Capital

Definition

Capital is the financial assets or resources that firms use to fund their operations and growth. It can come from various sources, including equity, debt, and retained earnings.

5 Must Know Facts For Your Next Test

1. Capital structure refers to the mix of debt and equity financing a firm uses.
2. Equity capital represents ownership in the company and comes from issuing stocks.
3. Debt capital involves borrowing funds through instruments like bonds or loans.
4. Retained earnings are profits reinvested in the business instead of being distributed as dividends.
5. The cost of capital is a crucial factor in deciding the optimal capital structure for a firm.

Review Questions

• What is the difference between equity capital and debt capital?
• How do retained earnings contribute to a firm's capital?
• Why is the cost of capital important when determining a firm’s capital structure?

Related terms

Equity:

Represents ownership in a company, typically through stocks.

Debt: Borrowed funds that must be repaid with interest, such as bonds or loans.

Cost of Capital:

The required return necessary to make an investment worthwhile, considering both debt and equity.