5. What is meant by capital structure decisions?
Capital structure decisions are the choices a business makes about how to fund its operations and growth. Specifically, they involve deciding the exact mix of borrowed money (debt) and money from owners (equity) to use. [1]
Think of it like buying a car:
- Debt is a car loan. You must make fixed payments. If you miss them, you lose the car.
- Equity is using your own savings. You own the car outright, but it takes you longer to save up. [2]
A business aims for the "best mix." This mix keeps financing costs low and pushes up the value of the company. Using too much debt makes the risk of going bankrupt high. Using too much equity is safe, but it can slow down growth. [1, 3, 4]
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