2.7. Capital Structures

A fundamental question for every company that is trying to raise capital is whether to use debt, equity, or some combination of both as a source of finance. A company’s capital structure is the extent to which it relies on debt vs. equity financing—how much of its capital comes from selling shares, and how much from selling bonds or taking on other forms of debt.

Equity. Equity financing essentially means selling a portion of the company. Funds from equity financing do not need to be paid back, making this an essential source of financing for high-growth companies. At the same time, it is usually a more expensive way to raise capital than debt financing because one is giving up ownership and there is no tax deduction similar to the one for repaying debt. The viability and relativ