Capital Structure

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Definition of 'Capital Structure'

Capital structure refers to the mix of debt and equity used to finance a company's assets. The capital structure of a company is important because it can affect the company's cost of capital, its risk profile, and its ability to grow.

There are two main types of capital structure:

* **Debt capital** is money borrowed from lenders, such as banks or bondholders. Debt capital typically has a fixed interest rate and a maturity date.
* **Equity capital** is money invested by shareholders in exchange for shares of stock. Equity capital does not have a fixed interest rate or maturity date.

The optimal capital structure for a company will vary depending on its industry, its growth prospects, and its risk tolerance. A company with a high risk profile may want to use more debt capital to finance its assets, while a company with a low risk profile may want to use more equity capital.

The capital structure of a company can be analyzed using a number of ratios, such as the debt-to-equity ratio, the interest coverage ratio, and the debt-to-assets ratio. These ratios can help investors and creditors assess the financial health of a company and its ability to repay its debts.

Capital structure is an important decision for any company, and it should be carefully considered before making any changes.

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