Q.Define Capital Structure.

Capital structure completes this chapter's picture of business finance by asking how a firm's long-term funds should be mixed.

Capital structure refers to the composition or mix of a firm's long-term sources of finance — that is, the proportion in which owned funds (equity share capital, preference share capital and retained earnings) and borrowed funds (debentures and long-term loans) are combined to finance the firm's total assets.

Capital structure is narrower than financial structure, which covers all sources of funds, both long-term and short-term, appearing in a firm's balance sheet. A firm aims for an optimum or sound capital structure that keeps its overall cost of capital reasonably low and financial risk within safe limits, while maximising the value of the firm and the return availabl …