What does capital structure include?

Capital structure refers to the way a company finances its overall operations and growth through various sources of funds. It primarily focuses on the proportionate relationship between different types of capital, which typically includes long-term debt, common equity, and preferred stock.

Long-term debt represents loans or bonds that the company is obligated to pay back over a period longer than one year, providing the company with necessary funds while obliging it to make interest payments. Common equity gives shareholders ownership in the company and claims on assets and earnings, making it a vital source of financing. Preferred stock, while it has equity features, typically provides fixed dividends and has priority over common equity in the event of liquidation, making it a hybrid form of capital.

This combination of financing sources is vital as it influences the overall risk and cost of capital for the company, which in turn affects investment decisions and strategic planning. Understanding the components of capital structure is essential for evaluating a company's financial health and strategic position in the market.