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Capital structure is the combination of the debt and equity a company uses to finance its long-term operations and growth.  

For publicly traded companies, common stock is by far the most utilized form of capital, and usually comprises the majority of stock ownership of a company. 

Capital Structure allows analysts to identify the optimal value of the Cost of Capital of a company, based on the proportion of equity and debt issued. Cost of Capital is the rate of return that investors and bondholders of a certain company expect for their investments.  

SmarTbots Inc, is a robotics company with $60 million in debt (usually bonds) and $80 million in equity (usually stocks). The current capital structure of StarTbots is 57% equity and 43% debt.

Equity= ($80 M) / ($60 M + $80 M)

Debt= ($60 M) / ($60 M + $ 80 M) 

From calculating the capital structure of the company, analysts are then able to calculate the proportion of debt and equity when obtaining new funds - a key value for determining the weighted average cost of capital of a company. 

Each type of capital in the capital structure has different terms and rights conferred on the owners. Managers consider these varying terms and rights when deciding which form of capital to use. A utility company, with a constant inflow of revenue from a stable customer base, is better able to use long-term debt and bonds in its capital structure. Whereas a tech start-up, with the uncertainty of regular future revenue, will most likely have a capital structure heavy in common stock and little, if any, long-term debt. 

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