DECA Business Management and Administration Exam Practice – Complete Prep Guide

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What does capital structure refer to?

Only equity financing in a company

The legal framework for investment decisions

The mix of debt and equity financing for investments

Capital structure refers to the mix of debt and equity financing that a company uses to fund its operations and growth. This concept is essential for businesses as it directly influences their risk and return profiles. When a company decides how to finance its activities, it can choose between using borrowed funds (debt) and funds raised through equity, such as stock issuance.

A well-balanced capital structure is crucial for maintaining financial health and achieving the desired capital cost. It can impact a company's leverage, financial risk, and overall valuation. By understanding their capital structure, managers can make informed decisions that align with the company's financial strategy and objectives.

The other options do not accurately capture the definition of capital structure. Some focus solely on equity financing or the legal framework, which are not comprehensive enough to describe the overall concept.

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The overall amount of assets in a company

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