What Is Capital Structure?

Capital Structure is a term used in finance to refer to how a company is structured and financed. Basically, it details the mixture of debt and equity used to finance the company. The equity is from investors and is preferred stock, common stock and retained earnings (cash) whilst the debt is bonds.

The greater proportion of the company which is financed by debt, the higher leveraged the company is. For example, if a company is financed with 10% equity and 90% debt, it would have 10x leverage (100% / 10%). Capital structure can also be measured by the debt-to-equity ratio. Usually, companies which are heavily financed by debt have more problems when there are issues in the money markets as they struggle to fund their assets.

Capital Structure can also refer to the way in which a takeover / acquisition offer is structured. Just like buying a house, an offer will be financed by cash, debt and issuing stock. The relative proportions used will determine the capital structure of the bid.

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