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Capital Structure of a Firm

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How does the capital structure of a firm compare to the capital structure of an individual? In what ways are they similar? Can you provide an example of how individuals use debt and equity in their personal financial lives that parallels the basic capital structure decisions made by a firm?

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The solution discusses how does the capital structure of a firm compare to the capital structure of an individual.

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CAPITAL STRUCTURE

How does the capital structure of a firm compare to the capital structure of an individual? In what ways are they similar? Can you provide an example of how individuals use debt and equity in their personal financial lives that parallels the basic capital structure decisions made by a firm?

Answer:

The capital structure of a firm is composed of debt and equity. Debt is composed of loans from banks and from other forms of securities such bonds. On the other hand, the equity portion of the capital structure comes from owners of business who may be the stockholders. The debt- equity ratio tells how a firm is dependent on either internal or external sources of finance. Hence, a low debt- equity ratio manifests that a firm has low debts and high levels of equity, indicative of high dependence on owners or internal ...

Solution provided by:
Elisa Valdez, PhD
Education
  • Bachelor of Science in Business Administration, University of the Philippines
  • Master in Business Administration, Saint Mary's University
  • Doctor of Philosophy in Education, University of the Philippines
  • Doctor in Business Adminstration (IP), Polytechnic University of the Philippines
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