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Capital structure refers to the specific mix or combination of a company’s long-term sources of funds used to finance its overall operations and growth. These sources typically include equity capital, preference shares, and various forms of debt such as debentures, long-term loans, and retained earnings. The capital structure of a company is crucial because it determines the financial risk and return profile of the business. It reflects how a company finances its assets and operations while balancing the interests of shareholders and creditors. A well-designed capital structure can minimize the cost of capital, maximize the firm’s value, and ensure long-term sustainability. Equity capital forms the foundation of capital structure. It includes funds contributed by the owners in the form of share capital and retained earnings. Equity provides a cushion against financial risks because dividends are paid only when the company earns profits. Shareholders are residual claimants, meaning they receive profits after all obligations to creditors and preference shareholders have been met. Equity capital, however, is relatively expensive because shareholders expect higher returns due to the inherent risk. Preference shares occupy a middle ground between equity and debt. Preference shareholders have a preferential right over equity shareholders to receive dividends and repayment of capital during liquidation. Preference shares typically carry fixed dividend rates, which must be paid before any dividend distribution to equity shareholders. While preference shares do not dilute ownership control significantly, they represent a fixed financial obligation similar to debt. Debt capital, including long-term loans, debentures, and bonds, is another significant component of capital structure. Debt financing has the advantage of tax deductibility of interest, reducing the effective cost of _______ ____ _____ ______ __________ _________ ______ ______ _______ _______ __________ ______.
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