Question

Can you elaborate on the capital structure? How does it point a firm in the direction of stocks or loans as a way of raising capital?

Answer 1

Capital structure :-

A firm uses it's various sources of funds so that it can effectively continue to finance it's operations. When the sources of funds are higher, there is a greater chance of risks for the investors. It is mainly the debt amount taken by a firm so that it can finance it's operations as well as it's assets.

Raising capital :-

There are few ways a company can raise capital for the capital structure such as debt, which is one of the common ways to increase the capital. It can be said that many firms like to issue debt for the raising in the capital as the debt amount doesn't need to pay taxes. The interest which can be gained from the debt amount are all tax free.

Equity, on the other hand is very expensive than that of debt. The lenders, in case of equity, mostly claims to be a the part of the earned amount in future like that of the owner. But one good point is that there is no need to repay the shareholders in case of equity capital.

Hope this helps :)