Capital Structure – Equity & Debt
A company’s capital structure is the relative proportion of equity and debt used to finance assets and operations. A company’s capital structure determines both the nature of its stakeholders and its expected cost of capital.
Equity is an investment instrument that represent ownership while debt represents a financial obligation.
Equity instruments include:
- Common stock
- Preferred stock
- Retained earnings
Debt instruments may be categorized in several ways:
- Junior or senior
- Secured or unsecured
- Public or private
- Short-term or long-term
Short-term debt is referred to as a current liability, maturing within one year or the operating cycle, whichever is longer. Short-term debt includes marketable securities, short-term loans and notes payable, and revolving lines of credit. Long-term debt refers to an obligation that will not be satisfied within one year or within the operating cycle, whichever is longer. Long-term debt instruments include bonds and long-term notes payable and bank loans with more than one year terms.