Question

Capital structure refers to

• A. Relation between current assets and current liability
• B. Relation between long-term debts and equity
• C. Both (A) and (B)
• D. None of these

Hint:

A simple way to remember is: {Capital Structure} deals with the {structure of long-term capital}. Working capital management deals with short-term assets and liabilities.

Answer 1

The Correct Option is B

Step 1: Understanding the Question:
The question asks for the definition of 'Capital Structure'.
Step 2: Key Concept:
Capital structure is the particular combination of long-term sources of funds used by a firm to finance its long-term assets. It describes the mix of debt and equity on the liability side of the firm's balance sheet.
Step 3: Detailed Explanation:
- Capital Structure is concerned with the long-term financing of the company. The main components are shareholders' funds (equity share capital, preference share capital, and reserves) and borrowed funds (long-term debts like debentures and term loans). Therefore, it refers to the relation or proportion between long-term debts and equity. This matches option (B).
- The relation between current assets and current liabilities, as mentioned in option (A), defines the Working Capital position of the firm, not its capital structure.
- Option (C) is incorrect because (A) is not part of the capital structure definition.
Step 4: Final Answer
Capital structure refers to the mix or proportion of long-term debts and equity used to finance a company's assets.