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Capital Structure - Definition

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Definition:

Capital structure is the composition of long-term liabilities, specific short-term liabilities like bank notes, common equity, and preferred equity which make up the funds with which a business firm finances its operations and its growth. The capital structure of a business firm is essentially the right side of its balance sheet.

Capital structure, broadly, is composed of the firm's debt and equity. There are considerations by management and the stakeholders over what mix of debt and equity to use. Should more debt financing be used in order to earn a higher return? Should more equity financing be used to avoid the risk of debt and bankruptcy?

Examples:

The capital structure of XYZ, Inc. is 40% long-term debt (bonds), 10% preferred stock, and 50% common stock.

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