Question text A firms capital structure refers to: Select one: a. The way a firm invests...

Question text A firms capital structure refers to: Select one: a. The way a firm invests its assets b. The amount of equity capital in the firm c. The way in which a firm’s assets are financed d. The decision to pay dividends or retain earnings

Expert Solution

A firm's capital structure refers to the way in which firm's assets are financed.

A firm's capital structure is basically how a firm chooses to finance it's operations and therefore has many options to choose from. For example if a firm chooses to finance 20% of its capital by the means of Equity and 80% by the means of debt taken from bank/financial institutions/angel investors etc.

A firm can choose either Equity, Debt or from Hybrid Securities.

Although it is advisable for a firm to always finance some through Equity, some through debt and some forming hybrid of securities because it gives a firm expansive options to consider seeking risk and returns as per their requirement or size of operations.

An example of an optimum capital structure :

Lowest Risk Lowest cost Highest priority in Liquidation	Assets
	Hybrid Financing (Convertible debt,Preference capital,warrants etc.)
High Risk Hish cost Highest priority in Liquidation	Preferred Equity(no voting rights)
	Common Equity(voting rights)

jeff jeffy answered 1 year ago

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