Define Capital Structure
by SANTOSH
(VIZIANAGARAM)
Q: What is the meaning of "capital structure"?
A: The term "capital structure" refers to the structure of capital (equity) for a business. Actually more often it refers to the structure of both equity and liabilities (debt) for a business.
In other words, what and how much are the sources of financing for the business?
For example, let's say we have a company that has the following equity and long-term liabilities:
- Ordinary shares $6,000,000
- Preference shares $3,000,000
- Debentures $1,000,000
In the above example the ordinary and preference shares are equity . The capital structure (in terms of equity alone) would be $6 million ordinary shares and $3 million preference shares. Or we could say the capital structure is 66.67% ordinary shares ($6 million ordinary / $9 million total) and 33.33% preference shares ($3 million preference / $9 million total).
Or if we included the liabilities (debentures) in the capital structure we could say that the equity came to $9 million (90%) and the long-term liabilities to $1 million (10%) of the capital structure. Or the capital structure is 90% equity and 10% debt (liability).
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