What does the term "capital structure" refer to in finance?

The term "capital structure" refers to the mix of debt and equity financing used by a firm. This concept is fundamental in finance because it determines how a company funds its operations and growth, and it significantly impacts the firm's risk profile, cost of capital, and overall financial stability.

A company's capital structure comprises the various sources of funds it utilizes, including long-term debt (such as bonds and loans) and equity (such as common stock and preferred stock). The balance between these two sources affects the firm's leverage—higher levels of debt can lead to higher returns during good economic times but also increase financial risk if the firm struggles to meet its debt obligations.

Understanding the capital structure is crucial for financial management, as it influences decisions related to investment opportunities, financing strategies, and the potential for shareholder returns. By assessing and optimizing capital structure, firms aim to achieve lower overall costs of capital while managing risk effectively.

In contrast, the other options do not relate to the definition of capital structure. Calculating taxes, determining total asset values, or managing dividends are separate components of corporate finance that do not describe the mix of debt and equity financing.