Definition: Capital Structure is how a firm finances its business, operations and growth by using a mix of debt and equity.
Debt involves both long-term debt and short-term debt.
Equity involves both common equity and preferred equity.
See also Cost of Capital and Debt to Equity Ratio.
Because of tax advantages on debt issuance, it is cheaper to issue debt rather than new equity. This is only true:
1. for profitable firms, since tax breaks are available only to profitable firms
2. up to a certain point, because adding debt increases the default risk - and thus the interest rate.
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