CAPITAL STRUCTURE AND ITS THEORIES

Abstract

The phrase capital structure refers to the sum of all long-term funding sources. These long-term sources of funding include equity share capital, reserves and surplus, preference share capital, loans, and debentures. A corporation must decide how much of its own funds and outside funds, particularly debt financing, it should have. WACC and a firm's value are impacted by the amount of finance. There are four capital structure theories for this, including the traditional, M&M approach, net income, and net operating income.