Which components make up capital structure?

Capital structure refers to the way a corporation finances its overall operations and growth through various sources of funds. The correct answer identifies the three primary components that comprise capital structure: debt, equity, and preferred stock.

Debt represents borrowed funds that the company must repay over time, often with interest, and can take forms such as bonds or loans. Equity refers to the ownership interest in the firm, typically through common stock, which represents ownership stakes held by shareholders. Preferred stock is a hybrid security that has characteristics of both debt and equity, usually providing dividends to its holders but with no voting rights like regular equity.

These three components reflect how a company balances risk and return in its financing strategy and are crucial in determining the cost of capital, leverage, and overall financial health.

In contrast, the other options refer to different financial constructs. For instance, assets, liabilities, and equity represent the accounting equation and the company's balance sheet rather than specifically outlining capital structure. Similarly, long-term debt, short-term debt, and retained earnings mix elements of debt financing and earnings retention but do not comprehensively cover the broader aspects of equity and preferred stock. Lastly, current liabilities, fixed assets, and shareholder equity also mix different financial categories and are not representative of a company's capital