Corporate Finance

Capital structure


Capital structure refers to the amount of debt that a company has in comparison to its levels of equity. Striking the right balance between the two types of financing is crucial for the financial health of the firm.


According to trade-off theory, the management of the firm should only raise capital if the benefits outweigh the drawbacks. So, if a firm can achieve growth by altering the capital structure, it is worthwhile.


Debt is preferable as it is tax-deductible, though too much debt can cause financial problems as interest payments are not optional. Equity finance is seen as the worst option as a firm loses some ownership.


ensuring that a company has a suitable capital structure is key as it can threaten their future if not. Capital structure varies, so investors should make comparisons between companies in the same industry.

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