Friday, April 6, 2012

Basic Components of Corporation's Capital Structure

Basic Components of Corporation's Capital Structure

A corporation's capital structure mainly consists of the securities issued by the corporation in exchange for  cash, property, or services contributed or that will be contributed to it in the future. See also information about a corporation's financial leverage.

  1. Common Stock (Corporate Adventure): Every Corporation must have common stock and it is the must junior type in liquidation of a corporation. Equity must demonstrate the stockholders intention to embark upon the corporate adventure taking upon the risk of loss along with the profits too.
  2. Preferred Stock: The are fixed rights which are more senior to common stock and provide investors more certainty in their rates of return
  3. Debt (Most Certainty): Senior in liquidation, no voting powers 
  4. Options: A right to purchase stock at a future time for a fixed price from the corporation.
  5. Hybrid Securities: The most common form of hybrid security is the convertible security, which combines a stock option with another form of investment. 
    1. The terms of a debt instrument allow the debt holder to exchange the debt instrument for a fixed number of shares of common or preferred stock in the corporation when a certain event happens.
    2. Hybrid securities can present difficult problems of classification for tax purpose,

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