Ace the AFP Exam 2025 – Boost Your Financial Wizardry!

"Capital structure" refers to the way a company finances its overall operations and growth by using different sources of funds, primarily debt and equity. The correct answer highlights the specific combination of these two financing forms, illustrating how a company strategically plans its funding options to maximize value and manage financial risk.

Debt generally includes loans and bonds that obligate the company to repay the borrowed amount plus interest, while equity represents ownership stakes in the company, such as common and preferred stocks. By effectively managing its capital structure, a company can optimize its capital costs, influence its stock price, and ensure long-term sustainability and financial health.

Understanding capital structure is vital for financial management, as it impacts a company's leverage, risk profile, and ability to invest in growth opportunities. This is why the selected answer accurately captures the essence of capital structure within the context of corporate finance.