Capital structure

Capital structure is the mix of debt, equity, and other financing a company uses. It determines how the company funds its assets and allocates financial risk between investors and creditors.

Debt-to-equity ratio: A financial ratio comparing a company’s interest-bearing debt with its shareholders’ equity. It gives a direct, widely used measure of leverage within a capital structure.
Corporate debt: Borrowed money that a company is contractually obligated to repay, usually with interest. Loans and bonds are major debt components of corporate financing.
Modigliani–Miller theorem: A set of propositions showing that, under specified idealized conditions, a firm’s value is independent of its financing mix. Its benchmark result makes real-world reasons for choosing a capital structure easier to isolate.
Leveraged buyout: An acquisition financed with a large amount of borrowed money relative to the buyer’s equity contribution. It is a transaction in which debt-heavy financing is central to the ownership change.
Interest tax shield: The reduction in taxable income produced by deductible interest payments on debt. It is a central tax benefit that can make debt financing attractive.
Weighted average cost of capital: The average required return on a company’s financing sources, weighted by their shares of total capital. It combines the costs of debt and equity in proportion to the capital structure.
Common stock: An ownership security that typically carries voting rights and a residual claim on a company’s assets and earnings. Common shares provide equity capital and absorb losses after creditors.
Trade-off theory of capital structure: A theory that firms balance the tax benefits of debt against expected costs of financial distress. It explains leverage as a compromise between borrowing benefits and risks.
Dividend recapitalization: A transaction in which a company borrows money to fund a dividend or other distribution to shareholders. It changes the debt-equity mix while returning capital to owners.
Corporate tax: A tax imposed on the profits of corporations. Tax rules affect the relative after-tax cost of debt and equity.

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