Capital Structure

Posted in Finance, Accounting and Economics Terms, Total Reads: 1272

Definition: Capital Structure

Capital Structure is the proportion of debt and equity in a firm’s capital that it uses to finance its assets for smooth operation and growth.

The Capital Structure shows the composition of liabilities of the firm telling whether the claim on the assets of the firm is an equity claim or a debt claim. The equity portion of capital structure of the firm consists of common stock, preferred stock and retained earnings. This can be found in the shareholders’ equity section on the balance sheet. The debt component in the capital structure consists of long term debt and permanent short term debt. Thus capital structure is part of financial structure and represents permanent sources of firm’s financing.

For example XYZ Company currently has Rs. 10 Crore in permanent short term debt, Rs. 30 Crore in long term debt outstanding, Rs. 15 Crore in preferred stock and finally Rs. 45 Crore in common stock and retained earnings. Total debt component is therefore Rs. 40 Crore and total equity Rs. 60 Crore. Then XYZ Company’s capital structure has 40% debt and 60% equity.

Hence, this concludes the definition of Capital Structure along with its overview.

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