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A firm’s mix of equity, debt, and internally generated funds that it uses to finance its activities is called what? Explain and provide examples of debt, equity and internaly generated funds. Provide a detailed multiple paragraph response.

Answer 1

A firm’s mix of equity, debt, and internally generated funds that it uses to finance its activities is called Capital Structure of the firm.

The Capital Structure is firm’s morphology of different sources of finance. The different sources of finance are equity shares, preference shares, debentures, long-term loans, retained earnings and other long-term sources of funds.

Examples of Debt – The Company needs money for their business operations. Like us, company also borrow money. They borrow from different sources such as Banks, shareholders (creditors of the company) etc. It can be done publicly by Debt Issue i.e. corporate bonds. But the company need to pay interest rate on these Debt issues.

Example of equity- The equity to the company is a money generated by selling of its parts. The part can be shares. The company sells its shareholding to investors in order to raise equity funds. The company do not pay the interest rates here to investors. The company have to give their shareholders, the profit percentage of the business as per their shares. The shareholders have voting rights too.

Example of Internally generated funds- The internally generated funds are created by the operations of the business rather than any Loan, Debt Issue, Equity Issue, Sale of Asset, insurance recovery or Indebtedness.