Free US Law Dictionary

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Capital Structure

Financial Markets

Bond market
Stock (Equities) Market
Forex market
Derivatives market
Commodity market
Spot (cash) Market
OTC market
Real Estate market

Market Participants

Investors
Speculators
Institutional Investors

Corporate finance

Structured finance
Capital budgeting
Financial risk management
Mergers and Acquisitions
Accounting
Financial Statements
Auditing
Credit rating agency

Personal finance

Credit and Debt
Employment contract
Retirement
Financial planning

Public finance

Tax

Banks and Banking

Fractional-reserve banking
Central Bank
List of banks
Deposits
Loan
Money supply

Financial regulation

Finance designations
Accounting scandals

History of finance

Stock market bubble
Recession
Stock market crash

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In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80 billion in debt is said to be 20% equity financed and 80% debt financed. The firm's ratio of debt to total financing, 80% in this example, is referred to as the firm's leverage.

In the capital structure decision. The theorem states that, in a perfect market, the value of a firm is unaffected by how that firm is financed. This result provides the base with which to examine real world reasons why capital structure is relevant, that is, a company's value is affected by the capital structure it employs. These other reasons include bankruptcy costs, agency costs and asymmetric information. This analysis can then be extended to look at whether there is in fact an 'optimal' capital structure: the one which maximizes the value of the firm.

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