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CMA Intermediate · Financial Management and Business Data Analytics · Capital Structure and Capital Stacking

In the context of capital structure, the term 'capital stacking' most appropriately refers to:

Capital stacking means arranging a firm's financing sources in layers by priority of claim and cost, with senior debt at the base, then subordinated debt and preference capital, and common equity as the top residual layer bearing the highest risk and cost.

  1. AArranging the different sources of capital in layers by seniority and cost, from senior debt at the bottom to common equity at the topCorrect
  2. BBuying back equity shares and cancelling them to reduce paid-up capital
  3. CConverting all long-term debt into preference share capital
  4. DValuing a firm's assets at the cost of stacking its inventory

Explanation

Capital stacking describes the layered arrangement of financing sources in the capital structure. Senior secured debt ranks first and is cheapest, then subordinated debt, preference capital and finally equity, which is the residual and most expensive layer. The other options describe unrelated transactions.

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