capital structure


The capital structure of a company is the composition of capital and financial resources that the company has acquired.


A company can be financed with own money (capital) or borrowed money (liabilities). The proportion between the two amounts is known as capital structure.

About the capital structure we have to take two types of decisions:

-      The amount of resources in short and long term.

-      The relation between own and the borrowed funds.

The financial structure is composed of Equity and Liabilities:

-      Liabilities contain the obligations and contributions owned by the company.

·        Noncurrent liabilities: includes long-term debt

·        Current liabilities: includes the short-term debt

-      Equity is the total value of a company after deducting debts

Optimal Capital Structure:

If we value a company by calculating the net present value of their future cash flows at a discount rate determined, if the discount rate is the cost of capital, we can deduce that a low capital cost increase the value of the company.

But there are other theorie, the theorie of Miller and Modigliani. The theorie states that in a perfect market without taxes, as a company is financed is irrelevant to its value. The value of a company will determined by its real assets and its ability to generate cash flows, but not the way that assets are financed.