Describe capital structure and explain why it is important?

Expert Solution

Capital structure is the combination of various form of capital in the total capital of the company and it could be meaning that the company is having a combination of equity capital and the debt capital and the preference capital in the overall capital structure so it is a structure of different types of capital used by company for various operations.

Capital structure is important because it will be determining the overall cost of the capital which will be borne by the company and it will also mean that it will have an impact on the return on the capital as that will provide with the optimum flexibility to the company and the company will also able to take tax advantage if it is going for debt capital or the company will also have to lose control if it will try to go for equity capital so the company will always be trying to have an optimum capital structure so that it can maximize its value in the long run by maximizing upon the rate of return and cutting upon the cost of capital.

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