CAPITAL STRUCTURE The second major question for the financial manager concerns how the firm should obtain and manage the long-term financing it needs to support its long-term investments. A firm’s capital structure (or financial structure) refers to the specific mixture of short-term debt, long-term debt, and equity the firm uses to finance its operations. The financial manager has two concerns in this area. First, how much should the firm borrow; that is, what mixture is best? The mixture chosen affects both the risk and value of the firm. Second, what are the least expensive sources of funds for the firm?
If we picture the fi rm as a pie, then the fi rm’s capital structure determines how that pie is sliced. In other words, what percentage of the fi rm’s cash fl ow goes to creditors and what percentage goes to shareholders? Management has a great deal of fl exibility in choosing a fi rm’s fi nancial structure. Whether one structure is better than any other for a particular fi rm is the heart of the capital structure issue.
In addition to deciding on the fi nancing mix, the fi nancial manager has to decide exactly how and where to raise the money. Th e expenses associated with raising long-term fi nancing can be
capital structure The mix of debt and equity maintained by a firm.


Author Since: November 30, 2020