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.