Question

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

Answer 1

• 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)