What is meant by "capital structure"?

"Capital structure" refers specifically to the mix of a company's long-term debt and equity financing. This concept is critical in understanding how a company funds its operations and growth. The capital structure provides insight into the risk and return profile of a company; it reflects the balance between debt (which must be repaid and can incur interest costs) and equity (which represents ownership in the firm and does not have to be repaid in the traditional sense, though dividends may be paid to shareholders).

A solid capital structure is essential because it influences a company's financial leverage, cost of capital, and overall stability. By having an optimal capital structure, a company aims to minimize its cost of capital while maximizing shareholder value. Key factors in determining the right balance involve assessing market conditions, interest rates, the company's operational stability, and the growth opportunities available.

Other choices do touch on important aspects of a company's operations and financial situation but do not capture the precise definition of capital structure as it specifically pertains to the financing mix of debt and equity. The total market value of a company's assets reflects its valuation and not the financial strategies employed; the arrangement of ownership and management roles focuses on governance; and the system of cash flow and financial activities pertains to operational functions, not the financing component