Capital structure
The mix of debt and equity funding a firm. It changes who is owed what, and can change the cost of capital, without changing the business.
Where you will meet it
Capital structure appears in 16 learning outcomes on the CFA syllabus. A few of them:
- Explain the return and risk features of equity securities
“Risk is a consequence of position in the capital structure, not a property of the label.”
- Work out profitability margins and explain what they mean
“Net margin is after everything and therefore mixes operating performance with capital structure and tax position.”
- Contrast credit analysis of high yield issuers with that of investment grade ones
“Analysts examine the capital structure in detail, because structural subordination determines recovery, and they model recovery explicitly rather than treating it as a constant.”
- Set out what drives a firm's capital structure
“Capital structure is the mix of debt and equity used to finance a firm.”
Practise it
Practise capital structure until it is automatic: questions that explain every wrong option.
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