Understanding Capital Structure

What is capital structure?

• Capital structure is the amount of cash a company holds.

• Capital structure refers to a company's total assets.

• Capital structure is the mix of debt and equity financing used by a company.

• Capital structure is the process of hiring new employees.

What are the main components of capital structure?

• Revenue and expenses

• The main components of capital structure are debt (long-term and short-term) and equity (preferred and common).

• Cash flow and profit

• Assets and liabilities

How does capital structure affect a company's risk?

• Capital structure has no impact on a company's risk.

• A higher capital structure always reduces risk.

• Capital structure affects a company's risk by influencing its financial leverage and stability.

• Capital structure only affects a company's marketing strategy.

What is the difference between debt and equity financing?

• Debt financing is only for large corporations; equity financing is for small businesses.

• Debt financing requires no repayment; equity financing is a loan with interest.

• Debt financing involves selling ownership shares; equity financing is borrowing funds.

• Debt financing is borrowing funds to be repaid with interest; equity financing is raising capital by selling ownership shares.

Why is an optimal capital structure important for a business?

• It ensures that all employees receive higher salaries.

• It increases the amount of debt a company can take on.

• An optimal capital structure is important because it minimizes the cost of capital and maximizes shareholder value.

• It allows for more frequent changes in management.