Capital Structure
The mix of debt and equity a company uses to finance its assets and operations.
What is Capital Structure?
Capital structure refers to the combination of debt (bonds, loans) and equity (common stock, retained earnings) that a company uses to finance its assets and operations. The optimal capital structure balances the tax benefits of debt (interest is tax-deductible) against the risks of financial distress that come with too much leverage. The Modigliani-Miller theorem, a foundational concept in corporate finance, proposed that in a perfect market, capital structure is irrelevant to firm value — but in practice, taxes, bankruptcy costs, and agency conflicts make the choice of capital structure critically important to a company's cost of capital and valuation.
Example
Apple Inc. intentionally uses significant debt despite having massive cash reserves. By issuing bonds at low interest rates and using the proceeds for buybacks, Apple reduces its tax burden (interest is deductible) and returns capital to shareholders more efficiently than holding excess cash. This leveraged capital structure lowers Apple's WACC while maintaining financial flexibility.
Source: Apple Inc. 10-K — SEC EDGAR