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Simple English definitions for legal terms
capital structure
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A quick definition of capital structure:
Capital structure refers to how a company gets money to run its business. It's like a recipe for how much money comes from borrowing (debt) and how much comes from selling ownership (equity). Think of it like a cake recipe where you need to mix the right amounts of flour, sugar, and eggs to make a delicious cake. In the same way, a company needs to mix the right amounts of debt and equity to have a healthy financial structure.
A more thorough explanation:
Capital structure refers to the way a company finances its operations by using a combination of debt and equity. It is the mix of short-term and long-term debt, as well as capital stock, that a company uses to fund its activities.
For example, a company may have a capital structure that consists of 60% debt and 40% equity. This means that the company has borrowed 60% of its funds from lenders and investors, and the remaining 40% is owned by shareholders.
Another example of capital structure is a company that has a mix of short-term and long-term debt, such as a line of credit and a mortgage. The company may also have issued stocks to raise capital.
Capital structure is important because it affects a company's financial health and risk. A company with too much debt may struggle to make payments and may be at risk of bankruptcy. On the other hand, a company with too much equity may not be using its funds efficiently and may not be maximizing its profits.