The correct answer is: A. Share capital + Reserves + Long-term debts
Capital structure is the mix of debt and equity financing that a company uses to fund its operations. It is a key decision for any company, as it can have a significant impact on the company’s financial risk and return potential.
Share capital is the amount of money that a company has raised by issuing shares to investors. Reserves are the accumulated profits of a company that have not been distributed to shareholders. Long-term debts are loans that a company has taken out that are due to be repaid over a period of more than one year.
The optimal capital structure for a company will vary depending on a number of factors, such as the company’s industry, its risk profile, and its growth prospects. However, in general, companies aim to strike a balance between debt and equity financing that minimizes their overall cost of capital.
Debt financing is cheaper than equity financing, as companies do not have to pay dividends to debt holders. However, debt financing also carries more risk, as companies are legally obligated to repay their debts. Equity financing is more expensive than debt financing, as companies have to pay dividends to shareholders. However, equity financing also carries less risk, as companies are not legally obligated to repay their shareholders.
The optimal capital structure for a company will also depend on the company’s tax situation. In some countries, interest payments on debt are tax-deductible, which can make debt financing more attractive.
Overall, the optimal capital structure for a company is a complex decision that should be made on a case-by-case basis. However, in general, companies aim to strike a balance between debt and equity financing that minimizes their overall cost of capital.
Here is a brief explanation of each option:
- Share capital + Reserves + Long-term debts is the correct answer. This is the most common definition of capital structure.
- Share capital + Long and short-term debts is not the correct answer. Long-term debts are a subset of debts, so this option is too broad.
- Share capital + Long-term debts is not the correct answer. This option does not include reserves, which are an important component of capital structure.
- Equity and preference share capital is not the correct answer. This option does not include long-term debts, which are an important component of capital structure.