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

Which of the following best describes 'capital structure' of a company as used in financial management?

Capital structure is the mix or proportion of long-term funds, such as equity share capital, preference share capital, reserves and long-term debt, that a firm uses to finance its operations. It concerns the financing side, not the asset side or liquidity.

  1. AThe proportion of long-term sources of funds such as equity, preference shares and debt used to finance the firmCorrect
  2. BThe total value of fixed assets shown on the asset side of the balance sheet
  3. CThe ratio of current assets to current liabilities of the firm
  4. DThe amount of working capital financed through trade creditors alone

Explanation

Capital structure refers to the mix of long-term sources of finance, namely equity, preference capital and long-term debt. The asset-side and current-ratio options describe asset composition and liquidity, not financing mix.

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