Capital Structure

A firm is mainly financed by its stocks which it sells to its shareholders and receives cash inflows. When a firm also takes loans to finance it or issue debt securities, for example bonds, it also has to pay regular interest payments to the debt holders. The firm’s mix of debt and equity financing is called its capital structure. A firm without debts is called unlevered firm, and a firm with debts is called levered firm.

Corporations have to pay corporate taxes which are usually more than double of the personal taxes. The interest that the company pays for the finance acquired by loans or issuing debt securities are tax-deductible expenses, and thus escape taxation at corporate level.