-equity ratio, which provides insight into how risky a company is. Usually a company more heavily financed by debt poses greater risk, as this firm is relatively highly levered.

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RELATED FAQS
  1. On which financial statements does a company report its long-term debt?

    A company lists its long-term debt on its balance sheet under liabilities, usually under a subheading for long-term liabilities. Long-Term ... Read Full Answer >>
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  3. How do bankruptcy costs affect a company's capital structure?

    A higher amount of debt in a company's capital structure increases interest payments and the risk of bankruptcy. A company ... Read Full Answer >>
  4. What are preferred shares?

    Preferred shares represent an ownership stake in a company. Owners of preferred shares have a claim on the company's assets ... Read Full Answer >>
  5. How can I use Net Operating Profit After Tax (NOPAT) to compare companies and make ...

    Since net operating profit after tax (NOPAT) is used to measure a company's operating income without the effects of capital ... Read Full Answer >>
  6. When should a company consider issuing a corporate bond vs. issuing stock?

    A company should consider issuing a corporate bond versus issuing stock after it has already exhausted all internal forms ... Read Full Answer >>
  7. How can an investor evaluate the leverage of an insurance company?

    For investors conducting fundamental analyses of insurance companies, leverage can have multiple definitions. Insurance leverage ... Read Full Answer >>
  8. Does the tradeoff model or the pecking order play a greater role in capital budgeting?

    The static trade-off theory and the pecking order theory are two financial principles that help a company choose its capital ... Read Full Answer >>
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    Debt affects a company's levered beta in that increasing the total amount of a company's debt will increase the value of ... Read Full Answer >>
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